Over the past decade, the venture-capital industry has seen tremendous growth. Last year alone, over $160 billion was spent on investments in startup companies worldwide. The interest from investors in early-stage companies has nearly tripled over the years and deal counts have continued to climb. But is it possible for this momentum to last?
Below we'll review the current state of affairs in the venture-capital sector, what has led to its rapid growth in recent years, and how the industry's financial bubble may soon be ready to burst.
Where Has All This Growth Come From?
One of the major factors leading to the growth of venture capital has been the excitement surrounding new technological advancements that young startup companies are introducing. Combine this factor with a newer generation of younger, unsophisticated investors, and the result has been an all-time-high in capital investments.
Another element leading to higher IPOs has been growing competition with venture capital groups and large investment firms. With CVC investors eager to get a stake in the next big thing before someone else, 2018 saw record-breaking offers being made and megafunds arranged with a focus on closing investment deals in record time.
Bad Investment Habits Could Spell Trouble
There have been some dangerous trends over the past few years that have led to some instability in the venture capital sector. With new investors entering the scene, there continue to be more undisciplined decisions being made towards unicorn investments and unsuccessful companies. It seems that while there has been excitement around new technology startups and their perceived potential, not enough due diligence is being made into the financial impact of large-scale investments and the overall sustainability of these organizations.
Another issue in the investment scene has to do with companies being purchased with inflated valuations as part of a "spray and pray" investment strategy. Much of this has to do with a lack of understanding or consideration into the business models of these organizations and instead, putting more focus on playing a numbers game and hoping for an early payout. The new trend for many of today's young startups is to build a company with the primary focus of getting acquired, rather than investing the time and resources necessary to create a long-term, scalable business.
Unfortunately, the way things are going, it's inevitable that this financial bubble is about to burst. With 80 percent of so-called "unicorn" companies being set to fail within two years of inception, now is not the time to invest without thorough due diligence.
How To Get Back On Track
All is not lost, however, in getting the venture capital sector back on track - but it will take a lot of effort. A critical balancing act first needs to take place when it comes to both the short- and long-term expectations of larger investments. This will require new mindsets from investment groups and CEOs alike, forcing a better understanding of a "business concept" versus a "sound business strategy".
Venture capital investors also need to be more realistic when it comes to understanding their risks and give better attention to business valuations. This will ensure a more disciplined approach to investing and help foster better relationships between investors and company founders.
While the future of venture capital may seem grim, it's important to know that nothing is certain when it comes to the elasticity of this financial bubble. Regardless, you can guarantee that in the next few years we will see a drastic change in how investors view and value big technology organizations, with significantly fewer investments in unicorn companies.