VENTURE CAPITAL FIRMS HAVE RECORD AMOUNTS OF CASH ON HAND

On 1 August, the world’s venture capital firms were sitting on a record $539 billion in cash waiting to be deployed.  

The amount has grown by $100 billion this year alone, data service Preqin  reported.

Funds that focus on cryptocurrencies and blockchain businesses have done especially well, drawing in $21 billion so far this year, largely on pace with last year’s record $31 billion, according to analysis firm PitchBook.

The flood included $4.5 billion for Andreesen Horowitz’s largest crypto venture fund yet.

However, only 435 crypto-related venture deals were done in this year’s second quarter, 10 percent fewer than in the previous quarter, CB Insights noted, the first such decline since before the COVID era.

As the market for deals hunkers down, some crypto-focused funds might divert money into cryptocurrencies and digital tokens instead of backing companies, The Wall Street Journal said.

With inflation growing and the world economy slowing, venture investors have become cautious, doing fewer deals and biding their time as they watch trends in the economy to see which industries promise the safest and brightest futures.

Venture firms did 3,374 deals in this year’s second quarter, 24 percent fewer than in the first, according to PitchBook, in part because a large number of companies closed funding rounds last year.

Meanwhile, the firms keep accumulating cash, both in proceeds from previous investments and as institutions and wealthy individuals remain confident that venture capital has a good chance of offering returns that will best inflation.

Normally, as venture-funded businesses mature, they issue stock, which allows venture firms an easy way to cash out.

Now, initial stock offerings are largely on hold until equity markets stabilize. 

Also, stock prices for existing companies often are used to benchmark the future values of fledgling firms that might attract venture dollars. A rough market heightens investors’ caution.

Therefore, instead of betting on startups, venture firms might use their hoard of cash to support the companies they already hold stakes in during today’s economic turbulence, the WSJ said.

TRENDPOST: Venture funds’ swelling heaps of cash illustrate the increasing bifurcation of the U.S. economy: modest- and middle-income earners are unable to afford to buy a house and struggle to pay rising rents, while a wealthy minority ships its extra cash off to gamble with venture capital firms. It is important to note their holding cash as it signals a concern that equity markets will hit a deeper bottom.