VCs and PEs tend to evoke strong reactions among people. People either think they’re changing the world or they’re ruining it, they’re either benevolent angels or Satan’s minions. People in the world of finance tend to look at these people from a returns lens and compare them with public equities. And pretty much all the research shows that for all the fanciness PE & VC returns haven’t matched common stocks. Whether this is a fair comparison, that in itself is another contentious debate.
This piece looks at the how VCs have fared in the US and boy oh boy is it scathing
My analysis of start-ups, however, shows that the big losses suffered by Uber, Lyft, WeWork, Pinterest, and Snapchat—greater than 50 percent of revenues annually—are just the tip of the iceberg. More than 90 percent of America’s “unicorns”—start-ups valued at $1 billion or more while privately held (before IPOs)—lost money in 2019 or 2020, even though more than half of them were founded over ten years ago. And a similar trend of losses holds for European, Indian, and Chinese start-ups. Of similar importance, recent analyses of venture capital (VC) firms show that returns on investments in VCs have barely exceeded those of public stock markets over the past twenty-five years, and their current losses suggest that returns will fall even further.
This decline in returns for venture capital is a serious problem for the U.S. economy, not only because it suggests that innovation is less profitable than in the past, but also because it significantly affects the investments of major institutions such as pension funds and university endowments. As shown in the previously cited Morgan Stanley report,7 these institutions have steadily increased their investments in VC funds since 1970. These institutions also invest in start-up IPOs, and the data discussed in the next section indicate that pre-pandemic returns for investors in unicorn IPOs were negative.
This reminds me of another piece in the MIT Tech Review which looked at venture capital from the lens of how the capital is allocated.
In the United States, she says, 75% of venture capital goes to software. Some 5 to 10% goes to biotech: a tiny handful of venture capitalists have mastered the longer art of building a biotech company. The other sliver goes to everything else—“transportation, sanitation, health care.” To fund a complete system of innovation, we need to think about “not only the downstream invention itself, but what preceded it,” Dahl says. “Not only inspiring people who want to invent, but thinking about the way products reach us through companies.”
Continuing yesterday’s conversation on bubbles, sharing something I had shared already. If it looks like a bubble, walks like a bubble, feels like a bubble, and smells like a bubble, it’s still not a bubble. Predicting bubbles is a difficult task and timing them is even harder. Even the best can’t get it right.
Dalio, Lynch, Marks, Klarman, Soros, and Buffett had all spotted the bubble and warned investors of the dangers. But their foresight came too early. From 1995 until the peak in 2000, investors who favored international stocks, value stocks, bonds, or commodities had all lagged the NASDAQ by more than 20% per year. The below table shows the annualized returns of major stock indices, value indices, bond indices, and commodities from the first warnings of a bubble to the market’s peak in 2000.
There are a few utterly asinine canards in the market like index funds are bad, buybacks are bad, etc. But the notion that short selling is bad for the markets has to be right at the top of the pile. Every time there’s volatility in the markets, all the idiots come out of the woodwork advocating for a ban on short selling. In spite of mountains of research showing this is a stupid idea, this narrative refuses to die.
But the blame is entirely misguided. Short sellers play a critical role in supporting market functioning. From policing markets and warning investors about potential fraud, to supporting the price discovery process by carefully scrutinizing the financial statements and valuations of companies, short sellers play a highly visible role in keeping prices honest. As a result, rather than contributing to volatility, short sellers help to stabilize markets.
This passage struck a chord. Typically, when you try changing people, they often feel like they are being attacked and they become defensive. The more you try to change someone, the more they rely on what they actually do or believe in.
Changing peoples’ behaviour is really really hard. Your colleagues , customers , friends , yours , everything. Don’t make your most important projects dependent on changing peoples’ behavior, don’t burn yourself up on it, if it happens it’s great, but know the odds are always stacked against you.
A pile of links
The Emerging Asia Pacific Capital Markets: India. The Indian markets in numbers.