Since 2020, the Federal Reserve has injected billions of dollars into the financial markets. These funds were widely used as the debt burden grew and new uses for the funds were found everywhere.
In 2022, as the Federal Reserve began raising its key interest rate and as it began to reduce the size of its securities portfolio, the flow of funds reversed, financially threatening many investors and organizations that had benefited from the largesse from the Fed.
But, now look at what is happening in the world of venture capital.
Note: This is cash on the balance sheet of venture capital funds.
Also note that this fund cache started accelerating in size in 2016 and hasn’t slowed down since.
Also, note that for 2022, the figure is only for half of the year.
Venture capital firms have increased their cash balances by more than $100 billion globally since the end of last year, reaching nearly $539 billion in July.
“During the first half of the year in the United States, venture capital firms raised almost 90% of the amount they raised all of last year… Large funds, in particular, helped propel the ‘rise,” wrote Marc Vartabedian and Berber Jin in the Wall Street Journal. .
Why does this accumulation occur?
Well, the word on the street is that investors remain optimistic about the future of the work venture capitalists will do, but for now high inflation rates and rising interest rates pose problem.
At the moment there, the flow of transactions has diminished and the word on the street is patience.
And that’s what VCs do, be patient.
In the second quarter of this year, companies made only 3,374.
This number was down 24% from the previous quarter.
The picture drawn from this data is that the venture capital world will slow down even more this year and ensure that existing investments have the funds they need to adapt and survive into the future.
It is estimated that there will be few IPOs and that the main objective of venture capital funds will be to provide “good artists” with what they need during this period, but do not extend your reach to a time of great uncertainty.
There is another line of thinking running through the industry. This school of thought focuses on the possibility that the economy of the United States…and, indeed, the global economy, is facing a transformation into a “new” era.
This “age” is one in which the emphasis will be on the growth and dissemination of information. In other words, intellectual capital will drive the future.
This transformation will affect almost all areas of the economy and will result in the construction of platforms and networks that will spread throughout the world.
One of the very important aspects of this transformation is that there will not be the “physical” ups and downs of the world as happened in the age of manufacturing and industry.
Transformations will occur at a more continuous pace.
The world will be different.
Right now we are debating the severity of the coming recession. Some analysts see a substantial drop because of all the markets that are out of balance. Others think the fit may not be so severe.
Those who think the world is moving into the next “era” see the transition dominated by flows in the information space, and this, not being as tangible as the physical world of the manufacturing world, will not be as severe than the historical model has been.
I believe that the venture capital world sees this “new” era coming and wants to be ready to play an important role in the transition.
They are hoarding their resources to take advantage of the “technology” based acceleration that will occur in the relatively near future.
The “information” age
I sincerely believe that the venture capital world is a very, very important space to watch in the near future.
Venture capitalists are watching and setting aside funds to play a big role in that future.
Again, to me, I think the accumulation of cash on the balance sheets of venture capitalists is intentional and I believe these organizations will continue to build their resources.
Getting into the game at the start of the “new” era will yield major results, not only financially, but also in terms of “being there” when the “new” era takes off.
Moreover, these cash balances on the balance sheets of venture capitalists cannot be touched by the Federal Reserve as it works to fight inflation and get the economy back in better shape.
In fact, venture capitalists will be in better relative shape in the economy if the Fed tightens monetary policy and pushes interest rates even higher.
These cash balances could be a major force in ushering the “new” era into its next phase.
Here, the venture capital industry could very well be in the right place at the right time.
They are definitely worth watching.