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Is venture capital the new ‘vampire squid’?

Eleven years ago, American reporter Matt Taibbi wrote a piece, ‘The Great American Bubble Machine’, for Rolling Stone in which he coined the phrase for which, arguably, he is now most well-known.

Taibbi, who once co-edited the infamous The eXile in Russia and is often pegged as a Gonzo author in the style of Hunter S. Thompson, spent a few thousand words taking Goldman Sachs to task. But among those words, the most-famous 28 of them, was his ‘vampire squid’ description of the banking giant that comes in the second sentence.

Taibbi wrote: “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Staggering growth

Fast-forward to 2021 and we have Bjorn Tremmerie, head of technology investments for the European Investment Fund, reportedly saying that a bubble may be arising in European venture capital as valuations reach an all-time high.

Reports PitchBook: “European VC investments have soared this year, reaching €79.2bn across 7,663 deals, according to [our] data. Capital invested has eclipsed 2020’s record by over 86%.”

The piece then quotes Tremmerie, who was speaking at an event called SuperVenture 2021 earlier this week, as saying: “I’m worried that the behaviour of the ecosystem has gone in the direction of 1999 all over again. Valuations in my opinion are too high and we can see companies trade below their listing price. Investors are behaving like they don’t want to miss out on things and there’s too much FOMO.”

Pitchbook then outlines the state of the European VC market, with financial writer Leah Hodgson writing: “Valuations have gone through the roof with the average for all European VC deals up 212% to €140.3m in 2021. The average unicorn on the continent is now worth €3.9bn. This year alone, 65 startups reached the coveted status including buy now, pay later startup Zilch and cryptocurrency platform Bitpanda.

“Among existing unicorns, valuations have leapt, as was the case for Klarna, which was worth 47% more following an investment in June than its previous round in March. Challenger bank N26 was valued at $9bn in October, up from $3.5bn in 2020.”

Stratospheric valuations

Hodgson also raises a number of salient points about the speed in which deals are being closed: the time between fundraises has dropped from 3.62 years in 2020 to 3.02 years today. And due diligence is being put to one side as US funds, and the capital they hold, enter the market.

Forbes reported on this earlier this week, writing: “In just the first half of 2021, investments in Israeli tech companies totaled $11.9bn, outpacing the $10.3bn raised in all of 2020, which also shattered funding records, according to the Israel Venture Capital (IVC) Research Center.”

It is not difficult to hit upon a venture capital news story. The Financial Times published 19 stories containing this phrase within the past week. And five days ago, The Economist ran a story on whether crypto startups would ever produce the next tech giant as ‘valuations are reaching the stratosphere’.

The problem with the stratosphere is that it is nigh-on impossible to breathe up there.

Not limited to Europe

And the alarm bells are sounding. There was a publication in March from Bain and Company called the India Venture Capital Report 2021.

The authors concluded: “Overall, the strength of India’s VC ecosystem has driven real economic value for the country—VC investments have played a pivotal role in bolstering the start-up ecosystem in India—only behind US and China globally—and have created more than three million jobs directly or indirectly over the past eight year.”

But writing for The Hindu Business Line, the chief investment officer of TIW Private Equity Mohit Ralhan said that while there is no evidence of a funding bubble at the broad level, venture capital investors ‘[…] need to have adequate risk management frameworks at the portfolio level, which has been a critical part of all successful venture capital operations’.

If there is a rush on, it is more than understandable that due diligence will get shunted to one side. It is predictable.

None of this is surprising, and it brings us back to Matt Taibbi. He posited in 2010 that Goldman Sachs was the problem, but the thing is that the bank was following the money in order to turn a profit. That, at the end of the day, is its raison d’etre. The problem for all of us is that we have to live in a world that it manipulates.

If this market is running hot, that is just the human experience

There may be a rush on and some, maybe even most, will be cautious. But many will not and they will be the first to lose their shirts. Very few tech firms become the next Google, Amazon, or Apple. Most fail. The question is how many will go down and who will they take with them?

Pete Carvill

Pete Carvill is a reporter, writer, and editor based in Berlin who has been writing for the B2B and mainstream media since 2007. He is a contributing writer for Expert Investor and, in addition, has...

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