#12. Party like it’s 1999
January 17, 2022
VC fundraising has boomed over the last 18 months. US VC funds of the 2020 vintage (those that started investing in 2020) have outperformed the S&P 500 by over 2x (72% v. 31% IRR). 2019 US VC funds have similarly outperformed. As have 2020 global VC funds. As have 2019 global funds. It’s been pretty, pretty good. And that’s on $294 billion invested globally into startups from VCs in 2020.
Why? Because VC returns aren’t insulated from public markets. In fact, they’re largely driven by them. Big tech multiples and VC-backed IPOs have similarly skyrocketed over the last 18 months, driving up private market fundraising and confidence. Apple, Microsoft, Google/Alphabet, and Tesla alone are responsible for about half of the S&P 500’s gains since April. Times have been good for VC. They haven’t been this good since 1999. What’s special about 1999? That was a minute before the dot com crash that investors and start-ups look back on and think “well we’d never do that again. Pets.com? Hohoho what idiots.” The question for VCs and their investors are, when will the music stop on public tech confidence?
Come a market downturn, there will be a very rapid bifurcation of funds. VCs doing their own version of momentum investing (i.e., chasing hyped up industries with high multiples) will falter. Those whose portfolios are built on start-ups taking advantage of structural inefficiencies in industries will continue to build value. Per Axios, 90% of institutional investors plan to increase their VC footprint and 40% expect the IPO pace to continue. Those 40% are likely the ones who will get washed out. Maybe a portion of them have actually thoroughly thought it through. But my guess is they believe the party won’t stop because their investment strategy depends on it. Investment strategies that depend on the biggest boom in VC history aren’t ones I want to invest in. Good investors won’t say “oh but this won’t end.” They’ll say “when we go through this next very normal part of the cycle, this is why our thesis and portfolio hold up.”
Anyway 🤞.
