There Is No Venture Capital Bubble

If there was a VC valuation bubble, it’s largely been pricked. How do I know? Some of it is gut feel.
Some of it is that I am not seeing companies ask for extremely high valuations anymore. Some of it is that VCs are a lot slower to write checks.

Yes, interest rates are still basically 0%.  Our nation’s fiscal and tax policy sucks.  Our Federal Reserve policy isn’t living in the world of reality either.  But, startups are.

I was not able to listen to Professor Steve Kaplan‘s talk, but I received his slides. He does a lot of research on PE/VC. There are many things that I love about Professor Kaplan. But, one thing I really love is his dispassionate research. He doesn’t have confirmation bias. He lets the data speak. But, once the data speaks, he is able to distill it down into easily understandable and data.

His research is blowing apart some “common knowledge”.  For example, who did better in recent fund vintages, Private Equity or Venture Capital?

People generally believe that PE is less risky than VC.  Hard to lose money when you are investing in real companies with real revenue, right?  The fact is VC returns are better than PE returns since 2006.  PE did better from 1999-2005.  This isn’t based on valuation-but on return of capital to Limited Partners.

I think there are a lot of reasons for that.  VC does better in downturns.  No matter what pundits say, the world economy is still in a downturn.  GDP growth sucks.  The only thing that grows like crazy when that happens is technological advances.  Currently, we are in the midst of some of the most awe inspiring technological advances our world has seen for quite some time.

Another really interesting stat to me is capital flows.  If there is a bubble-you’d expect a lot of money to be sitting in VC funds and being put to work.  However, Professor Kaplan found that commitments to funds are flat.  He also found that as a percentage of stock market value, funds were the same as they were in 2004-and that’s down significantly from 2007.

People aren’t investing in VC.  That means there isn’t as much capital which means there isn’t a bubble.  But, returns are better.  That means there is opportunity.  The math shows that seed and series A investors do better than other investors.