Silicon Valley entrepreneurs lose out as venture capital shifts from megafunds, while investors exit the ARK Innovation ETF, impacting Mid Tech companies.
Although a bull market may be being driven by Big Tech, Silicon Valley entrepreneurs aren’t benefiting from any spillover effects. Venture capitalists are decreasing their investments in megafunds, depriving startups of much-needed financing while they travel the protracted path to an IPO. Investors are swiftly leaving Cathie Wood’s ARK Innovation ETF, which is still heavily weighted with pandemic-era tech companies like Roku and Zoom, whose effects are more akin to mild annoyances than major disruption. They will be known as Mid Tech.
Wall Street has once again rewarded productive corporations and AI hype. Because of this, a new bull market is virtually exclusively driven by the lucrative and AI-curious mega-cap MAAAN stocks (Microsoft, Apple, Amazon, Google parent Alphabet, and Nvidia). Wall Street and venture capitalists are impatiently waiting to see which startup or Mid Tech business will start producing big revenues and join the adult table.
You are aware of the reason: The Fed’s push to raise interest rates has stopped the flow of inexpensive funding for growth-oriented tech companies, both public and private. In contrast, given the current state of the economy, major institutional investors like pension funds and university endowments are being far more frugal. This has caused severe problems for venture funds and one of the most well-known ETFs in the sector:
- Pitchbook reports that venture firms have funded only seven $1 billion-plus VC funds in 2023, compared to prior years. The Wall Street Journal reported that Andreessen Horowitz is considering shrinking its next venture funds, Tiger Global and Sequoia Capital have cut back, and Y Combinator closed its long-running growth investment fund.
- Despite a 50% year-to-date gain, ARK shares are 70% below their peak, and the company’s assets under management are around $9 billion, down from $30 billion owing to investment losses. The ETF lost $717 million in the past year, according to FactSet.
“You have a whole group of people who got in somewhere near the top and are sitting on horrific losses,” Matthew Tuttle, CEO of Tuttle Capital Management, the company that runs the inverse-ARK ETF, told the Wall Street Journal. Some of those individuals, in my opinion, have declared, “I’m never getting back to even; this is probably the best I’m going to do, and it’s time to get out.”
In the end
By mistake, only Tesla and Zoom from ARK’s top five investments—Tesla, Roku, Zoom, Coinbase, and Block—made money in 2017. However, the fund has also placed some bets that have left investors scratching their heads, such as selling off its interest in Nvidia in January before the company’s meteoric rise to a trillion-dollar market cap. So much for letting the chips that power AI supercomputers fall where they may.