We invite promising journalists and would-be journalists to apply for an internship supported by the Marjorie Deane Foundation. Successful candidates will spend three months with The Economist in London writing about business. Applicants are asked to send a covering letter and an original article of no more than 500 words that would be suitable for publication in the Business section. Applications should be sent to [email protected] by April 1st. More
Venture capitalists are not known for their humility. But the world’s biggest investors in innovation have been striking a more humble tone of late. In a recent letter to investors Tiger Global, a hedge fund turned venture-capital (VC) investor, reportedly admitted that it had “underestimated” inflation and “overestimated” the boost the pandemic would give to the tech startups in its portfolio. In November Sequoia, a Silicon Valley VC blue blood, apologised to investors in its funds after the spectacular blow-up of FTX, a now defunct crypto-trading platform that it had backed. Speaking in January, Jeffrey Pichet Jaensubhakij, the chief investment officer of GIC, one of Singapore’s sovereign-wealth funds, said that he was “thinking much more soberly” about startup investing. The VC giants’ newfound contrition comes on the back of a gigantic tech crash. The tech-heavy NASDAQ index fell by a third in 2022, making it one of the worst years on record and drawing comparisons with the dotcom bust of 2000-01. According to the Silicon Valley Bank, a tech-focused lender, between the fourth quarters of 2021 and 2022, the average value of recently listed tech stocks in America dropped by 63%. And the plunging public valuations dragged down private ones (see chart 1). The value of older, larger private firms (“late-stage” in the lingo) fell by 56% after funds marked down their assets or the firms raised new capital at lower valuations.This has, predictably, had a chilling effect on the business of investing in startups. Soaring inflation and rising interest rates made companies whose promised profits lie primarily in the distant future look less attractive today. Scandals like FTX did not help. After a decade-long bull run, the amount of money flowing into startups globally declined by a third in 2022, calculates CB Insights, a data provider (see chart 2). In the final three months of 2022 it fell to $66bn, two-thirds lower than a year earlier; the number of mega-rounds, in which startups raise more than $100m, fell by 71%. Unicorns, the supposedly uncommon private firms valued at more than $1bn, became rarer again: the number of new ones contracted by 86%.This turmoil is forcing the biggest venture investors—call them the VC whales—to shift their strategies. For Silicon Valley, it signals a reversion to a forgotten style of venture capitalism, with fewer deep-pocketed tourists splashing the cash and more bets on young companies by Silicon Valley stalwarts.Misadventure capitalTo understand the scale of VC’s reversal of fortune, consider its earlier bonanza. Between 2012 and 2021 annual global investments grew roughly ten-fold, to $638bn. Conventional VC firms faced competition from a new breed of investor from beyond Silicon Valley. These included hedge funds, the venture arms of multinational companies, from Shell to Samsung, and the world’s sovereign-wealth funds, some of which began investing in startups directly. Dealmaking turned frenetic. In 2021 Tiger Global inked almost one new deal a day. Across VC-dom activity “was a bit unhinged”, says Roelof Botha, boss of Sequoia Capital, “but rational”, given that low interest rates meant that money was virtually free. And “if you weren’t doing it, your competitor was.”What passed for rationality in the boom times now looks somewhat insane. The downturn has spooked the VC funds’ main sources of capital—their limited partners (LPs). This group, which includes everyone from family offices and university endowments to industrial firms and pension funds, is growing more nervous. And stingier: lower returns from their current investments leaves LPs with less capital to redeploy, and collapsing stockmarkets have left many of them overallocated to private firms, whose valuations take longer to adjust and whose share of some LPs’ portfolios thus suddenly exceeds their quotas. Preqin, a data firm, finds that in the last quarter of 2022 new money flowing into VC funds fell to $21bn, its lowest level since 2015. What new VC funding there is increasingly flows into mega-funds. Data from PitchBook, a research firm, show that in America in 2022 funds worth more than $1bn accounted for 57% of all capital, up from 20% in 2018. How the VC whales behind these outsize pools of capital adapt to the VC winter will determine the shape of the industry in the years to come. The venture cetaceans can be divided into three big subspecies, each typified by big-name investors. The startups they finance range from the newly founded in need of “seed” funding, to the somewhat older, later stage firms that are looking to rapidly grow. First there is the conventional Silicon Valley royalty, such as Sequoia and Andreessen Horowitz. The second group comprises the private tourists, such as Tiger and its New York hedge-fund rival, Coatue, as well as SoftBank, a gung-ho Japanese investment house. Then there are the sovereign-wealth funds, such as Singapore’s GIC and Temasek, Saudi Arabia’s Public Investment Fund (PIF) and Mubadala of the United Arab Emirates. As well as investing directly, these entities are LPs in other VC funds; PIF, for example, is a large backer of SoftBank’s Vision Fund. Together these nine institutions ploughed more than $200bn into startups in 2021 alone, or roughly a third of the global total (not counting the state funds’ indirect investments as LPs). All nine have been badly damaged by last year’s crash. Sequoia’s crossover fund, which invested in both public and private firms, reportedly lost two-fifths of its value in 2022. Temasek’s listed holdings on American exchanges shrank by about the same. SoftBank’s mammoth Vision Funds, which together raised around $150bn, lost more than $60bn, wiping out their previous gains. In a sign that things were terrible, its typically garrulous boss, Son Masayoshi, sat out its latest earnings call on February 7th. Tiger reportedly lost over half of the value of its flagship hedge fund and marked down its private investments by about a quarter, torching $42bn in value and leading one VC grandee to speculate that the hedge fund might turn itself into a family office. All three groups have reined in their investments. But each has responded to the downturn in distinct ways. That is in part because it has affected them to different degrees. The private outsiders have been hardest hit. The combined number of startup investments by the three firms in our sample fell by 76% between the second half of 2021 and the same period in 2022. Tiger has lowered the target for its latest fund from $6bn to $5bn; its previous one raised $13bn. In October Phillipe Laffont, Coatue’s boss, said that the hedge fund was holding 70-80% of its assets in cash. The firm has also raised $2bn for its “tactical solutions fund”, designed to give mature startups access to debt and other resources, as an alternative to raising equity at diminished valuations during a market downturn. SoftBank has all but stopped investing in new startups. Instead, in the second half of 2022 most of its capital went to well-performing portfolio firms, says Lydia Jett, a partner at the Vision Fund. The other two groups are also retrenching, but not as drastically. According to data from PitchBook, in the second half of 2022 the number of deals struck by Sequoia and Andreessen Horowitz fell by a combined 47%. Direct investments by the four sovereign funds in our sample slowed by a more modest 31% in the same period, no doubt thanks to their governments’ deep pockets and longer time horizons. Taken together, venture capitalists’ slowing pace of investment has left them with a record amount of capital that LPs had already pledged to stump up but that has yet to be put to use. Last year the amount of this “dry powder” was just shy of $300bn in America alone (see chart 3). According to data from PitchBook, our five private whales are sitting on a combined $50bn or so; the sovereign investors hold their numbers close to their chest but are likely to be of a similar order of magnitude, all told. Some of it may wait a long while to be deployed, if it ever is. But some will find grateful recipients. Who those recipients are also depends on which group of whales you look at.Conventional VCs and the hedge funds are focusing on younger “early-stage” firms. in part because volatility in the public markets makes it harder to value more mature companies that hope to list in the near future. Mr Botha says that Sequoia has doubled the number of “seed” deals with the youngest companies in 2022, compared with 2021. In January the firm launched its fifth seed fund, worth $195m. Last April Andreessen Horowitz launched an “accelerator” programme to nurture startups. About half the startups Tiger backed in 2022 were worth $50m or less, compared with just a fifth in 2021, according to PitchBook.Early-stage firms are unlikely to be the only recipient of VC cash. David DiPietro, head of private equity at T. Rowe Price, a fund-management group, thinks that startups selling “must-have” products, such as cyber-security services, or cost-cutting tools, such as budgeting software, should fare well. Money will also keep flowing to well-managed businesses with strong balance-sheets., expects Kelly Rodriques, chief executive of Forge, a marketplace for private securities. Firms with buzzy new technologies, such as artificial-intelligence chatbots and other forms of whizzy “generative AI”, are also likely to attract investments—especially if those technologies already work in practice and underpin a viable business model. Another category of startups likely to gain favour comprises those involved in industries that governments deem strategic. In America, that means climate-friendly technology and advanced manufacturing, on which Uncle Sam is showering subsidies and government contracts. Some 8% of the deals all our whales made in the second half of 2022 involved firms working on technologies to combat climate change, for example, up from 2% in the same period of 2021. Last year Andreessen Horowitz launched an “American Dynamism” fund, which partly invests in firms that rely on government procurement, such as Anduril, a defence-tech startup.Sovereign-wealth funds are likely to be looking elsewhere. Seed deals are simply too small for them: whereas the typical early-stage American company is worth about $50m, in 2021 the median value of startups backed by the sovereign funds was a whopping $650m. And to them, what counts as “must-have” startups is somewhat different, determined less by the market or other states’ strategic imperatives, and more by their own governments’ nation-building plans.On February 16th PIF said it would take a stake in VSPO, a Chinese platform for video-game tournaments. This is part of a plan dreamed up by Muhammad bin Salman, the Saudi crown prince, to invest $38bn in “e-sports” by 2030 and make Saudi Arabia a gamer’s mecca. Temasek invests heavily in firms that develop technology to boost food production. In the past year it backed Upside Foods, a startup selling lab-grown meat, and InnovaFeed, a maker of insect-based protein. This is motivated by Singapore’s goal of locally producing 30% of the city-state’s nutritional needs by 2030, up from about 10% in 2020. Rohit Sipahimalani, chief investment officer of Temasek, thinks that over the next few years his focus will shift towards “breakthrough innovation rather than incremental innovation”, on the back of government support of strategic tech. One group of firms is likely to see less investment from our whales, however: those in China. The Communist Party’s harsh two-year crackdown on consumer technology may be easing but the VC titans remain wary of what was until recently one of the world’s hottest startup scenes. An executive at a big venture fund says that in the past, foreign investors in China knew that the government would be respectful of their capital. Now, he sighs, it feels like the government “has pulled the rug out from underneath us”.Tiger has said that there is a “high bar” for new investments in China. GIC has reportedly scaled back its investments in China-focused private funds. Mr Sipahimalani of Temasek says diplomatically that he is trying to avoid investing in “areas caught in the cross-hairs of US-China tension”. Sequoia is reportedly asking external experts to screen new investments made by its Chinese arm into quantum computing and semiconductors, two such contentious areas. All told, the number of our whales’ deals with Chinese startups fell from 22% of the total in 2021 to 16% in 2022. After the dotcom crunch VC investments needed nearly two decades to return to their previous peak. Today’s tech industry is more mature, startups’ balance-sheets are stronger and, according to the Silicon Valley Bank, their peak valuations relative to sales are lower than in 2000-01. This time the whales of VC are unlikely to need 20 years to nurse their wounds. But the experience will have lasting effects on the sort of businesses they back. ■ More
IN THE POPULAR imagination, a corporate board seat looks like the cushiest sinecure in business. Board members appear to get paid—often handsomely—to attend a few meetings a year and to nod knowingly as the chief executive pontificates on strategy. They seldom make the news unless the occasional tut-tut results in the CEO being shown the door, or an activist investor campaigns for a seat at an iconic company (as has happened in recent months at Disney, Salesforce and Tesla). Once the errant boss is out or the activist campaign is over, either because it succeeded or, as in Disney’s case, the challenger is placated with concessions, the board slinks back into comforting obscurity.Listen to this story. Enjoy more audio and podcasts on More
Compared with the attention heaped on Bob Iger’s return to the helm of Disney and the stepping back of Reed Hastings at Netflix, news on February 16th that Susan Wojcicki would resign from YouTube after nine years as ceo caused barely a rustle in the media pages. That is a sign of two things. First, how little attention Wall Street analysts and entertainment-industry scribblers pay to the business of YouTube, even though it has become a hub—as well as a byword—for global video. Second, how overshadowed it is by the teetering ramparts of its parent company, Alphabet. Sundar Pichai, the tech giant’s beleaguered boss, is fighting wars on so many fronts, from Microsoft’s ChatGPT-inspired encroachment on Google search to trustbusters and the Supreme Court, that the goings-on at YouTube must seem like a sideshow.Listen to this story. Enjoy more audio and podcasts on More
The charismatic corporate climber is a common target for resentment in office life. He—and research suggests men are particularly given to such narcissism—hogs the spotlight in meetings, is adept at grabbing undeserved glory, and is a pro at self-promotion. More often than not, he is the boss’s pet. But he rises on the back of another, unsung, corporate archetype: the competent, diligent but unexciting achiever.Listen to this story. Enjoy more audio and podcasts on More
Mathias Döpfner is a polarising figure in Germany. Lefties loathe him for leading Axel Springer, a publishing giant, because of the aggressive gutter journalism of Bild, its flagship tabloid that helps set the tone of the political debate. Conservatives take umbrage at his provocative pronouncements. And jealous types of all stripes envy his transformation from music critic to media mogul, who in 2020 received Springer shares worth a cool €1bn ($1.1bn) from Friede Springer, widow of the firm’s eponymous founder, as a gift. Listen to this story. Enjoy more audio and podcasts on More
“It’s free and always will be,” Facebook vowed on its landing page for nearly a decade. The world’s largest social network still is. But from this week its users and those of its sister app, Instagram, will have the option of paying $11.99 a month for a “verified” account, buying them better customer service, more widely distributed posts and a blue badge next to their name.The subscription is the latest example of a growing trend. Last June Snapchat, a messaging app popular among 20-somethings, launched a $3.99 plan called Snapchat+. In December Twitter relaunched Twitter Blue, an $8-per-month service. Like Meta’s offering, both offer an assortment of perks, the most significant being a more prominent place for the user’s posts in the feeds of others.It is hardly surprising that ad-supported networks are looking to diversify their sources of revenue. After years of non-stop growth the online-advertising business has hit a speed bump. The great one-off shift of ad budgets from offline locations, like newspapers, to the web is mostly complete. And since 2021 mobile advertising has been hampered by anti-tracking rules pioneered by Apple, which make it harder for apps like Facebook to target ads and measure their effectiveness.The results have been painful. Meta, Facebook’s parent company, has reported falling revenue in each of the past three quarters. Despite a recent rally its stock is trading at less than half the value at its peak in 2021. Snap, which owns Snapchat, has lost nearly 90% of its market value in the same period. Twitter, which was bought last October by Elon Musk, a mercurial self-styled “technoking”, is “trending to breakeven” having previously faced bankruptcy, its owner tweeted this month.Subscriptions are no substitute for ads. Snap said on February 17th that 2.5m people had signed up to Snapchat+, less than 1% of its app’s 375m daily users. That implies annual subscription sales of no more than $120m, or less than 3% of Snap’s total revenue last year. Though Twitter has not said how many have joined Blue (its entire press office seems to have been sacked), a recent leak put the figure at below 300,000. The product remains a work in progress, with promised features such as fewer ads still billed as “coming soon”. On February 17th Twitter adopted a new approach to driving sign-ups, announcing that two-factor authentication by text message, a security feature, would shortly be turned off for those who don’t cough up.Meta says its offering is aimed at “creators”, who use its platforms for work and might be most willing to pay for verification and extra reach. Whereas “Elon has a plan for everyone to buy Twitter Blue (but has yet to give good reasons why), for Meta it is about a scalable way to prevent impersonation of businesses [and] celebs,” suggests Benedict Evans, a tech analyst. Rob Leathern, a former Facebook executive, rejects the idea that the plan is a copy of Snap’s and Twitter’s efforts: Facebook has been working on verification for years, he says, citing its acquisition in 2018 of Confirm.io, a biometric-ID startup.To the extent that social networks embrace subscription it will mean a windfall for the mobile platforms that host their apps. Google, which runs the Android operating system, and Apple, which runs iOS, make no money from apps’ advertising revenue, but take a cut of consumers’ in-app purchases, including recurring subscriptions. Having whacked the mobile ad business with new privacy rules, Apple and Google stand to profit from the resulting move to subscriptions.There may be a sting in the tail. Whereas Meta’s new service costs $11.99 for those signing up on the web, the price if paying via the app is $14.99. Similarly, Mr Musk, who has called Apple’s fees “a 30% tax on the internet”, charges $8 for Twitter Blue online and $11 in app. Such two-tier pricing has proved controversial, with Apple blocking apps such as Fortnite, a video game which told users they could pay less in a browser. But as more large companies embrace differential pricing, consumers may learn that they can get a big discount by signing up outside Apple and Google’s ecosystems. ■ More
“Choiceful, discerning, thoughtful.” That is how Walmart’s boss, Doug McMillon, described consumers on the American retail giant’s quarterly earnings call on February 21st. That may be so. What they are not, at least in aggregate, is careful, thrifty or frugal. Last year consumer spending increased even as real disposable income declined by more than 6%. The splurge continued in January, as America shopped its way through a warm winter, buoyed by 517,000 new jobs and a sizeable inflation-linked bump in social-security payments. Last month retail sales rose by 3% month on month, and consumer sentiment reached its highest level in more than a year. Those looking for evidence of a “soft landing”, where the economy avoids a recession despite tighter monetary policy, found solace in the American consumer.On the surface, Walmart’s fourth-quarter results look like exhibit A for the optimists. The company’s comparable sales in America grew by a faster-than-expected 8.3%, compared with a year earlier. Look closer, though, and the earnings are full of warning signs. A big reason for Walmart’s market-share gains in groceries was cash-strapped consumers, including high-income families, trading down from fancier supermarkets. Its higher-margin discretionary offering, which includes toys, clothes and homeware, did less well. That was despite heavy discounting of wares in order to clear inventories overstocked as a result of post-pandemic miscalculation about shoppers’ appetite for things like garden furniture. Most troubling, Walmart forecast sales growth of 2.5-3% for the current fiscal year, below analysts’ expectations.Other retailers tell a similar story, more poignantly. Home Depot, which also reported its results on February 21st, disclosed its seventh successive year-on-year decline in transaction volumes—and this quarter, for the first time, it was not offset by growth in the average size of transactions. The company’s share price fell by more than 7% on the news. Shoppers’ baskets may get lighter still as jitters hit the housing market: according to Barclays, a bank, the more the asking price for properties fall, the less consumers spend on an average trip to Home Depot.Following a pandemic-era blow-out, investors expect retailers’ margins to narrow. Although the worst labour shortages have subsided, wages remain high. In the case of Walmart and Home Depot, they are rising. In January Walmart announced pay increases which will raise its average hourly wage to more than $17.50. uBS, a bank, estimates that such moves will cost the company around $1bn a year. Home Depot said that it would spend an extra $1bn on higher hourly wages for workers. A bigger worry is the potential drop-off in consumer demand. The tailwind from strong household balance-sheets, fortified by pandemic-induced saving and government handouts, will not blow for ever. According to Goldman Sachs, another bank, households have spent a third of their excess savings and will have spent another third by the end of 2023. Firms that, like Home Depot and Walmart, were quick to flaunt their pricing power last year are now more careful about further price rises, lest this put shoppers off shopping. Last week Kraft Heinz, a food conglomerate, said it was mostly done raising prices this year. Even well-heeled consumers, who disproportionately drove retailers’ sales growth in 2022, are feeling the heat, as Walmart’s success with them shows. It is all too easy to imagine Mr McMillon’s discerning shoppers turning into dispirited ones. ■ More
