Signs are everywhere that VC is in for a world of hurt.

Statistically, 2023 has been “the most difficult year for start-ups in at least a decade.”

3,200 venture-backed U.S. companies went out of business in 2023 (the doomed companies raised $27.2 billion). It’s been deemed a “cash bonfire” for investors.

• “After staving off mass failure by cutting costs over the past two years, many once-promising tech companies are now on the verge of running out of time and money.  They face a harsh reality: Investors are no longer interested in promises. Rather, venture capital firms are deciding which young companies are worth saving and urging others to shut down or sell.”  New York Times: From Unicorns to Zombies.

And macro conditions have tanked:

• Low interest rates that enabled risks on high-growth start-ups are done;


• War in Ukraine and the Middle East;


• Tech IPOs have floundered; and


• SPACs have collapsed as a path to liquidity.  (2021 SPAC proceeds: $162 billion.  2023 SPAC proceeds: $3.7 billion.).

The stratospheric growth in VC funding – up 8x since 2012 to $344 billion – can’t be sustainable.

This has to be a market top.

Right?

Welp, this isn’t the first time we’re being told we’re in a bubble.  (It’s not even the tenth time.)

For perspective, it’s worth recalling that there have been statistically sound, persuasively-argued cases that we’re in a bubble, for a decade.

They’ve all been wrong.

A selection of the greatest hits by year:

• 2013 – Reuters:  The Dot-Com Bubble All Over Again?


• 2013 – New York Times:  If It Looks Like a Bubble and Floats Like a Bubble…


• 2014 – Marc Andreessen:  Many high burn rate companies will VAPORIZE. … Worry.


• 2015 – Mark Cuban:  This tech bubble is worse than the tech bubble of 2000.


• 2016 – Jim Breyer:  There’s blood in the water: 90% of unicorns will be repriced or die.


• 2017 – TechCrunch:  2016 was winter, unicorns are overvalued.


• 2018 – Research Affiliates:  Yes. It’s a Bubble. So What?


• 2019 – The Financial Times:  Loss-Making Tech Companies Are Floating Like It’s 1999.


• 2020 – New York Times:  Pandemic pummels startups.


• 2021 – CNBC:  ‘This Feels Like 1999’: Global Start-Up Funding Frenzy Fuels Fears of a Bubble.


• 2021 – Jeremy Grantham:  This bubble will burst in due time.


• 2022 – The Economist:  Tech bubbles are bursting all over the place.


• 2023 – The Economist:  Valuations sprout a bubble.

Does the long history of erroneously calling a market top, mean that it will never come?

Of course not.  VC is an asset class like any other, with ups and downs.  Latency (or ahem, optimism) in private marks may have masked the scale of the downdraft, and long-delayed follow on rounds may start getting done – as down rounds.  And there’s no question that statistically, VC is having a lousy moment.

But less-discussed in the statistics about company failures and the massive growth in VC capital raised?

The even-more massive growth in the economic (and societal) impact of VC-backed companies.   

From 2006 to 2021, VC investments increased 12x to $345B.  (The real growth rate is lower if you use as a benchmark, the year before, when VC funding was 50% that size, or the year after, when it was 70% that size.)

During similarly long time scales, the impact of VC-backed companies across every aspect of economy and society has grown even faster.  Examples:

• Ecommerce. In 2002, U.S. quarterly spend on ecommerce was $11 billion.  Today, it’s up 25x to $278 billion.


• Online search.  In 2003, there were 61 billion searches on Google.  Today, they’re up 20x to 1.2 trillion.


• Employment.  Employment at VC-backed companies?  It’s up 960% since 1990.  (In comparison, total private sector employment increased by 40% over the period.)


• Social media.  It didn’t exist in 1996.  Today, there are more than 5 billion global users, the average American checks their mobile device 159 times a day, and spends 2 hours and 24 minutes on social media every day.  In total, users will spend 4 trillion hours on social media this year.  (We said the impact was massive; we didn’t say it was good.)


• Returns.  Longitudinal data show VC has consistently outperformed public markets over 5, 15, and 25-year periods.

We also note that while the absolute size of VC investment has exploded, it’s still tiny relative to other asset classes – even in the US, it’s only 0.8% of GDP (in the EU it’s only 0.3%).

And of course, VCs are sitting on $166 billion of dry powder that needs to go somewhere.

The punchline: tune out shrill predictions of a bubble.

No one, ever, has consistently succeeded in timing the market.  Not in venture.  Not in any asset class.  Optimizing outcomes for institutional investors is what we do.  But even on our best days, we won’t claim to be able to do that.

If you’re an institutional investor in VC, our counsel: stay the course.

If you’re able to successfully time the market, you’re smarter than us.  And if you are, please meet us at the craps table.