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Venture Capital Investing Cycles

Len Batterson, February 20, 2024

There are signs of the beginning of a new upswing in the VC investing cycle.

Venture capital investing is and always will be a highly cyclical investment business. There are a lot of ups and downs, and it is challenging to know when to enter and when to leave. 

Much of this timing challenge is that venture capital investment is not liquid, and the investor is tied up and can’t exit. Secondary exit markets do exist and are now gaining some traction. Mostly, VC investors, recognizing the lack of liquidity, just put their investment in a box and neither open the box nor worry much about its value until the exit window opens the box. Others, of course, of a more exacting disposition, worry all the time.

There is good reason to worry.

Many factors can negatively impact venture capital investment values. These include but are not limited to:

  • The Initial Public Offering market opportunities
  • Lack of a hot technology driving the market higher
  • General economic conditions
  • An overheated VC market with resulting high entry valuations
  • An economic or financial crisis
  • General low confidence, whether enterprise or consumer
  • Exploding sectors, i.e., the Internet Bubble
  • Recession fears (always with investors)
  • Geo/political instability
  • Lack of cash position
  • Stronger alternatives to Invest
  • Lack of long-term stability outlook
  • A disposition to fold investment positions
  • Frequent market observations by investors and business press

Should several of these negative depressive factors occur at one time, the VC market can dive for several years without much let-up except for specific red-hot sectors. This has been the case for several years with AI and, more recently, the race to develop General AI and its offspring, providing some relief. 

Since entering the VC business in 1982, I have experienced at least five down-cycles, generally lasting two to three years. The down-cycles, at least in my case, were not overall harmful as the lower entry valuations in the down-cycles made up for the time lost when it was more challenging to raise additional investment capital. Timing was everything… almost.

There are signs of the beginning of a new upswing in the VC investing cycle.

Seed and early-stage entry prices are holding steady, and the improving public market promises that soon, the IPO market will result in more return of capital to investors and, thus, more capital to invest in VC funds and pools. Economic conditions are more stable, with valuations falling to more reasonable entry levels as consumer confidence rises. While the political and geopolitical landscape continues to be murky, the overall economic picture continues to improve with lowering inflation and low unemployment in a reasonable balance. New emerging technologies such as quantum computing, genetics as a knowledge base for a new medicine, and general AI will also, over time, increase overall productivity, leading to positive longer-term development and outlooks. 

This, at heart, is the basis for successful venture capital investing.