Is the boom in tech stocks slowing down

The leaders of one of the largest US hedge funds, A16z, are gradually moving away from direct and active involvement in the affairs of high-tech start-ups, switching to the purchase of personal real estate. Randomness or trend?

US stock markets reacted positively to the decision taken on December 15 by the Federal Reserve System (FRS) to leave interest rates unchanged. At the same time, participants were not disappointed by the halving of the Treasury bond repurchase program, from $15 billion to $30 billion, with Nasdaq showing the most significant jump: 2.15%.

However, it is precisely the outlook for the technology sector that worries several experts. Therefore, Bloomberg columnist Chris Bryant points to several signs that indicate declining investor interest in startup funding. Faced with uncertain economic prospects, representatives of big venture capitals, in their opinion, may imbue themselves with the Chinese philosophy of tang ping (translated from Chinese “lie back and freeze”), preferring to spend money already earned rather than risk it. And there are already vivid examples of such behavior. And in sufficient quantity.

Have venture capital investments reached their peak?

The volume of risk investments in the world in 3Q2021 amounted to almost $160 billion, an increase of 105% compared to the same period last year. And almost half of this amount – 72,000 million dollars – was raised by American companies. This is also an almost double increase compared to the third quarter of 2020.

And the volume of investments in startups for 9 months of this year has already exceeded the figure for 12 months of 2020: $437.7 billion against $284.2 billion.

In addition to the well-known SoftBank Group or Tiger Global Management class players in this market, new classes of investors are rushing to acquire assets in tech startups: family offices (businesses that manage joint ownership by individuals), mutuals, and hedge funds. , as well as sovereign investment funds. As a result, the average amount of late-stage fundraising deals has doubled in the past five years, from $8.03 million in 2016 to $16.5 million in 2021.

Rice. 2. The average cost of a transaction in the “seed”, early and late stages of attracting funds for new companies. New records. Source – Proposal Book

And in many cases, already during the first “seed” rounds, the number of transactions reaches a once-astronomical $100 million. In this context, the population of unicorns, startups worth more than $1 billion, which has also doubled, is not surprising. Today there are already 925 of them, compared to 111 in 2015.

Rice. 3. The growth of unicorn startups accelerated noticeably in Q4 2020. Source: CB Insights

There is another consequence of increased investor competition in startups: a significant reduction in the timing of funding rounds. If before they could last weeks, now it takes several days to complete all the transactions. And here The first question arises: do investors have time to properly familiarize themselves with the financial and commercial viability of the object in which the share is acquired? And then there is another, no less important.

“The real problem is that all companies that have raised a significant amount of funds in the private equity market may now find themselves in a difficult situation: if the stock markets plunge by 30-50%, then they themselves will continue to be the sole buyers, The venture investor shares his fears and the sponsor of SPAC, Chamath Palihapitiya.

Exactly The risk that a public offering would make it harder for startups to find buyers for their shares has led to a surge in popularity of purpose-built takeover companies. SPACE (Special Proposal Acquisition Company). As has already written, financial analysts assess the prospects of the “shell companies” themselves ambiguously.

The venture capital market recorded another phenomenon that may indicate their overheating: the partners of investment funds are increasingly beginning to retire, and long before reaching retirement age.

Successful investors move from Silicon Valley to Las Vegas

In early December, Bloomberg journalists noted that one of the biggest venture capitalists in Silicon Valley, Ben Horowitz, changed his place of residence on his personal LinkedIn page from California to Las Vegas. The Nevada real estate was also purchased by his partner, Mark Andreessen. And these are just two examples of a new wave of relocations that is taking sponsors of tech startups out of their usual “habitat.”

Horowitz and Andriessen founded their company, a16z, in 2009 after selling a data center automation startup for $1.6 billion. In little more than ten years, they have brought into the big business quite a few startups with capitalizations in the tens and hundreds of millions of dollars. Among them are such iconic projects as Airbnb, Coinbase, GitHub, Slack and Stripe. And among the a16z co-investors is Bloomberg LP, owner of Bloomberg Businessweek.

In their role as venture capital investors in startups, the partners at a16z, which manages $18 billion in capital, have gone beyond providing financing. They held regular mini-conferences, bringing the founders together with potential Fortune 500 clients and providing many public relations services. All of this clearly goes beyond generally accepted practice in the risk business.

Rice. 4. Two funds established by a16z ranked in the top 10 in the US in 2020 for capital raised. Font – Pitch Book

Recently, as the businessmen who work together with Horowitz and Andreessen told Bloomberg on condition of anonymity, the partners are becoming less and less involved in the company’s day-to-day activities. They also resigned from the board of directors of several companies. So if last year Horowitz was on 16 boards, now he has only 11, and his partner is on 7 instead of 11 three years earlier. His role in today’s business is characterized as “coaching.”

Both partners began to pay more attention to hobbies and entertainment. Shortly before changing his social media status, Horowitz bought a $14.5 million Las Vegas mansion with miniature golf, a pool and views of the Strip. Journalists explain the choice of this city by the fact that the investor’s favorite football team moved here in early 2020. Rappers often perform here, Horowitz’s friends. Andreessen made an even bigger purchase, spending $36 million on four neighboring lots in the exclusive Summit Club residential complex. No income tax in Nevada, according to Bloomberg, also played a role in choosing a new place of residence for venture investors.

The publication’s sources admitted that both partners continue to spend considerable time on the fund’s affairs and often visit Silicon Valley, but insiders remain skeptical about the fund’s prospects.

«Leadership change is the main reason hedge funds cease to exist», explains Yo Tango, professor of venture capital at Harvard Business School.

A sacred place is never empty

Meanwhile, venture capitalists who have already made money from investments in tech startups prefer to rest on their laurels, bankers now want to get their share of the holiday table pie.

Thus, Morgan Stanley announced its intention to offer equity participation in high-tech startups (with a minimum entry threshold of $20 million) to the wealthiest clients even before the placement of shares of these companies on the stock exchanges. For many, the idea of ​​investing in the next Airbnb at a price lower than the starting price in the IPO sounds very tempting. but analysts Bloomberg impulse be extremely wary of such a generous “gift” from investment bankers.

Rice. 5. Airbnb share price dynamics (ABNB) at this time initial public offering in December 2020 Weekly Calendar. A fountain – Yahoo Finance

First of all, the profitability of venture capital investments is characterized by very high volatility. According to a study by Steve Kaplan, an economist at the Business School. university Of Chicago Booth, from 2009 to 2019 venture capital funds outperformed the Standard & Poor’s 500 Index by about 10% annually. However, between 2000 and 2008 they were 1% behind the S&P 500, excluding commissions paid and the factor of low investment liquidity.

The second point Kaplan draws attention to is the amount of funds entering the market. There is an inverse correlation between the entry of risky investments and their profitability. It was after the boom of 1999-2000. the profitability of venture capital funds was minimal. Considering the current records in terms of the volume of funds raised by these structures, a quick return and a high return on investment cannot be counted on..

In addition, investors are not very optimistic about the average prices of the securities placed, set by investment banks. If in the 1980s For shares of a technology company it was proposed to pay 6 times its annual profit, but now this multiplier has skyrocketed to 13 times. Those calculations are led by University of Florida finance professor Jay Ritter.

It seems that the Chinese philosophy of tang ping (lie back and wait) is time to join not only the owners of luxury real estate in Nevada, but also ordinary investors.

Sources: BBC, Bloomberg, CB Insights, Investors, Pitch Book, Yahoo Finance.