It's 'liquidity, stupid': VCs say tech investing is tough amid IPO lull and 'nuts' AI hype

cnbc.com:

LISBON, Portugal — It's a tough time for the venture capital industry right now as a dearth of blockbuster initial public offerings and M&A activity has sucked liquidity from the market, while buzzy artificial intelligence startups dominate attention.

At the Web Summit tech conference in Lisbon, two venture investors — whose portfolios include the likes of multibillion-dollar AI startups Databricks Anthropic and Groq — said things have become much more difficult as they're unable to cash out of some of their long-term bets.

«In the U.S., when you talk about the presidential election, it's the economy stupid. And in the VC world, it's really all about liquidity stupid,» Edith Yeung, general partner at Race Capital, an early-stage VC firm based in Silicon Valley, said in a CNBC-moderated panel earlier this week.

Liquidity is the holy grail for VCs, startup founders and early employees as it gives them a chance to realize gains — or, if things turn south, losses — on their investments.

When a VC makes an equity investment and the value of their stake increases, it's only a gain on paper. But when a startup IPOs or sells to another company, their equity stake gets converted into hard cash — enabling them to make new investments.

Yeung said the lack of IPOs over the last couple of years had created a «really tough» environment for venture capital.

At the same, however, there's been a rush from investors to get into buzzy AI firms.

«What's really crazy is in the last few years, OpenAI's domination has really been determined by Big Techs, the Microsofts of the world,» said Yeung, referring to ChatGPT-creator OpenAI's seismic $157 billion valuation. OpenAI is backed by Microsoft, which has made a multibillion-dollar investment