Venture Investing Just Had Its Biggest Q1 in 15 Years, Says PwC Report(recode.net)
recode.net
Venture Investing Just Had Its Biggest Q1 in 15 Years, Says PwC Report
http://recode.net/2015/04/16/venture-investing-just-had-its-biggest-q1-in-15-years-says-pwc-report/
5 comments
CPI dramatically understates inflation, because non-compressible, and non-substitutable items are excluded (such as fuel.) The basket of CPI goods is arbitrary and changed from time to time to massage the numbers, and the things that would show inflation the best are excluded from the calculation.
Unfortunately, the correct measure of inflation is monetary inflation, but the fed stopped publishing the numbers to derive that over a decade ago-- about the point when inflation was regularly exceeding %10 a year.
At this point, to be honest, with the FOMC's efforts to "manage" the "markets", which really means, manipulating the economy to make the Fed's inflationary policies seem less damaging, and the fed's direct monetization of treasuries (an open secret) the economy is pretty highly distorted.
This makes these kinds of comparisons wrong, but it also means the economy itself is in a bubble because the distortion obscure the true price of money leading to mal investment.
Eventually this will no longer be sustainable.
Unfortunately, the correct measure of inflation is monetary inflation, but the fed stopped publishing the numbers to derive that over a decade ago-- about the point when inflation was regularly exceeding %10 a year.
At this point, to be honest, with the FOMC's efforts to "manage" the "markets", which really means, manipulating the economy to make the Fed's inflationary policies seem less damaging, and the fed's direct monetization of treasuries (an open secret) the economy is pretty highly distorted.
This makes these kinds of comparisons wrong, but it also means the economy itself is in a bubble because the distortion obscure the true price of money leading to mal investment.
Eventually this will no longer be sustainable.
So VC investment still needs to increase by 37% to equal Q1FY2000
Not according to the money tree report which says q1-2000 was 28b.
So VC investment would still need to more than double to match it.
https://www.pwcmoneytree.com/HistoricTrends/CustomQueryHisto...
Not according to the money tree report which says q1-2000 was 28b.
So VC investment would still need to more than double to match it.
https://www.pwcmoneytree.com/HistoricTrends/CustomQueryHisto...
Do you mean to note that these numbers are not inflation adjusted?
This added to real GDP being more than 25% higher than it was in 2000, makes this surprising in the opposite way than the article's intent (to me, at least)
In my opinion the most interesting number when it comes venture investing, is what the hedge funds are putting in now:
"While venture capitalists poured $11.3 billion into startups in the first quarter, up only 11% from a year ago, non-traditional funds invested $6.4 billion, a 167% increase, according to a report on Tuesday from CB Insights, which tracks the market. Two years ago, the outsiders contributed less than $1 billion."
http://finance.yahoo.com/news/hedge-fund-money-going-to-vent...
"While venture capitalists poured $11.3 billion into startups in the first quarter, up only 11% from a year ago, non-traditional funds invested $6.4 billion, a 167% increase, according to a report on Tuesday from CB Insights, which tracks the market. Two years ago, the outsiders contributed less than $1 billion."
http://finance.yahoo.com/news/hedge-fund-money-going-to-vent...
This is an important point because money from "traditional" funds like Kleiner Perkins is different than money from "non-traditional" funds, like Goldman Sachs. Venture capitalists balance all risk within their VC fund, but "non-traditional" funds can balance risk against other funds. For example Goldman can balance its real estate risk against its venture capital risk. A reliable comparison does not exist between "traditional" and "non-traditional" venture funds because their volumes differ so much. Thus they cannot, taken together, enable investors to make meaningful inferrences from "Venture capital market" trends alone. Non-traditional funds see the market differently than traditional funds, because they are hedged in many different areas.
Yes - the rush of private equity, hedge fund, mutual fund and sovereign wealth fund money has been massive. These unusual suspects have quickly become almost 1/3 of the investment $ into private fast-growth companies.
The full 121 page report referenced in the Yahoo article is available here for download.
https://www.cbinsights.com/research-venture-capital-q1-2015
note: CEO of CB Insights
The full 121 page report referenced in the Yahoo article is available here for download.
https://www.cbinsights.com/research-venture-capital-q1-2015
note: CEO of CB Insights
The inevitable bubble chatter will pick up steam again. There are many reasons to believe we're in a bubble and in our view, stronger reasons to believe we're not.
Here are several in support of a bubble.
1. There were 9x as many $100 million private financing rounds as there were $100 million public offerings. People are starting to call these private IPOs which is a bit of an oxymoron but the point around private market money being plentiful and even providing some liquidity to founders and early investors is happening even in some private transactions.
2. In the first 3.5 months of this year, there were 16 new companies that raised money at a billion dollar valuation or higher. There were 15 in all of 2013.
3. All sorts of new money is flowing into the market, i.e. private equity, hedge funds, mutual funds, corporations and sovereign wealth funds.
Why we are NOT in a bubble.
1. All of the US unicorns combined are worth less than Facebook
2. They collectively are worth 3.5% of the Nasdaq 100. Of course, notable tech companies like Twitter are also on NYSE so the % is overstated.
3. The public markets have not lost their mind. In fact, they're fairly hostile to new issuances which despite VC bellyaching is a good thing for VCs and in maintaing the current climate. When retail investors get burned on tech, the bubble will quickly pop. But right now, that's not the case as just calling yourself tech doesn't guarantee a high valuation. The market, while still far from perfect, treats companies with crappy or suspect fundamentals with skepticism (see Box).
4. There is no mechanism that will force a quick contraction. A bubble is typified by rapid expansion and contraction of asset values. The expansion part is happening for sure.
5. But there is not scorecard to provide the contraction. When companies are publicly traded, you have that daily scorecard to force it, but right now, it's private money going in and the beauty of the private markets is you can bury your dead very quietly. In essence, the opacity of the private markets enables investors to point to any failing investment or investor and just say "they were dumb money, we are different". And so there is no event that will pop it.
Notes:
A. I'm the CEO of CB Insights. We track private company financings and exits.
B. A crazy exogenous factor like a disease pandemic, terrorism, a China meltdown, war, etc are not considered in the above. If I could predict those with any certainty, I'd be doing that.
C. I gave a presentation at the Quebec Venture Capital and Private Equity conference this past week on this topic "Bubbles, Unicorn and Our Crazy Private Markets". It may be of interest if you're interested in the data behind some of the above bullets.
https://www.cbinsights.com/reports/tech-bubble-unicorns.pdf
Here are several in support of a bubble.
1. There were 9x as many $100 million private financing rounds as there were $100 million public offerings. People are starting to call these private IPOs which is a bit of an oxymoron but the point around private market money being plentiful and even providing some liquidity to founders and early investors is happening even in some private transactions.
2. In the first 3.5 months of this year, there were 16 new companies that raised money at a billion dollar valuation or higher. There were 15 in all of 2013.
3. All sorts of new money is flowing into the market, i.e. private equity, hedge funds, mutual funds, corporations and sovereign wealth funds.
Why we are NOT in a bubble.
1. All of the US unicorns combined are worth less than Facebook
2. They collectively are worth 3.5% of the Nasdaq 100. Of course, notable tech companies like Twitter are also on NYSE so the % is overstated.
3. The public markets have not lost their mind. In fact, they're fairly hostile to new issuances which despite VC bellyaching is a good thing for VCs and in maintaing the current climate. When retail investors get burned on tech, the bubble will quickly pop. But right now, that's not the case as just calling yourself tech doesn't guarantee a high valuation. The market, while still far from perfect, treats companies with crappy or suspect fundamentals with skepticism (see Box).
4. There is no mechanism that will force a quick contraction. A bubble is typified by rapid expansion and contraction of asset values. The expansion part is happening for sure.
5. But there is not scorecard to provide the contraction. When companies are publicly traded, you have that daily scorecard to force it, but right now, it's private money going in and the beauty of the private markets is you can bury your dead very quietly. In essence, the opacity of the private markets enables investors to point to any failing investment or investor and just say "they were dumb money, we are different". And so there is no event that will pop it.
Notes:
A. I'm the CEO of CB Insights. We track private company financings and exits.
B. A crazy exogenous factor like a disease pandemic, terrorism, a China meltdown, war, etc are not considered in the above. If I could predict those with any certainty, I'd be doing that.
C. I gave a presentation at the Quebec Venture Capital and Private Equity conference this past week on this topic "Bubbles, Unicorn and Our Crazy Private Markets". It may be of interest if you're interested in the data behind some of the above bullets.
https://www.cbinsights.com/reports/tech-bubble-unicorns.pdf
The inevitable bubble chatter will pick up steam again.
The best reason to believe we're not in a bubble is that people are still talking about a bubble.
It'll take a few more years till we're really at a new peak of irrational exuberance, till everyone has forgotten the last bubble and the damage it caused, till huge valuations with no profits seem completely rational, and no one dares speak out for fear of looking a fool and missing out on the huge gains everyone else is making. At that point, when no-one is talking about bubbles any more (either pro or con), we've entered a new normal, and once again people are talking about the end of history, we'll be in a bubble.
What could pop this bubble when it comes to fruition? There are lots of possibilities, but a dip in profits at one of the big advertising companies might be enough to stop acquisitions and hiring and hit valuation badly. No acquisitions means no exits, no exits means no investment, no investment means no advertising. When contractions arrive, they're often unexpected and impossible to stop, because markets run on confidence.
Volatility over the last few decades is certainly very high, possibly caused by the huge dislocations of globalisation, robotics and computerisation - very similar to the industrial revolution. I see no reason why that volatility would end right now, we are still in a transition period between a collection of protectionist nation states and a global economy, and between an industrial and an information economy. That means more bubbles and more crashes.
The best reason to believe we're not in a bubble is that people are still talking about a bubble.
It'll take a few more years till we're really at a new peak of irrational exuberance, till everyone has forgotten the last bubble and the damage it caused, till huge valuations with no profits seem completely rational, and no one dares speak out for fear of looking a fool and missing out on the huge gains everyone else is making. At that point, when no-one is talking about bubbles any more (either pro or con), we've entered a new normal, and once again people are talking about the end of history, we'll be in a bubble.
What could pop this bubble when it comes to fruition? There are lots of possibilities, but a dip in profits at one of the big advertising companies might be enough to stop acquisitions and hiring and hit valuation badly. No acquisitions means no exits, no exits means no investment, no investment means no advertising. When contractions arrive, they're often unexpected and impossible to stop, because markets run on confidence.
Volatility over the last few decades is certainly very high, possibly caused by the huge dislocations of globalisation, robotics and computerisation - very similar to the industrial revolution. I see no reason why that volatility would end right now, we are still in a transition period between a collection of protectionist nation states and a global economy, and between an industrial and an information economy. That means more bubbles and more crashes.
>> There is no mechanism that will force a quick contraction
I'm curious - what do you think the mechanisms are for unraveling private investment over exuberance?
Just for example, if we assumed that valuations are 100x above reality and things will continue getting worse for a few years. Is it effectively like sub-prime rather than 2000?
Sub-prime was pretty sudden with banks rushing to exit their positions. What could happen here? A couple of fire-sale IPOs and then all these investors have to admit their balance sheets are nonsense? Would this cause economic contagion or will it be the pension-funds that are left holding the bag?
I'm curious - what do you think the mechanisms are for unraveling private investment over exuberance?
Just for example, if we assumed that valuations are 100x above reality and things will continue getting worse for a few years. Is it effectively like sub-prime rather than 2000?
Sub-prime was pretty sudden with banks rushing to exit their positions. What could happen here? A couple of fire-sale IPOs and then all these investors have to admit their balance sheets are nonsense? Would this cause economic contagion or will it be the pension-funds that are left holding the bag?
AIUI a lot of the private investment is sovereign wealth funds and wealthy individuals; some of it is large pension types but those are increasingly just indexing.
Note how few hedge funds exploded in the 2008-9 crisis. Rather what we've seen from the hedge funds is several years of underwhelming returns. I wonder if part of that is slowly meting out the losses that they never declared back in '09.
Banks are hopefully doing less of the big private investments? (I don't actually know). In that case this might be the kind of bubble, like the Tokyo property bubble of the late '80s, that never actually pops, just slowly deflates.
Note how few hedge funds exploded in the 2008-9 crisis. Rather what we've seen from the hedge funds is several years of underwhelming returns. I wonder if part of that is slowly meting out the losses that they never declared back in '09.
Banks are hopefully doing less of the big private investments? (I don't actually know). In that case this might be the kind of bubble, like the Tokyo property bubble of the late '80s, that never actually pops, just slowly deflates.
I think it would be good to define "bubble" specifically. It's not solely when valuations are up.
Also, I love CB Insights.
Also, I love CB Insights.
It's impossible to define a bubble until it's popped.
I think that's kinda silly to say. I knew there was going to be a housing bubble in 2001, before 9/11. The reason was the the changes to the CRA under clinton forced banks to make uneconomic loans (Because otherwise was considered "racist' because poor ethnic people had less ability to repay loans and were more likely to be denied. When ability to repay was included in the analysis, it was clear that the policies weren't racist, but this didn't happen until much later.)
The other reason was the Fed had interest rates at artificially low levels to try and boost the economy after the dotcom bubble burst (Rather than just let it work out and let interest rates be at the true cost of money.)
When you force people to buy things and you incentivize buying things by making the cost of them lower, you're going to get a lot of people buying that asset.
In 2001 that asset was houses.
By 2007, I had spent 5 years investing on this thesis and called the top. I as off by a year, and missed the actual top which happened in 2008, but I am not complaining.
The point being, people who understand economics is a science and were paying attention to what was going on knew there was a bubble, long before it burst, and in fact, before it startsed to inflate. I didn't figure it out myself, btw, I read an article in 2001 that clued me in.
I can't say whether there is a bubble in startup valuations. I'm not making that argument.
I will say there is a bubble in the US Dollar, because the strategy employed by the government to fight the dotcom bust is the same one they deployed to fight the housing bust, they just changed the targets.
As a result we're seeing the stock market in a bubble and a lot of froth in the economy, but it's widely distributed (rather than concentrated in houses).
This will likely allow the bubble to inflate much longer.... but it also means the bursting will be much more dramatic and damaging.
The other reason was the Fed had interest rates at artificially low levels to try and boost the economy after the dotcom bubble burst (Rather than just let it work out and let interest rates be at the true cost of money.)
When you force people to buy things and you incentivize buying things by making the cost of them lower, you're going to get a lot of people buying that asset.
In 2001 that asset was houses.
By 2007, I had spent 5 years investing on this thesis and called the top. I as off by a year, and missed the actual top which happened in 2008, but I am not complaining.
The point being, people who understand economics is a science and were paying attention to what was going on knew there was a bubble, long before it burst, and in fact, before it startsed to inflate. I didn't figure it out myself, btw, I read an article in 2001 that clued me in.
I can't say whether there is a bubble in startup valuations. I'm not making that argument.
I will say there is a bubble in the US Dollar, because the strategy employed by the government to fight the dotcom bust is the same one they deployed to fight the housing bust, they just changed the targets.
As a result we're seeing the stock market in a bubble and a lot of froth in the economy, but it's widely distributed (rather than concentrated in houses).
This will likely allow the bubble to inflate much longer.... but it also means the bursting will be much more dramatic and damaging.
> I think that's kinda silly to say. I knew there was going to be a housing bubble in 2001, before 9/11.
Hindsight Bias - http://en.wikipedia.org/wiki/Hindsight_bias
If you are so sure that you could predict this, then is it safe to assume that you are worth millions now? I'm sure you can understand that if someone has full knowledge something will take place, that it'd be extremely easy to put money into the system that you could game.
> The point being, people who understand economics is a science and were paying attention to what was going on knew there was a bubble, long before it burst, and in fact, before it startsed to inflate. I didn't figure it out myself, btw, I read an article in 2001 that clued me in.
Economics is a science? I'd love to hear more.
Hindsight Bias - http://en.wikipedia.org/wiki/Hindsight_bias
If you are so sure that you could predict this, then is it safe to assume that you are worth millions now? I'm sure you can understand that if someone has full knowledge something will take place, that it'd be extremely easy to put money into the system that you could game.
> The point being, people who understand economics is a science and were paying attention to what was going on knew there was a bubble, long before it burst, and in fact, before it startsed to inflate. I didn't figure it out myself, btw, I read an article in 2001 that clued me in.
Economics is a science? I'd love to hear more.
The economic data don't support this talking point (frequently seen in conservative political circles) that the mid 1990s CRA amendments caused the housing crisis.
If that were the case, you would expect to see CRA loans performing worse than private loans. But the opposite was true--loans to persons in CRA-eligible zip codes performed slightly better than loans to otherwise similar borrowers.[1]
[1] http://www.federalreserve.gov/newsevents/speech/20081203_ana...
If that were the case, you would expect to see CRA loans performing worse than private loans. But the opposite was true--loans to persons in CRA-eligible zip codes performed slightly better than loans to otherwise similar borrowers.[1]
[1] http://www.federalreserve.gov/newsevents/speech/20081203_ana...
$10,000 in 12-17 month CD. The bank gave me $10. I'm worried.
this is blogspam for the actual press release available here (PDF):
https://www.pwcmoneytree.com/NewsFeed/GetNews?Title=Q1%20201...
(everything except the two quotes in the blog post are in the press release + a lot more info)
All of the historical data is also available on money tree's website: https://www.pwcmoneytree.com/HistoricTrends/CustomQueryHisto...
Clearly, even after adjusting for inflation, we haven't hit what was seen during 2000 yet
Note also, that this is the best _first quater_ since 2000... it's actually 10% less than q4-2014 (8% fewer deals).
All of the historical data is also available on money tree's website: https://www.pwcmoneytree.com/HistoricTrends/CustomQueryHisto...
Clearly, even after adjusting for inflation, we haven't hit what was seen during 2000 yet
Note also, that this is the best _first quater_ since 2000... it's actually 10% less than q4-2014 (8% fewer deals).
Bubble predictor?
No, no, no. This is the new paradigm.
Stamps.com is nothing like Pets.com.
New Economy, it was called.
Oddly enough, we did end up with a new economy. Old corporations were torn down and new ones were built, and cultures generally changed for the worse. Employee stack ranking was still unusual when Enron rolled it out (leading to its demise). Open-plan offices for programmers were a minor startup negative to be put away after 50 people, not something to be celebrated.
We actually got a new economy in the early and mid-2000s (for those who don't know, 2002-5 and 2008-9 were horrible years for job seekers, especially recent college grads). It just wasn't a very fun one, and most of the newness had nothing to do with technical progress.
Oddly enough, we did end up with a new economy. Old corporations were torn down and new ones were built, and cultures generally changed for the worse. Employee stack ranking was still unusual when Enron rolled it out (leading to its demise). Open-plan offices for programmers were a minor startup negative to be put away after 50 people, not something to be celebrated.
We actually got a new economy in the early and mid-2000s (for those who don't know, 2002-5 and 2008-9 were horrible years for job seekers, especially recent college grads). It just wasn't a very fun one, and most of the newness had nothing to do with technical progress.
Early open-plan office designs for the enterprise: http://www.romanroadsmedia.com/wp-content/uploads/2013/10/tr...
More recent: http://chsi.harvard.edu/markone/images/HumanComputers.jpg
Putting humans into rows and columns, performing the same tasks, is common pretty much anywhere you look.
The list is a (the?) fundamental data structure, and the two dimensional list is an easy extension.
For those who desire control over other humans, it's an easy way to check that things are (superficially) in line.
[] The trireme design is an arguably effective arrangement in terms of moving a boat.
More recent: http://chsi.harvard.edu/markone/images/HumanComputers.jpg
Putting humans into rows and columns, performing the same tasks, is common pretty much anywhere you look.
The list is a (the?) fundamental data structure, and the two dimensional list is an easy extension.
For those who desire control over other humans, it's an easy way to check that things are (superficially) in line.
[] The trireme design is an arguably effective arrangement in terms of moving a boat.
Anywhere except where you want creative intellectual work to happen.
Stack ranking didn't help but Enron's problems were far deeper and had more to do with a fundamental lack of oversight. Stack ranking, if anything, was a symptom of the same disease that led Skilling to insist on mark-to-market accounting and Fastow to create special investment vehicles that profited himself rather than his employer.
I see you downvoted (greyed out), but still think you have a point.
They are saying this is the best quarter since 2000Q1 without realizing what's so special about that date..
They are saying this is the best quarter since 2000Q1 without realizing what's so special about that date..
Source: http://www.usinflationcalculator.com/
Edit: Thanks gkop