What happens to the flow of venture capital when the market drops? Investors and start-ups have to recalibrate and make difficult choices when rocky times are ahead.
RACHEL MARTIN, HOST:
The market is down, especially for tech stocks. And that changes the calculations for the private equity investors known as venture capitalists. As Wailin Wong and Adrian Ma from the Indicator podcast explain, both investors and startups are facing hard choices.
ADRIAN MA, BYLINE: Before we get to the doom and gloom, let’s revisit some of the high-flying times for tech. Nicole DeTommaso is a senior associate at Harlem Capital. It’s a firm that specializes in early-stage funding for startups run by women and people of color.
NICOLE DETOMMASO: Valuations were through the roof. You know, people were getting 30 million valuations off of an idea. And we still wanted to be in with those great founders. You couldn’t sit out because, otherwise, you just wouldn’t be deploying.
WAILIN WONG, BYLINE: Deploying is, basically, spending money. It’s what venture capitalists live to do because the sooner those funds go to work helping a company create the next bit of world-changing technology, the sooner they might see a return on that investment.
MA: And as it turns out, VCs have their own investors to answer to. Those investors are called limited partners – or LPs.
WONG: Limited partners are often wealthy individuals or institutions who spread their money around to lots of places, including VC funds. And one reason they’re called limited partners is because they don’t get involved in picking which startups to invest in.
MA: So to sum it up, startups get their money from venture capital firms, which get their money from limited partners. And so now it is time to follow that same flow of money that we talked about, and follow it in a down market. Nicole says the trouble started with that thing we’re all living with now, high inflation.
DETOMMASO: Honestly, it…
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