Economic Contraction

Slowdown in venture capital | Looking for Alpha

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One of the areas I’ve been directly involved with for the last thirty years or so has been with startups and start-ups.

I saw this area as vital to growth and advancement of American industry, and I also saw this area as a vital place for the energy and intelligence of young people to contribute their talents and perseverance to the economy to advance things.

In the past two or three years, I have never seen so much activity in this space.

Driving this business has been a “glut” of money.

Never before have I seen so much money available for these young entrepreneurs.

Never before have I seen so much activity in the nation’s colleges and universities to promote the development and execution of new ventures, most of which are started by the younger generation.

Venture capital and angel finance boomed during this time.

Thank you Federal Reserve System.

Now backtracking.

To slow down

The latest data released from this space indicates that venture capitalists reduced their investment in early-stage deals by 22%, year-over-year:

“This marked the largest year-over-year quarterly decline in seed funding since at least 2010, except for a decline in the second quarter of 2020, when investors briefly pulled back early in the year. the global pandemic.”

So writes Berber Jin in the Wall Street Journal.

“The retreat shows investors’ growing caution towards riskier investments such as fledglings, a shift in market sentiment in recent years when competition among venture capital firms pushed them to invest even earlier in the market. life cycle of a startup… There follows a similar decline in funding for late-stage startups, which are closer to IPO and therefore more affected by changes in the stock market.”

And, hindsight seems ubiquitous.

In the seed-stage deals section, U.S. deal volume fell 11% year-over-year in the second quarter.

Jeff Morris Jr., who manages a seed fund, is quoted by Mr. Jin as saying,

“The seed and Series A funding environment is the most challenging I have ever seen in my career as a fund manager.”

Predictably, crypto startups have suffered more than others due to the general abandonment of crypto-assets.

Fed withdrawal

The Fed has thrown a lot of money into the US economy to combat the effects of the Covid-19 pandemic and the economic recession that has accompanied it.

Now we are on the other side of the hill.

The world became very disjointed by the first move.

Now the Fed is working to help the economy return to a more connected world, a world that can progress in a more normal way.

But, the transition from one world to the other is going to be very painful and cause many other disturbances.

However, the backward adjustment cannot be avoided.

And, so, the accumulation of cash made its way through the debt markets, across the economy and across the world.

The time for winnings has arrived. We return to the debt markets, in the economy and in the world.

As for the debt markets, I’ve written quite a few articles on how the reversal works its way through various segments of the debt market that built up during the Fed expansion.

It is important to understand these retractions because they portray in their own way what policy makers have to deal with.

The US economy, and the world, are in a period of contraction.

The US economy, and the world, are in a period of contraction while, at the same time, they are in a period of transition to the modern information age.

Slowdown in entrepreneurial effort

It makes me sad, however, to see the downturn in the world of venture capital and angel finance.

It’s exciting, as well as productive, to see all the energy and intelligence working in this space.

It will be disappointing to see a bigger drop in silver entering this space.

But, as the Federal Reserve has created bubbles elsewhere in the economy, it has also created bubbles in the world of entrepreneurship.

The pain spreads.