Last week, there was this interesting post on PitchBook titled “Softbank’s Losses Signal the End of the VC Era.” The Author, Andrew Woodman, writes, “On Thursday we learned that the Softbank’s Vision Fund posted an investment loss of $27 billion for its latest fiscal year. Its stock price meanwhile has plummeted, losing around half of its value since March 2022.”

While Softbank and most VC firms will survive this, the results are not at all surprising. The game was simple. Interest rates were low and there was high availability of credit. It was super easy to raise money in that environment. While the stock market was going up, there was a clear arbitrage in the valuations of public markets and private markets. So, bid up prices of private companies and then take them public. A simple financial alchemy. This is all there was to it. The game was all about valuations.

An example of this was a Softbank investment, One 97 PayTm. This company was taken public despite the company making massive losses. The IPO issue price was Rs.2,150 whereas the stock is now down at Rs.620.

Tiger Global is another such investor. According to Bloomberg, the firm’s hedge fund declined 15% in April, taking its loss in 2022 to 44%. Tiger Global’s long only fund was hit even worse, tumbling 25% last month and extending its drop for the year to 52%.

The same story is playing across many VC firms. Thus, founders have been asked to tighten their belts. This means focus on reducing cash burn. The easiest way to do this is to fire people.  One firm was splashing advertisements during all IPL matches while having no qualms in firing 1200 people. Well, most of these firms are used to taking such short cuts including using loss leaders to acquire users/customers. Many neither have the patience nor the inclination to do the right thing. The only thing that seems to matter is valuation because they are in the business of building valuations.

Except that the party had to end at some point of time.

Why am I telling you all of this?

Because there are many VC backed “grow at all costs” firms in our profession/industry too. They have raised money at crazy valuations and are sitting on massive losses too. There is practically no differentiation in most of these firms.

Venture Capital ownership puts tremendous pressure on growth. We are now at a time when they have to avoid increases in operating expenses. This means they have to grow without an increase in operating expenses. Something they are not used to.

But they have to window dress and look good hoping for an IPO exit.

So, expect some crazy stuff to happen in our space. Some of it is already happening.

While that is one trend playing out, another one is clearly playing in our backyard.

There is a proverb that captures this trend well – “The Seeds of Destruction are sowed in good times.”

After the initial market scare of 2020, the period until the end of 2021 was an era of making easy money not only for our industry/profession but also for investors. New NFOs were launched every other week or day. Investment Flows were strong with some breaking records of collections. Not just this, there were so many PMS’s touting their returns (I will be writing a post soon covering PMS’s on happyrichinvestor.com). Not just this, there was bullshitting going on everywhere. The new age casino operators (online stock and crypto trading platforms as well as these gaming apps) too had a merry time. There was euphoria everywhere. Not to mention FOMO (Fear of Missing Out) along with billions spent on media. This in turn fuelled even more FOMO. Many people were thinking of betting and gambling as investing.

While all of this was going on, there was no hard work needed from our end. We simply could watch our AUM grow. Many of us thus had started to make some dangerous assumptions.

Now even this party (like the VC one) has come to an end (until the next one happens). Not only this, but we are also witnessing revenues shrink, costs going up (thank you venture capitalists for that and the era of easy money) and aggressive (desperate) competition.

Thus, it’s important to review your assumptions and your business model while taking cognizance of the risks facing your business.

Andrew ends his post writing – “Yes, the deal making will continue. But the party, for the want of a better word, is over.”

While the party may be over in the venture capital space, like in early 2020, this is yet again one of the best times to build a real and solid business in our industry/profession. More and more people will be needing the wise counsel of a compassionate and real financial professional. Many missed the opportunity then. Don’t miss it NOW.