Cash crunch could wipe out venture-backed firms this year, Morgan Stanley warns

Start-ups backed by venture capital (VC) could be wiped out in droves this year as cash dries up and investors turn off the taps, analysts have warned.

The venture capital sector globally has been buffeted by rapid interest rate hikes and wild market gyrations in the past 12 months, with investors dramatically scaling back investment and companies slashing their valuations to raise money.

Venture investment in the fourth quarter of 2022 plunged to less than half of the frothy peaks recorded in the final three months of 2021, as firms raised just £75.6 billion across 7641 deals.

In the US, analysts at Morgan Stanley have now warned that “challenges abound” and the average VC-backed firm could face collapse this year.

“At current cash burn rates, the median VC-backed company will run out of cash in [the second half of this year],” the bank’s analysts said in a note yesterday.

“Broader impacts could be significant, VC-backed companies employ upwards of five million people, and drive revenue in important public equity segments,” they warned.

Limited partners, which back VC investors with funds, face over $500bn of capital calls at a time when portfolios had been marked down in value, they added.

The warnings come amid a tectonic shift in strategy for start-ups and VC investors, who have soured on the high-growth cash burn strategies that dominated for the past decade.

Investors have placed a premium on profitability and called for start-ups to rein in ‘growth at all cost’ business plans.