Venture capital in times of market turmoil: what to do next?

As these two indices - which led stampeding growth over the past decade - come falling down to earth, one question stands out: what should investors do now??

In times of public market decline, the first thing investors often seek to do is find assets that are uncorrelated to public markets.?

If public market investments are decreasing in value, anything correlated to them will decrease in value too. To reduce the risk of losses, investments therefore need to be uncorrelated to public markets. That way, assets have the potential to hold value – or increase – while public markets decline.?

Traditionally, gold has been seen as an asset uncorrelated to public markets. And even plain old cash in the bank is uncorrelated to public markets.?

But in today’s era, inflation is high. Putting money in the bank is the quick way to find it losing up to 9% a year to inflation (if you live in the UK). So if investors want to beat inflation, they need an investment that is both uncorrelated to public markets and has the potential to deliver a strong capital return.?

Enter early stage venture capital.?

Early stage venture capital invests in young startups: typically companies with only a handful of staff, a new tech product and some early, pioneering customers.?

When a company is young, it is often valued by investors on company-specific metrics, such as revenue growth, gross margins and fund raise needs, rather than how public companies in the same sector are performing.?

This means early stage venture capital asset values are often uncorrelated with public markets.?

We love to invest in two people and a PowerPoint. It doesn’t matter if inflation pops or interest rates go up. It won’t affect them. It might help actually, because of talent, and there’s less competition.

Bill Gurley, Benchmark Capital, All-In Summit 23 May 2022?

Experts have agreed with this. Henry Whorwood, head of research and consultancy at data platform Beauhurst, told City A.M. in May 2022 that public market volatility showed no sign of hitting UK early-stage tech firms yet.?

“We’re not yet seeing what’s happening in public markets (and indeed US private markets) trickle down to UK tech companies.” he said.?

This has also been observed historically.?

When the Cambridge Associates Benchmark Venture Capital Index is compared with the NASDAQ and the US Russell 3000, there is almost no correlation found between public markets and venture capital:?

?Similarly, indices with even longer time horizons have shown little correlation between early stage venture capital and public market indices:?

These results, in many ways, reflect the nature of venture capital investing.?

Venture capital investors invest in a range of companies, but expect only a few to breakout and become big successes. These big successes drive the majority of venture capital returns, and these successful companies can come from anywhere.?

The value that breakout successes enjoy is often driven by company-specific factors, such as bringing an emerging technology to market and dominating a niche, rather than the health of the overall economy.?

Clayton M. Christensen’s seminal Disruption Theory supports this view, claiming that many startups begin life in a small segment that is ignored by incumbents. The segment tends to be less competitive and less correlated to the market, and has the opportunity to deliver great capital growth for startups that capture that opportunity incumbents are not.?

At Further, we specialise in giving our investors access to early stage venture capital investing. Now, more than ever, we are excited by our offering.?

So, while public markets are in turmoil, investors can potentially find shelter in other asset classes, such as early stage venture capital. For early stage venture capital investors and their startups, there’s never a wrong time to build the future.??

When you invest, your capital at risk.?