The same ‘easy money’ policies that enabled excessive spending and mal-investment in real estate fuelled a boom and bust now unfolding in the venture capital and start-up space, as well. This has broader implications for asset prices, lenders, investment, jobs and the economy at large. See, Start-up failures rise 60% as founders face hangover from the boom years:
In the boom years, VCs would encourage founders to take larger and larger investments, inflating valuations, according to Healy Jones, vice-president at Kruze Consulting, an accountant to hundreds of venture-backed start-ups. It was a “crazy fundraising environment” in which “VC and founder incentives did not always align”, he said.
Founders are now facing the hangover. The jump in bankruptcies is due to the fact that “an abnormally high number of companies raised an abnormally large amount of money during 2021-2022”, said analysts at Morgan Stanley in a recent note to clients.
VC-backed companies employed 4mn people in the US, Morgan Stanley said, creating “spillover risks to the rest of the economy” should the rise in bankruptcies fail to slow.
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