Tech

US Venture Capital Outperformance Case


we have seen widely Global stock market losses this year. After a decade-long bull market, many venture capital funds have found themselves holding overvalued stakes in companies whose IPO prospects have disappeared or have been significantly delayed.

Markets are currently volatile, as evidenced by the broad correlations between asset classes. To be sure, there are structural factors, such as severe inflation, that sow the seeds of pessimism. The hawkish US Federal Reserve leading the global trend of rate hikes. The evolving European energy crisis. First land battle in Europe in 70 years. Confusion in his chain of various supplies. an ongoing global pandemic; rising global trade tensions, and, to close out Sunday, a slowly bursting Chinese credit bubble.

The public markets have priced in some of these headwinds, but their severity and duration remain unknown. As for the U.S. tech sector, the Nasdaq Composite is down sharply year-to-date, price/earnings are at their lowest in six years, and venture funding has slowed significantly. Earnings and profits for large-cap public technology companies, which have generally performed well so far, are expected to weaken in the coming quarters as a result of the Fed’s disruption of demand.

Our view is that despite all these pressures that are currently in the spotlight, the narrative of the technology and innovation supercycle remains unchanged and many companies are poised for growth. Private tech companies are looking back at fundamentals and valuations are returning to reasonable levels.

We also believe that the current economic climate creates a unique opportunity for venture capital funds holding dry powder to reap significant returns, similar to the case for VCs deployed in the period 2010-2014.

We believe the 2023/2024 vintage will indeed achieve Golden Period status, despite the Federal Reserve blocking the natural three-year transition period from the yield inversion to the Golden Period.

A sound investment process analyzes both macro trends and fundamental data to assess the likelihood of different potential outcomes. Over the next 6-12 months, he identified two different potential outcomes for the U.S. private tech sector.

Scenario 1: Additional Pain Before Recovery

A few weeks ago, Federal Reserve Chairman Jerome Powell said the Fed’s efforts to contain inflation would be accompanied by a “sustained period of below-trend growth” that “would cause some pain for households and businesses.” I predicted it would.

This means that the next 12-24 months will be a period of range-bound stagnation for US equities. Such consequences may occur in the short term in the event of negative economic and geopolitical developments such as:

aggressive federal reserve

An overly hawkish Federal Reserve in the face of deteriorating US economic conditions could trigger a stagnation in the public equity market, causing public equity prices to fall another 20% to 25%. These conditions will continue to constrain price/earnings multiples and adversely affect top-line performance.

While certain parts of the economy continue to perform well, it seems clear that Fed Chairman Powell is having his Paul Volker moment. Organizing a ‘soft’ landing was a ‘hopeful’ strategy but is becoming increasingly elusive.

Perhaps counterintuitively, long-term profitability prospects for the US tech sector remain strong, assuming further rate hikes in the near and medium term. Above-average returns for the tech sector (particularly his SaaS and cloud-enabled businesses) because stifled markets can scale quickly without the additional infrastructure and supply chain ramp-ups required by traditional bricks. may bring about. mortar business.

Growing geopolitical tensions over Ukraine

More than six months after Russia invaded Ukraine, the economic impact of rising commodity prices is beginning to seep across Europe. While it is too early to predict the military outcome of the conflict, it is clear that Europe and the United States are investing morally and financially to prevent Russia from successfully annexing parts of Ukraine. .

The current situation suggests a stalemate as the best-case scenario. The Ukraine conflict resembles the Soviet-Afghan war of the 1980s. It is a protracted war of attrition in which the West seeks to fund, train and arm local fighters to put pressure on the Russian economy and thereby force its withdrawal from the region. A threatened and cornered Russia could resort to last-minute tantrums involving either nuclear threats or limiting/eliminating European access to energy and commodity resources.

Growing geopolitical tensions around Taiwan



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