Karen Petrou: Unicorns, Zombies, and Capital Regulation

2023-12-11T10:23:04-05:00December 11th, 2023|The Vault|

As was again clear at last week’s Senate Banking hearing, credit availability is much on the mind when it comes to LMI communities and small business.  This makes a good deal of sense given the capital proposal’s unintended consequences, but it’s only part of the story.  When start-up ventures are unable to get bank loans, they turn to the capital market.  This is often necessary due to the start-up’s risk, but in recent years it’s also been driven by hundreds of billions of investor dollars desperately chasing higher yields as the Fed year-in, year-out kept real rates below zero.  Now that rates are finally, really positive, yield-chasing funds have evaporated.  As the New York Times made clear, unicorns have turned into zombies.  Some of the walking dead deserved to die long ago, but the flood of capital-markets funds exiting this sector also strands ventures that could and should have been vital innovators.  Had these entities been buoyed by bank loans as soon as they were viable, many would still be walking.

Not every zombie is an innovator we’ll sorely miss.  Many bet big on not-so-critical products such as still more scooters.  However, one sector left high and dry – early-stage biomedical research – is literally a matter of life and death.

In February of 2021 when the economy was growing but real yields were negative, the total enterprise value of approximately 700 publicly-traded biotechs was $598 billion.  As of the latest data, this is down to $213 billion …