Research Shows Investment Firms “Run Toward the Storm,” Despite Crashing Valuations

Shrinking company valuations might cause some investment firms to slow down, but there is still plenty of investment cash to be had.

A photograph shows lightning discharges from a thundercloud over trees in Montlouis-sur-Loire, Central France, on May 22, 2022. (Photo by GUILLAUME SOUVANT / AFP) (Photo by GUILLAUME SOUVANT/AFP via Getty Images) AFP via Getty Images AFP via Getty Images

Dramatic shifts in public markets can have equally dramatic impact on how private investors behave. This year, for example, the cratering of stock markets—particularly tech companies—is forcing even some of the world’s largest private companies to consider whether it is worth raising new capital at a lower valuation, the dreaded “down round.”

On the investor side, too, downward valuations change behavior. Last year, before Russia invaded Ukraine and before runaway inflation took root, all the investor chatter was about the increasingly rapid pace of deals. First Softbank, then Tiger Global, descended on Silicon Valley with bottomless pockets and astonishing speed, to the point where even the fastest venture firms worried about the quality of the deals. But this week, The Information reported that due diligence has returned “with a vengeance” to the world of venture capital (VC). “No longer in a rush to beat out competitors, investors are taking longer to close deals and spending more time vetting a startup’s business,” the publication said.

Intriguingly, at least on the private equity side, this trend can actually be quantified. BluWave is a Tennessee-based company that helps hundreds of private equity firms conduct due diligence and value creation. It measures the use of its tools to learn how much time is spent on those two tasks.

According to a BluWave study released Wednesday (July 20), private equity companies spent 32% of their time on due diligence activities in the second quarter of this year, with the remainder being spent on value creation. That figure is up from 22% in the first quarter, but it is far from the highest in recent years; in the fourth quarter of 2020, 44% of private equity firm time was taken up with due diligence.

These data suggest that at least some private equity firms view the current economic anxiety as an opportunity. “The best companies run towards a storm,” Sean Mooney, founder and CEO of BluWave, said in a statement. “This is the time for companies to become more efficient and get the right strategies, people, and technologies in place.”

Even if the pace of venture capital slows down somewhat, there is still plenty of money out there for startups. PitchBook recently noted that US VC funds closed on over $120 billion through June 30, which is already the second-highest total of any year. Research Shows Investment Firms “Run Toward the Storm,” Despite Crashing Valuations