Minsky Moments in Venture Capital

This is a good exposition of a normal dynamic in the public markets. I don't think it will be as dramatic in the private markets because spirals require liquidity and regular price updates neither of which happen in private markets.

That said the idea that once you think you know how to do a strategy (whether that's in bond trading or in growth rounds) its utility decreases as everyone copies it is very true, and a key aspect of how markets get efficient.

One thing I always wondered as a hedge fund guy was where all the reports of VC/PE doing badly went. You always hear about some hedge fund blowing up or having a terrible month, but I seem to never hear any bad news from the private markets world. In fact it's all "we returned 10x capital" which is pretty good even if it takes a few years, especially if there's no losses. Even Softbank seems to be doing okay considering the sheer scale of bad press.

Of course PE is a bit different to VC in the leverage, and might be a candidate for Minsky moments through the traditional credit spiral.

This essay gives a plausible alternative route for VC and clarifies what actually makes the spiral happen.

But for both I just struggle to think of many bad events other than WeWork, which hasn't even died.

> I seem to never hear any bad news from the private markets world

The names are less recognisable, so the stories don’t get as much traction in the popular, paywall-free press. But plenty of funds shut down, some quite spectacularly, e.g. Rothenberg.

Interesting piece. But speaking as someone who was formerly a very junior VC through the dot-com era, there most certainly can be a negative spiral.

The public and private markets aren't as distinct as they might appear to be. A VC buying shares in a private company at valuation X must believe that a sale is possible at a big multiple of X, and soon. Some VC will be the last investor before the company goes public or is acquired. And that last private investor has to sell to another buyer, either a strategic acquirer with cash (or highly-valued stock) or an investor making a purchase in an IPO. And if those exits don't look as rosy as they used to (seen the share price movements of publicly-traded tech stocks lately?), the whole thing runs in reverse.

Worse, if the companies needing financing aren't cash-flow positive or profitable (and few are), existing investors' stakes will be diluted as prices drop. Investors might want to slow the pace of investments to reserve cash to fund the needs of their existing companies, rather than take bets on additional companies needing cash.

Also, while speed is good for startups, "time diversification" used to be considered a good thing for VC investors, who really are playing a portfolio game. The worst-performing funds from the dot-com era were those raised and invested in 2000, just before the peak of the bubble. Of course, at the time, no one knew it was the peak.

Almost no one working in VC now would remember it, but there was a short recession in the early 90s that greatly affected the VC industry. The fund I worked for had been founded in the mid-80s, and reading the old investor letters was fascinating. Admittedly early stage tech was a far smaller industry back then (the dollars thrown around now make the deals I worked on in the dot-com era look positively quaint), but so were the burn rates.

> Some VC will be the last investor before the company goes public or is acquired.

Or goes bust.