Seed of doubt: venture capital tightens up

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Hello and welcome to the Intelligence from the Economist. Today from London, I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. It was supposed to be the most transparent election ever in Nigeria, but things didn't quite go to plan. We look at the outcome and why it's likely to be challenged in the courts. And in the early days of the pandemic, lots of people reached for new and interesting condiments to jazz up all those meals at home. We examine an old and interesting condiment that caught fire during that time. Chili Crisp. First up though, It's really striking how many youngish businesses that are now household names got their start with venture capital. Snap, Uber, WhatsApp, Alibaba, Facebook, Airbnb. The list is enormous and pretty, pretty techy. Those vast injections of financing for new business ideas have kind of altered what people expect from startup companies. It wasn't about early profits from the better mousetrap. It became cutthroat stuff of grabbing market share and winner takes all cash splashing battles. The returns, they could come down the line after the winner had taken all. But times are changing, belts are tightening and some kinds of startups might not find the backing they might once have counted on.

There have been lots of VC funded companies that went bust last year and so it's starting to feel a bit like a venture capital winter.

Guy Scriven is our US Technology correspondent.

The amount of funding that's going into venture capital, that's come down by about a third in the past year. If you look at the NASDAQ index, which is compiled of lots of tech companies which are listed, it had one of the years on record last year. What you've seen also is that valuations are dropping as well. So between the end of 2021 and 2022, the average value of listed stocks in America dropped by about 2/3. And you saw a similar decline in the private market as well. So later stage private firms, so firms which might go public in the next two or three years, their value fell by about half over that same period across a lot of different metrics. You've had quite a sharp downturn in venture capital.

So those of us with long memories might remember the dot com bust in the turn of the millennium. Are there parallels to be drawn here? I mean, what's going on?

Yes, there are parallels to be drawn. Though it's not quite as bad as the dot com bust. If you look at the performance of startups today, they probably have stronger balance sheets compared with the dot com bust era companies. So the problem today is you had this enormous kind of bull run in venture capital where huge amount of money flocked into the industry. And then last year things started to change. So you had soaring inflation, higher interest rates, and particularly those higher interest rates meant that companies that promised profits very far in the future started to be worthless because those future profits were discounted at a higher rate. What this has meant is basically a kind of slowdown in the amount of money that's being invested in startups in the past year. And you've seen other signs that the venture capital market is suffering as well. Mega rounds, which are rounds in which startups have raised more than $100 million, fell by about 70% and the creation of unicorns. Startups valued at more than a billion dollars fell by even more. They fell by 86% last year. So you've had quite a sharp contraction all across the venture capital market.

So if that's the high level picture, what have investors done in response here?

So it's easier to think about this in three big buckets of investors. One bucket is the conventional venture capital investors, and so that includes firms like Sequoia and Andreessen Horowitz. Another is the hedge funds who invest in stock markets as well and lots of other assets, but also have an interest in venture capital investing. And that includes big firms like Tiger Global and CO2. And then a third bucket that's worth thinking about is the sovereign wealth funds. So these are state backed funds which are enormous and also invest in lots of different assets, but do some investing in venture capital too. And all these different types of venture capital investors have slightly different incentives and motivations and have done slightly different things.

Well, take us through what each of those groups of investors is doing across the board.

You can say that they have all slowed investing and pulled back from startups to different degrees over the past year. The ones that have pulled back the most are the hedge funds. They've in some cases almost completely left the venture capital markets. If you look at the conventional venture capitalists, they have also slowed a bit, but they are also focusing on early stage investing. So investing in very young companies as opposed to investing in companies that are likely to go public in the next couple of years. If you look at the final bucket, the sovereign wealth funds, they've slowed their investing as well. But because they invest not only to make returns, but also for strategic purposes for whichever country they represent, they've continued investing in certain strategic industries.

What kind of companies then to stand to benefit are going to be the focus now that there's, well, a little less money sloshing around.

The way that one investor I spoke to put it was that over the next few years we're going to see a greater share of the kind of venture investment going to companies that produce must have products rather than nice to have products. So if you think of something like cybersecurity, all firms need cybersecurity to some degree. So that's quite a safe bet that probably isn't going to go away anytime soon. During the boom years, there were plenty of software companies and companies doing other things that appeared which basically only have kind of nice to have products. Those kind of companies might be the ones that suffer the most. But the hype cycle of Silicon Valley continues and there are lots of buzzy technologies that people are very excited about. One of the really clear ones is artificial intelligence and in particular AI chatbots. And they're attracting lots of new venture capital investment too.

But where there is still plenty of money sloshing around is in that sovereign wealth fund bucket you described. Even if those are fairly strategic, as you say.

Well, yes, some of their bets are strategic, but they do invest more broadly as well in areas that they are interested in. So a good example of this is Saudi Arabia's public investment fund. It recently, for instance, took a stake in vspo, a Chinese platform for esports. Similarly, if you think about Temasek, which is one of Singapore's sovereign wealth funds, and they invest heavily in technologies which help boost food production. Last year they invested in Upside Foods, which is a seller of lab grown meat, and Innovafeed, which makes insect based proteins. And the reason they do this is Singapore is a city state and doesn't really have very much farmland at all, but it does have a ambition to produce 30% of the country's own nutrition by 2030 and so Temasek invests in ways that might help this goal. Although it's not what you might think of as a strategic industry like missiles or semiconductors.

So it seems like a broad VC winter isn't really what's coming, what's going on here. It's more of a sort of a narrowing of the bets that are being made.

Yeah, I think that is probably true. Overall. There has been a slowdown in investment, but as I said, the really big companies are changing their priorities. So more small companies, more strategic bets and a focus on on profit rather than kind of fast growing companies. And all of this in a way is really quite welcome. You know, a lot of this will probably improve the ecosystem and may even end up producing better startups and better businesses for us all to enjoy the products of in the future.

Thanks very much for your time, guy.

Thanks. Jason.

Chinubu Bola Ahmed.

Of the APC is.

Hereby declared the winner and is returned elected.

Thank you.

On Wednesday, Nigerians woke up to learn of their new president elect.

The road has been long, yet we walk it. The battle has been hard fought, yet we won it.

In a typically slow, measured speech, Bola Tinubu happily accepted his win. But his opponents in the election aren't so happy. In a rare moment of unity, the vice presidents of both main opposition parties sat together in a press conference calling for another election.

The only honest thing to do is cancel the results and then call for another election day when everything is at stake and right now everything is at stake. My country is at stake. So I'm ready to deploy everything I can within the constitution not to let this happen.

They cited the failure of important voting technology and discrepancies in the results.

This election was hyped up to be Nigeria's cleanest ever.

Ore Ogunbi is a British Nigerian dual national who traveled to Lagos to vote and to cover the elections.

For the Economist, Civic Society, International Bodies, everyone had pretty high hopes because the Electoral Commission told us they were really prepared. They also boasted about this new technology that was supposed to be a game changer. It was supposed to identify voters and then transmit pictures of the results from all of the polling units. There's over 170,000 of them to a central online portal for public viewing and verification. Even though the final count was always going to be manual, this system was supposed to help people check for discrepancies, mistakes and just improve transparency. The problem was that it didn't really work. The uploads took ages. We're six days into Counting now. But regardless, the electoral commission declared a winner on Wednesday morning.

And so what were the results at that stage?

Well, 70 year old Mr. Tinubu has won it with 37% of the vote. Behind him was Mr. Abubakar with 29% of the vote. He's from the main opposition. And then Peter Obi of the New Ish Labour Party won 25% of the vote. But they all led in 12 states each. So it was kind of close. The results continue the rule of Tinubu's party, the incumbent APC. But it also threatens to continue the eight years of falling standards for Nigerians. In the eight years of APCs rule, Nigerians have grown poorer on average. Violence and insecurity have increased. But Tinubu's campaign slogan was Emi le Comte, which in Yoruba means it's my turn.

It'S my turn.

After a brutal fight, it seems that in fact it might be.

And what's been the reaction to that result?

Well, Peter Obi's Labour Party is declaring that they have won. And I assure you that good people.

Of Nigeria, that was explored all legal and peaceful auction to reclaim our mandate. We won the election.

And we'll prove it to Nigerian. And there's a chance that he could actually win this. I mean he's successfully challenged election results at a state level in the past, twice in fact. And with over 900,000 votes cancelled, it was close. They could have some success. And after Mr. Obi's declaration, Mr. Abubakar of the PDP also claimed that he had won the election and plans to challenge the results as well.

Okay, let's step back a bit from whether this was a flawed election, whether it will be rerun. How do Nigeria's prospects look with Mr. Tinubu in charge?

Many worry about Tinubu's ability to govern because of his frailty, which made him cancel several campaign events.

Our party will give you the prosperity that you need and we reward you.

He's also not the best orator.

Just be patient with us.

And there are some parallels with the current president who didn't live up to expectations. There are other concerns about his reputation. I mean, he once settled a case when the American government accused him of laundering drug money. He says as a former governor of Lagos that he developed the state. But others argue that he turned it into a personal fiefdom of sorts. Obviously Tinubu denies any wrongdoing then. Financial markets also weren't very happy about Tinubu's win. Nigeria's international bonds Fell on concerns that claims of rigging could lead to instability. Low turnout and a large share of undecided voters also complicated the polls, which had put Mr. Obi well ahead in the race. But now the opposition parties are calling for a rerun based on a number of failures in the voting process.

Failures in the voting process that was supposed to be the most technological and transparent ever.

Yes, quite. But it all started with actual voting day. Monitors from the Centre of Democracy and Development tell us that an hour after voting began on February 25, around a third of voting stations across the country still hadn't opened. Armed men attacked polling units in battleground states like Lagos, Kano and Rivers, which has a history of electoral violence. In addition to that, there were reports of voter intimidation, the snatching of ballot boxes, and even the burning of ballot papers. So all of this impacted already low turnout, with less than 30% of eligible voters actually casting their ballots. In other states, tens of thousands of votes were rejected due to apparent overvoting at polling units. It could have been simple miscalculations, it could have been tampering, but without those proper uploads of individual results, we just won't know.

So the good old fashioned manual counting worked as intended, but the new bells and whistles to make it all much more transparent did not.

And that's what's creating the problems. This device that was supposed to immediately upload pictures of results from each polling unit in real time for public viewing hardly worked on the day. In fact, as I'm recording, we're still waiting for results from thousands of polling units to be uploaded. Many of them that have been are illegible or they're incorrectly labeled, showing results from opposite ends of the country. Some agents have accidentally published selfies. Some of them have uploaded handwritten letters with testimonies of the malpractice that they witnessed. It was just a big mess.

And so in that sense, those opposing this result have some grounds for doing so.

It sounds like, well, yes, I think so, Jason. The Electoral Commission has taken responsibility for the glitches. But regardless, the delays have really raised suspicions. Many of the allegations of foul play are not without evidence. The Electoral Commission officials repeatedly promised that where there are discrepancies, manual tallies of results would be corroborated with the digital uploads it was promised as an anti rigging fail safe. But these delays, these incorrect uploads, or in some cases, uploads of handwritten forms that have clearly been scribbled over or rewritten in some kind of way, have brought on questions, unhappy voters are flooding social media with pictures of results announced at their own polling stations, attempting to point to discrepancies with the results announced at higher levels. At one collation center in Lagos, a Labour Party official complained that her colleague signed the results at gunpoint. In Rivers State, the returning officer paused the count after receiving death threats, but the results were announced anyway. The opposition will almost certainly be taking these results to court, in spite of fears that the judiciary could be compromised. Evidence from social media and reports from international observers could be particularly crucial. And some very close results are inevitably going to come into question. In addition to having the highest number of votes, Tinubu needed at least 25% of the vote in at least 25 states to win outright. In at least three of these states, he scraped that threshold with only 1%. And so those close calls are probably going to be subject to a lot of scrutiny.

And so looking at this from a higher level, what do you think all this means for the country?

Well, there were fears about violence, but those haven't really materialized yet. The Labour Party has clearly called for peace and personally I still have a lot of hope for the country and even the judiciary. But for a lot of people this process and this result has been really disheartening. The Labour Party is convinced that this next government won't really have a mandate.

They refused to upload results, they refused to refer to IREF just for them to defeat us. It took a serving government, illegality and constitutional breach to defeat Peter, Abe and my humble self. I tell you we're winners.

And a victory perceived by some to be illegitimate does put Tinubu on shaky ground. The opposition parties are clearly well supported. The country is really divided, shown by how the votes were split. And it doesn't help that Tinubu himself has a reputation for being a self interested kingmaker desperate for his own turn. So yes, it seems that he's got it, but there's still a sense that the battle here is not quite won for some.

Anyway, thanks very much for your time Ore.

Thanks for having me. Jason.

During the pandemic, people on social media jumped from one food trend to the next just to keep life in lockdown. Interesting.

Do you love sourdough bread and dream of making it, but often felt intimidated by how tedious it seems?

I have made this recipe for this banana bread dozens, hundreds, let's just say hundreds of times.

But from the Instagram ether arose an age old Chinese condiment that people in the west fell in love with. It goes by lots of names, but most people know it as Chili Crisp.

Chilli Crisp is a glowing rusty red oil and it's filled with bits of chilli, often Szechuan peppercorns. And also it's heavy with crispy fragments of garlic and shallots. And then it can include other ingredients like fermented black beans and sesame, which are all mixed together to form this delicious condiment which has really become the source of the moment.

Josie Dalap is our Middle east editor and writes about food for the Economist.

And the place that it has secured in lots of people's fridge doors tells you a story about how foods become fashionable.

So talk me through Chili Crisp. It's not a new thing.

No, Chili Crisp is not new in China. They've been eating varieties of the stuff for centuries. Today, a company called Laogan Ma is the most famous brand. It's made in the southwestern province of Guizhou, and It started in 1989 when a woman called Tao Huabi started selling noodles which were coated with this sauce, and they were incredibly popular. And a few years later, she set up a factory, and her face peers out sternly from the label on all 1.3 million bottles that the company now says it produces. A compare that to something like Heinz. Their plant in the Netherlands makes about 10 million bottles of ketchup a week.

It sounds like it's got lots of things that I like, but what does it taste like?

Well, most importantly, it tastes delicious. It's got a lot of things that a lot of people like. So it's spicy, but it's not overly so. It's not gonna set your mouth on fire. You can also use it to perk up anything from eggs to avocado to your old pizza crust. And I think one that's particularly appealing about it as condiment is that it has lots of these crispy bits, these crispy gubbins in it. And humans like crispy foods because we have a sort of evolutionary preference for them, since crunchiness is often an indicator of freshness.

But how did it catch fire, as it were, in the way that you describe and you mentioned, it's a sort of totemic for how food crazes begin.

I spoke to Kevin Vetter, who works for McCormick's Flavour Forecast, which predicts and influences which foodstuffs, which flavors, which tastes become popular. And he explained how, you know, in usual times, tastemakers interview chefs, they visit restaurants, they talk to historians, they really sort of immerse themselves in what people are cooking and eating to find out what the next popular flavor or foodstuff is going to be. But during the COVID 19 lockdowns, obviously they couldn't do that. And so instead, they had to watch what people were cooking and eating, both home and professional chefs via things like social media. And the answer, at least one of the answers, was chili crisp. And you could see all of these examples of people making it and teaching each other how to make it. And lots of people began doing that. And you can see it in the future becoming something like salsa, which, once upon a time was a very exotic thing to eat and is now really a pantry staple.

Okay, so I'm gonna dive in. I didn't make any sourdough, but I will have a go with chili crisp. How should I use it?

Best way in, if you're gonna go for something incredibly simple and quick, is on top of fried eggs on toast, all of this crunchy, crispy stuff that comes with the chili oil just to put on top of that. And I think it's that contrast that works so well.

This is all making me very hungry. I've got to go. But for now, thanks very much, Josie.

Thank you.

That's all for this episode of the Intelligence. The show's editors are Chris Impey and Jack Gill. Our deputy editor is John Jo Devlin, and our sound engineer is Will Rowe. Our senior producers are Sam Westron and Rory Galloway. Our creative producer is William Warren. Our producers are Alize Jean Baptiste and Kevin Kaners. And assistant producer Barkley Bram. With extra production help this week from Maggie Khedifa and Emily Elias, we'll all see you back here on Monday. Sam.