Venture capital firms have rarely been so slow in putting money to work – but that’s not necessarily a bad thing.
In recent years, private markets firms have competed on how fast they can make investments, according to Andrea Lamari Walne, general partner at Manhattan Venture Partners. Now they are touting their slower investment process, which they say allows partners to conduct more thorough due diligence and filter out unsustainable companies. That was a hard thing to do in the years prior to 2022, she added.
“It’s now a badge of honor to go slow in the diligence process,” Walne told II in an interview. “The traditional method of deploying capital quickly and spray and pray…is completely gone.”
A confluence of factors has contributed to the slowdown in capital deployment. First, they just don’t have the cash. Venture capitalists are raising less money from allocators, who are suffering from overallocation to private markets as their public portfolios shrink. That means capital is getting more expensive and partners need to be more careful about the companies they choose to back, according to Walne. Second, the recent market turmoil has hit VC valuations, especially late-stage companies. The unfriendly exit environment is forcing partners to spend more time on each transaction, Walne added.
The value of global venture capital investments was $21.3 billion in August, down 58 percent year-over-year, according to S&P Global Market Intelligence data. The number of transactions also fell 24.2 percent to 1,357, including 554 in the Asia-Pacific region, 476 in North America, and 234 in Europe. Technology, media, and telecommunications companies represent 44 percent of all venture capital; 17 percent is in healthcare; and 14 percent is invested in industrials. The largest funding rounds last month include a $1.5 billion investment in South Korea battery maker SK On, a $1 billion deployment in cell tower platform Tillman Global, and a $1 billion for cruise ship operator Virgin Cruises.
The slowdown in capital deployment means companies are having a hard time raising money from VCs. “I have never been more inundated with companies of all stages [that] are fundraising than I have in today’s market,” Walne said, adding that she received almost ten times the number of pitches this year compared to 2021. “The worst companies are really floundering. Quite frankly, maybe those are the companies that shouldn’t be raising money to begin with.”
“The need for speed is no longer the investment thesis,” she added.