The VC giants’ newfound contrition comes on the back of a gigantic tech crash. The tech-heavy NASDAQ index fell by a third in 2022, making it one of the worst years on record and drawing comparisons with the dotcom bust of 2000-01. According to the Silicon Valley Bank, a tech-focused lender, between the fourth quarters of 2021 and 2022, the average value of recently listed tech stocks in America dropped by 63%. And the plunging public valuations dragged down private ones (see chart 1). The value of older, larger private firms (“late-stage” in the lingo) fell by 56% after funds marked down their assets or the firms raised new capital at lower valuations.
Investment
How the titans of tech investing are staying warm over the VC winter – The Economist
Venture capitalists are not known for their humility. But the world’s biggest investors in innovation have been striking a more humble tone of late. In a recent letter to investors Tiger Global, a hedge fund turned venture-capital (VC) investor, reportedly admitted that it had “underestimated” inflation and “overestimated” the boost the pandemic would give to the tech startups in its portfolio. In November Sequoia, a Silicon Valley VC blue blood, apologised to investors in its funds after the spectacular blow-up of FTX, a now defunct crypto-trading platform that it had backed. Speaking in January, Jeffrey Pichet Jaensubhakij, the chief investment officer of GIC, one of Singapore’s sovereign-wealth funds, said that he was “thinking much more soberly” about startup investing.
This has, predictably, had a chilling effect on the business of investing in startups. Soaring inflation and rising interest rates made companies whose promised profits lie primarily in the distant future look less attractive today. Scandals like FTX did not help. After a decade-long bull run, the amount of money flowing into startups globally declined by a third in 2022, calculates CB Insights, a data provider (see chart 2). In the final three months of 2022 it fell to $66bn, two-thirds lower than a year earlier; the number of mega-rounds, in which startups raise more than $100m, fell by 71%. Unicorns, the supposedly uncommon private firms valued at more than $1bn, became rarer again: the number of new ones contracted by 86%.
This turmoil is forcing the biggest venture investors—call them the VC whales—to shift their strategies. For Silicon Valley, it signals a reversion to a forgotten style of venture capitalism, with fewer deep-pocketed tourists splashing the cash and more bets on young companies by Silicon Valley stalwarts.
Misadventure capital
To understand the scale of VC’s reversal of fortune, consider its earlier bonanza. Between 2012 and 2021 annual global investments grew roughly ten-fold, to $638bn. Conventional VC firms faced competition from a new breed of investor from beyond Silicon Valley. These included hedge funds, the venture arms of multinational companies, from Shell to Samsung, and the world’s sovereign-wealth funds, some of which began investing in startups directly. Dealmaking turned frenetic. In 2021 Tiger Global inked almost one new deal a day. Across VC-dom activity “was a bit unhinged”, says Roelof Botha, boss of Sequoia Capital, “but rational”, given that low interest rates meant that money was virtually free. And “if you weren’t doing it, your competitor was.”
What passed for rationality in the boom times now looks somewhat insane. The downturn has spooked the VC funds’ main sources of capital—their limited partners (LPs). This group, which includes everyone from family offices and university endowments to industrial firms and pension funds, is growing more nervous. And stingier: lower returns from their current investments leave LPs with less capital to redeploy, and collapsing stockmarkets have left many of them overallocated to private firms, whose valuations take longer to adjust and whose share of some LPs’ portfolios thus suddenly exceeds their quotas. Preqin, a data firm, finds that in the last quarter of 2022 new money flowing into VC funds fell to $21bn, its lowest level since 2015.
What new VC funding there is increasingly flows into mega-funds. Data from PitchBook, a research firm, show that in America in 2022 funds worth more than $1bn accounted for 57% of all capital, up from 20% in 2018. How the VC whales behind these outsize pools of capital adapt to the VC winter will determine the shape of the industry in the years to come.
The venture cetaceans can be divided into three big subspecies, each typified by big-name investors. The startups they finance range from the newly founded, in need of “seed” funding, to the somewhat older, later stage firms that are looking to rapidly grow. First there is the conventional Silicon Valley royalty, such as Sequoia and Andreessen Horowitz. The second group comprises the private tourists, such as Tiger and its New York hedge-fund rival, Coatue, as well as SoftBank, a gung-ho Japanese investment house. Then there are the sovereign-wealth funds, such as Singapore’s GIC and Temasek, Saudi Arabia’s Public Investment Fund (PIF) and Mubadala of the United Arab Emirates. As well as investing directly, these entities are LPs in other VC funds; PIF, for example, is a large backer of SoftBank’s Vision Fund.
Together these nine institutions ploughed more than $200bn into startups in 2021 alone, or roughly a third of the global total (not counting the state funds’ indirect investments as LPs). All nine have been badly damaged by last year’s crash. Sequoia’s crossover fund, which invested in both public and private firms, reportedly lost two-fifths of its value in 2022. Temasek’s listed holdings on American exchanges shrank by about the same. SoftBank’s mammoth Vision Funds, which together raised around $150bn, lost more than $60bn, wiping out their previous gains. In a sign that things were terrible, its typically garrulous boss, Son Masayoshi, sat out its latest earnings call on February 7th. Tiger reportedly lost over half of the value of its flagship hedge fund and marked down its private investments by about a quarter, torching $42bn in value and leading one VC grandee to speculate that the hedge fund might turn itself into a family office.
All three groups have reined in their investments. But each has responded to the downturn in distinct ways. That is in part because it has affected them to different degrees.
The private outsiders have been hardest hit. The combined number of startup investments by the three firms in our sample fell by 76% between the second half of 2021 and the same period in 2022. Tiger has lowered the target for its latest fund from $6bn to $5bn; its previous one raised $13bn. In October Phillipe Laffont, Coatue’s boss, said that the hedge fund was holding 70-80% of its assets in cash. The firm has also raised $2bn for its “tactical solutions fund”, designed to give mature startups access to debt and other resources, as an alternative to raising equity at diminished valuations during a market downturn. SoftBank has all but stopped investing in new startups. Instead, in the second half of 2022 most of its capital went to well-performing portfolio firms, says Lydia Jett, a partner at the Vision Fund.
The other two groups are also retrenching, but not as drastically. According to data from PitchBook, in the second half of 2022 the number of deals struck by Sequoia and Andreessen Horowitz fell by a combined 47%. Direct investments by the four sovereign funds in our sample slowed by a more modest 31% in the same period, no doubt thanks to their governments’ deep pockets and longer time horizons.
Taken together, venture capitalists’ slowing pace of investment has left them with a record amount of capital that LPs had already pledged to stump up but that has yet to be put to use. Last year the amount of this “dry powder” was just shy of $300bn in America alone (see chart 3). According to data from PitchBook, our five private whales are sitting on a combined $50bn or so; the sovereign investors hold their numbers close to their chest but are likely to be of a similar order of magnitude, all told. Some of it may wait a long while to be deployed, if it ever is. But some will find grateful recipients. Who those recipients are also depends on which group of whales you look at.
Conventional VCs and the hedge funds are focusing on younger “early-stage” firms. in part because volatility in the public markets makes it harder to value more mature companies that hope to list in the near future. Mr Botha says that Sequoia has doubled the number of “seed” deals with the youngest companies in 2022, compared with 2021. In January the firm launched its fifth seed fund, worth $195m. Last April Andreessen Horowitz launched an “accelerator” programme to nurture startups. About half the startups Tiger backed in 2022 were worth $50m or less, compared with just a fifth in 2021, according to PitchBook.
Early-stage firms are unlikely to be the only recipient of VC cash. David DiPietro, head of private equity at T. Rowe Price, a fund-management group, thinks that startups selling “must-have” products, such as cyber-security services, or cost-cutting tools, such as budgeting software, should fare well. Money will also keep flowing to well-managed businesses with strong balance-sheets., expects Kelly Rodriques, chief executive of Forge, a marketplace for private securities. Firms with buzzy new technologies, such as artificial-intelligence chatbots and other forms of whizzy “generative AI”, are also likely to attract investments—especially if those technologies already work in practice and underpin a viable business model.
Another category of startups likely to gain favour comprises those involved in industries that governments deem strategic. In America, that means climate-friendly technology and advanced manufacturing, on which Uncle Sam is showering subsidies and government contracts. Some 8% of the deals all our whales made in the second half of 2022 involved firms working on technologies to combat climate change, for example, up from 2% in the same period of 2021. Last year Andreessen Horowitz launched an “American Dynamism” fund, which partly invests in firms that rely on government procurement, such as Anduril, a defence-tech startup.
Sovereign-wealth funds are likely to be looking elsewhere. Seed deals are simply too small for them: whereas the typical early-stage American company is worth about $50m, in 2021 the median value of startups backed by the sovereign funds was a whopping $650m. And to them, what counts as “must-have” startups is somewhat different, determined less by the market or other states’ strategic imperatives, and more by their own governments’ nation-building plans.
On February 16th PIF said it would take a stake in VSPO, a Chinese platform for video-game tournaments. This is part of a plan dreamed up by Muhammad bin Salman, the Saudi crown prince, to invest $38bn in “e-sports” by 2030 and make Saudi Arabia a gamer’s mecca. Temasek invests heavily in firms that develop technology to boost food production. In the past year it backed Upside Foods, a startup selling lab-grown meat, and InnovaFeed, a maker of insect-based protein. This is motivated by Singapore’s goal of locally producing 30% of the city-state’s nutritional needs by 2030, up from about 10% in 2020. Rohit Sipahimalani, chief investment officer of Temasek, thinks that over the next few years his focus will shift towards “breakthrough innovation rather than incremental innovation”, on the back of government support of strategic tech.
One group of firms is likely to see less investment from our whales, however: those in China. The Communist Party’s harsh two-year crackdown on consumer technology may be easing but the VC titans remain wary of what was until recently one of the world’s hottest startup scenes. An executive at a big venture fund says that in the past, foreign investors in China knew that the government would be respectful of their capital. Now, he sighs, it feels like the government “has pulled the rug out from underneath us”.
Tiger has said that there is a “high bar” for new investments in China. GIC has reportedly scaled back its investments in China-focused private funds. Mr Sipahimalani of Temasek says diplomatically that he is trying to avoid investing in “areas caught in the cross-hairs of US-China tension”. Sequoia is reportedly asking external experts to screen new investments made by its Chinese arm into quantum computing and semiconductors, two such contentious areas. All told, the number of our whales’ deals with Chinese startups fell from 22% of the total in 2021 to 16% in 2022.
After the dotcom crunch VC investments needed nearly two decades to return to their previous peak. Today’s tech industry is more mature, startups’ balance-sheets are stronger and, according to the Silicon Valley Bank, their peak valuations relative to sales are lower than in 2000-01. This time the whales of VC are unlikely to need 20 years to nurse their wounds. But the experience will have lasting effects on the sort of businesses they back. ■
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Investment
IN FOCUS: 'No room for complacency' as fight for global investments heats up. What can Singapore do? – CNA
Apart from the US Chips and Science Act, the US Inflation Reduction Act is another incentive programme “that will compete for the same sorts of investments that Singapore would be interested in”, EDB chairman Beh Swan Gin told reporters at a press conference in February.
The US Inflation Reduction Act comprises billions of dollars of subsidies for the purchase of electric cars and other eco-friendly products that are made in America. This has rattled many European nations who fear that companies may choose to relocate or at least prioritise investment in the US.
In response, the European Commission has presented a Green Deal Industrial Plan with higher levels of state aid to help Europe compete as a manufacturing hub for clean tech products.
Then, there is BEPS 2.0 which is advocating a minimum effective tax rate of 15 per cent for multinational groups with annual group revenues of at least 750 million euros (US$818 million).
Currently, Singapore’s headline corporate tax rate is at 17 per cent but the effective tax rate of many businesses may be lower than that, or even the proposed global minimum, due to tax incentives given to those seen as beneficial to the country’s economic development.
Singapore has said it will implement a domestic top-up tax for these large multinational enterprises – about 1,800 of them currently meet the revenue threshold – from 2025.
Already, these firms are having concerns about how the new global tax rules will erode their tax savings in Singapore and mulling whether they should be looking at relocating or making new investments in other countries, said Mr Baik.
“Certainly, tax is just one of the factors in this evaluation process but recent global tax developments have undoubtedly elevated the tax benefits consideration among the factors.”
Meanwhile, the cost of doing business in Singapore has crept up the list of concerns for businesses.
Beyond the inflationary push in operating expenses such as electricity, firms are increasingly mindful of the cost of living here, said Dr Lei Hsien-Hsien, chief executive officer of The American Chamber of Commerce (AmCham) in Singapore.
The Singapore International Chamber of Commerce (SICC) said global companies are most concerned about the elevated rental costs for residential and commercial premises.
The former, in particular, is “making living here much less viable for many expat executives and prohibitive for others”, and this impacts a company’s ability to relocate talent to Singapore.
While Singapore continues to stand out for having low risks of doing business, SICC said “there is no room for complacency” as its regional peers can now better manage risks than before.
“When combined with lower business costs, regional markets will remain attractive to investors based on their risk appetite and their specific business requirements,” the chamber said.
A separate survey, released this week by the European Chamber of Commerce Singapore, also showed that 69 per cent of companies are ready to relocate their staff out of Singapore if there is no relief from rising rental costs of residential and office spaces.
Mr Wong, who is also Finance Minister, has warned that multinational firms are “mobile and … have options” for their next investment projects. Already, firms are “making this clear” in consultation sessions with policymakers.
“Because of BEPS, they will no longer enjoy the same tax advantages in Singapore. Meanwhile, other countries in the region are cheaper, while their home countries are offering very generous incentive packages,” Mr Wong said in his Budget round-up speech on Feb 24.
“So they ask us: what else can Singapore offer to stay competitive?”
Investment
Months after its launch, Canada's new investment industry regulator finally has a proposed name – The Globe and Mail
Three months after the launch of Canada’s new investment industry self-regulatory body, the organization has proposed a moniker for itself: Canadian Investment Regulatory Organization.
The organization has been nameless since it was formed out of the amalgamation of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) on Jan. 1. It has been temporarily using the name New Self-Regulatory Organization of Canada.
Now, in a proxy circular distributed to the industry on Friday, the New SRO board is requesting that the organization’s members, who include investment and mutual fund dealers, vote for the name change on April 24. If approved, the name will become official on June 1.
“We recognize the importance of establishing a new name and brand that reflects the values, purpose, and goals of New SRO,” New SRO chair Timothy Hodgson writes in the proxy. “Therefore, we have committed to an accelerated timeline to complete this important task and are confident that the chosen name will resonate with all stakeholders and foster a strong sense of confidence in the New SRO’s mission.”
The shift to a single self-regulatory organization happened after more than two years of industry consultation that began in 2019, when the Canadian Securities Administrators – an umbrella group for provincial and territorial securities regulators – announced it was considering an overhaul of the regulatory framework that governed IIROC and MFDA.
The two self-regulatory organizations had long been criticized by investor advocates and the investment industry for having overlapping areas of oversight, as wealth managers were increasingly serving customers buying both mutual funds, overseen by MFDA, and individual securities, which were IIROC’s responsibility.
In the fall of 2022, the merger was approved by the CSA, which also approved the combination of two investor protection funds – the Canadian Investor Protection Fund and the MFDA Investor Protection Corporation. The new single fund is independent from the new regulatory organization.
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A new committee of Greater Sudbury city council is being set up to find the “best way of streamlining and of encouraging investment in Sudbury.”
So described Mayor Paul Lefebvre, who used Thursday’s Fireside Chat event with the Northeastern Ontario Construction Association to announce the new five-member committee.
“It’s a big exercise, but I think it’s a positive way of affecting change,” he told Sudbury.com after delivering his address at Verdicchio Ristorante, adding that his goal is for the committee to present recommended changes to municipal bylaws by the end of the year.
The committee would host five to seven meetings this year to learn from local industry leaders, with priority given to those with experience working for other municipalities.
“What is going on elsewhere?” Lefebvre asked. “How are they doing things different from what’s going on here, and why is that the case, so we have a better understanding.”
Lefebvre said that with many regulations provincially mandated, he wants the committee to narrow in on what the municipality can actually accomplish.
In concert with the committee’s work, Lefebvre said an internal team at city hall will work with their counterparts in other municipalities to dig out best practices for Greater Sudbury to adopt.
Reflecting on Lefebvre’s address, Northeastern Ontario Construction Association executive director Mark Kivinen told Sudbury.com he is “very optimistic,” and that Lefebvre has “hit the ground running” since he was elected to head city council on Oct. 24, 2022.
“He is so engaged with the community and understands what the community wants and needs, and also has the ability to not stay stagnant, to open up and don’t be just locked in your little bubble,” Kivinen said, adding that the upcoming committee should aid in this effort.
“There are other municipalities that are doing things better than us, and we are doing some things better than them,” he said. “I think we understand now that if we’re going to promote growth, we’ve got to open up the city a little more.”
Thursday night’s speech and subsequent question and answer period highlighted an ongoing concern within the local construction industry of so-called “red tape” at city hall, which Lefebvre said city council’s upcoming committee will strive to suss out.
Ward 5 Coun. Mike Parent has also addressed “red tape” in a motion greenlit by city council in February, which will see the city partner with the Greater Sudbury Chamber of Commerce to investigate ways of streamlining processes for businesses.
During his speech, Lefebvre cited recent progress on the Employment Land Strategy and a $1.25-million interim fix approved for Fielding Road, which services one of the city’s industrial hubs, as recent signs of city council support for tackling economic growth.
“We’re serious about this,” Lefebvre said, adding that the work on Fielding Road is a solid investment that will help ensure clients and those working in the area won’t have to wear a mouthguard while navigating the pothole-filled road.
Earlier this week, city council approved a public consultation plan for a new tax incentive called the Employment Land Community Improvement Plan, which Lefebvre cited as another recent move toward spurring economic activity. Sudbury.com will be publishing an in-depth report on the proposal soon.
Tapping into the value-added market when it comes to battery-electric vehicles, the city’s infrastructure deficit, its collection of aging facilities, a need for housing across the continuum, and a need for employees in a local economy in which there are approximately 3,500 unfilled jobs right now, were also hot topics during tonight’s speaking engagement.
Lefebvre said all of these issues and more will need to be dealt with to help meet his ultimate goal of increasing Greater Sudbury’s population to 200,000 within 20 years.
Tyler Clarke covers city hall and political affairs for Sudbury.com.
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