Venture Capital’s Challenging Pivot Amidst Global Shifts

Deglobalization, geopolitical competition, and the end of cheap money call for a new industry playbook
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Key Takeaways

  • Venture capital industry faces challenges due to deglobalization, geopolitical competition, and the end of cheap money.
  • Industry focus on software and consumer start-ups may hinder pivoting to critical sectors.
  • Venture capital firms may lack expertise and networks for deep tech and capital-intensive businesses.
  • Early-stage and growth capital sources are likely to shift, with states expanding financing and tighter controls on dual-use technologies.

A Difficult Pivot Ahead for Venture Capital

Over the past decade, venture capital (VC) transformed from an artisanal strategy to a behemoth, raising $163 billion in the US in 2021 alone. However, the collapse of Silicon Valley Bank and the end of cheap money have exposed the industry’s vulnerabilities. The world is now characterized by deglobalization, geopolitical competition, and an emphasis on resilience over efficiency. These conditions require rapid advances in science and technology and call for a new industry playbook.

Challenges in Reorienting VC Focus

The VC industry has historically concentrated on capital-light software and consumer start-ups, with the proportion of capital invested in these sectors increasing from 39% in 2012 to 49% in 2021. While software will continue to be essential, especially with the growth of artificial intelligence, the splintering of the internet and increased government control over data and intellectual property flows will pose significant challenges.

Furthermore, the emphasis on information security and assurance over efficiency is likely to reduce the potential to sell across markets and increase development costs for software products.

Venture Capital’s Struggle in Critical Sectors

Many VC firms that want to pivot towards critical sectors like agriculture, computation, energy, and life sciences may face obstacles. Over the past decade, only 12% of deals completed in the US were in “hard” sectors such as energy, hardware, biotech, and pharmaceuticals. Most US VC firms lack the expertise and networks required for deep tech and capital-intensive businesses.

Additionally, they often don’t have relationships with universities and technology transfer offices or the experience to navigate complex regulatory pathways. This limits their ability to commercialize groundbreaking scientific discoveries and bring novel technologies and therapies to market.

Shifting Sources of Early-Stage and Growth Capital

States are likely to expand concessionary financing to start-ups in priority sectors, creating competition for deals. Valuation multiples may be affected by constraints on deep-pocketed foreign investors. Furthermore, dual-use technologies in aerospace, biology, computation, and materials are expected to face more stringent export controls.

To remain relevant in this changing landscape, the venture capital industry must adapt and update its playbook, moving beyond a focus on software and consumer start-ups and embracing the challenges of deep tech and capital-intensive businesses.

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