Could Price Corrections, Lower Interest Rates Offset ‘Zombie’ Funding?
Startup investing plummeted in recent months.
In 2021, more than 18,500 venture capital (VC) deals were signed. Last year, according to PitchBook, more than 15,300 investors supported at least one VC deal in the U.S. Yet, as of Q3, 2024 only about 11,425 deals were inked — a 25 percent decline from 2023. Some analysts attribute this steep plunge in dealmaking to “zombie” funding, in which VCs ostentatiously remain in business but are dying a slow death because they lack the cash needed to support new ventures.
As PitchBook explains, “So-called zombie funds can’t raise money … or write checks to new startups. Unlike the companies they back, which go bankrupt when they run out of money, [VC general partners] tend to disappear quietly. By overseeing their existing portfolio and collecting management fees, these firms can operate for years as zombies.”
Business Insider traces the origins of zombie funding back to the Great Recession, “when a wave of [VC] firms slowly met their demise” due to harsh economic conditions. Now, the media outlet predicts, a new wave of VCs could face similar undead status, but this time, the “destruction … will likely be much uglier considering the abundance of new VC funds started during the height of the tech boom from 2018 to 2022.” Simply put, the surge in new, tech-focused VCs — more than 1,100, according to PitchBook — that were launched during the 2018-to-2022 time frame may soon be relegated to the walking dead.
Vibrant VCs Vs. Zombies
What separates healthy, vibrant VCs from those facing a lingering half-life? Susan Lindeque, CEO of Avestix, believes sound fiscal sense and a degree of patience are essential ingredients.
“In 2022 and early 2023, many late-stage startups saw significant valuation markdowns,” she says. “Although the market has improved, venture investors need to be wary of overpaying, especially for startups that have yet to demonstrate profitability or sustainable growth. The smart VCs are those that are waiting for further price corrections.”
Last month’s interest rate reduction helped improve market conditions. Previously higher rates cut into the availability of startup funding. Now, Lindeque says lower rates could be a lifeline to founders who seek support but are understandably wary of zombie funding.
“Lower interest rates make borrowing cheaper,” she explains. “This potentially could increase the availability of capital for VC firms. Investors may be even more inclined to allocate funds to higher-risk, higher-reward assets like venture capital because of reduced borrowing costs.” Lower borrowing “could stabilize or increase valuations for startups, particularly in tech and growth sectors because they tend to be more sensitive to interest rates,” she says.
“This could encourage more dealmaking among VCs, which may help startups raise capital at more favorable valuations, making them more attractive to investors,” she says. “This might increase a risk appetite, possibly encouraging investors to seek higher yields in riskier asset classes, such as venture capital. This, in turn, could lead to increased capital inflows into VC funds and a willingness to invest in early-stage startups.” Lower interest rates alone won’t likely resuscitate zombie VCs, she says, but they could reward patient investors who are seeking opportunities that can demonstrate solid business fundamentals.
Next steps
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