Venture capital's $300bn question

Consider the following puzzle. In 2021 venture capitalists raised $150bn in fresh cash, a record amount.

Despite a market slowdown, they broke the record once again in 2022, raising more than $160bn. Chunks of this have already been spent, but close to $300bn of "dry powder" sits waiting to be put to use. Indeed, spending fell throughout 2022. Fledgling firms appear cheap. Why, then, are venture capitalists sitting on the cash?

As with many other puzzles in finance, the answer starts with the rapid rise in global interest rates since the start of last year. Higher rates have caused the value of stocks to plummet, as investors have moved capital into safer assets such as cash and government bonds. The tech-heavy nasdaq index has lost more than a fifth of its value over the past year. In 2022 the amount of capital raised in stockmarket listings dropped to a 32-year low. Public-market slowdowns such as the one currently in progress reduce expected returns for investors in private markets by lowering the valuation at which startups "exit" into public markets. Venture capitalists therefore demand lower prices in order to invest in the first place.