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Minsky Moments in Venture Capital

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Re: Minsky Moments in Venture Capital

#11

Post by arbuge »

MichaelZuo wrote: post #5
lordnacho wrote: post #4

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 consider…

Didn’t Uber have a down round? They didn’t implode of course but it seems like it did significantly affect their trajectory. I can’t think of any big YC company with a down round + death spiral, but I think maybe one of the Techstars companies?

Homejoy perhaps?

Re: Minsky Moments in Venture Capital

#12

Post by evancoop »

The antidote seems to be taking the long view. Minsky moments in finance would have been diminished if CEOs of banks were compensated based upon the status of the firm in 10 years or if their estates' incentives were aligned with the state of the bank in 20 or even 100 years.

VC presumably can structure their compensation paradigms similarly. Thus, minimizing the probability of ruin becomes a more rational choice.

Re: Minsky Moments in Venture Capital

#13

Post by JumpCrisscross »

hncommenter13 wrote: post #8

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…

> 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

To expand on this, as the article notes, the old game might have been (stylised) ten Series A investments, three of those raise a B and one raises a C. Today, all ten raise a B and then three months later a C. Valuations (perception of risk) go up (down). But has actual risk been reduced?

The Information‘s “The End of Venture Capital As We Know It” [1] argues that yes, software start-ups have become less risky over the past decade. I agree with this in part. (Cautiously. I make more money when Silicon Valley valuations go up, so of course I’d like that argument. It also sounds like “this time is different.”) Even if true, we may have overshot the mark. In a way, those mis-placed follow-on bets on doomed unicorns are VC’s analogy to leverage—it’s amplifying a single company’s effects on the portfolio.

[1] https://www.theinformation.com/articles/the-end-of-venture-c...

Re: Minsky Moments in Venture Capital

#14

Post by atdrummond »

lordnacho wrote: post #4

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 consider…

It's mainly confined to industry specific news sources but alternative asset data firms like Preqin definitely report on this info. And it makes sense that this info would be out there for two reasons: 1. Institutional investors, like CPPIB, who still invest in alternatives need a way to objectively compare funds and 2. VCs and PE, just like HF, both under-perform the markets outside a small set of firms that return genuine alpha consistently - just like hedge funds.

Re: Minsky Moments in Venture Capital

#15

Post by JumpCrisscross »

marquisdepolis wrote: post #2

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 k…

> spirals require liquidity and regular price updates neither of which happen in private markets

They do. They’re just slower and more opaque.

If institutional backers stop letting Tiger et al raise ten- and eleven-figure funds, growth-stage capital could dry up. That means term sheets vanishing, expected funding going away. Some firms will lean up and survive. Many won’t be able to. Those that raise will raise at worse terms. All of which affects the prices at which these companies’ shares trade on the secondary market, which feeds back into the fundraising difficulty (for funds and companies alike), with the added dimension of employee compensation and morale.

For companies with the massive burn and breakneck growth the current environment has encouraged, the snap could come quite fast. That hole in investors’ portfolios could then extend the pain to their more-disciplined peers. As another comment notes, illiquid markets melt down all the time. They just do so more ambiguously and more dramatically, with the bottom falling out as the top deckers keep sunning.

Re: Minsky Moments in Venture Capital

#16

Post by vmception »

This is all great and novel looks at improved market efficiency, but it is impossible to separate this from the Fed’s 8 trillion $ balance sheet and the continued speed of which it buys stuff ($100bn per month) to grow that balance sheet

If the Fed stops giving people $100bn/month in new dollars for their bonds and mortgage derivatives, will they still invest in new VC funds? Will the VC funds have capital to pump these startups so fast?

Turn off the Fed spigot and what? Is the confidence in the private market really there?

There just isn’t a history to know!

Re: Minsky Moments in Venture Capital

#17

Post by JumpCrisscross »

vmception wrote: post #16

This is all great and novel looks at improved market efficiency, but it is impossible to separate this from the Fed’s 8 trillion $ balance sheet and the continued speed of which it buys stuff ($100bn per month) to grow that balance sheet If the Fed stops giving people $100bn/month in new dollars for their bonds and mortgage derivatives, will they still invest in new VC funds? Will the VC funds have capital to pump th…

> will they still invest in new VC funds?

Given the Fed’s announcements have prompted a rotation out of fixed income and into public equities, probably. Equities fare better in times of inflation. Private equity is still equity. Valuations may flag.

> There just isn’t a history to know!

Yes there is. Venture capital, as an asset class, has been through multiple crashes and tight-money regimes. (Also, nitpick: the Fed hasn’t been buying $100bn/month for some time. It’s currently in the $10 to 30bn regime and winding down.)

Re: Minsky Moments in Venture Capital

#18

Post by vmception »

JumpCrisscross wrote: post #17
vmception wrote: post #16

This is all great and novel looks at improved market efficiency, but it is impossible to separate this from the Fed’s 8 trillion $ balance sheet and the continued speed of which it buys stuff ($100bn per month) to grow that balance sheet If the Fed stops giving people $100bn/month in new dollars for their bonds and mortgage derivatives, will they still invest in new VC funds? Will the VC funds have capital to pump th…

> will they still invest in new VC funds? Given the Fed’s announcements have prompted a rotation out of fixed income and into public equities, probably. Equities fare better in times of inflation. Private equity is still equity. Valuations may flag. > There just isn’t a history to know! Yes there is. Venture capital, as an asset class, has been through multiple crashes and tight-money regimes. (Also, nitpick: the Fed…

> It’s currently in the $10 to 30bn regime and winding down.

Double checking this, I think all of our numbers are off.

My initial number was very outdated, your amount is just the amount of the reduction.

I'm reading January was [to be] $60bn in purchases.

Re: Minsky Moments in Venture Capital

#19

Post by JumpCrisscross »

vmception wrote: post #18
JumpCrisscross wrote: post #17

Earlier quoted context omitted.

> will they still invest in new VC funds? Given the Fed’s announcements have prompted a rotation out of fixed income and into public equities, probably. Equities fare better in times of inflation. Private equity is still equity. Valuations may flag. > There just isn’t a history to know! Yes there is. Venture capital, as an asset class, has been through multiple crashes and tight-money regimes. (Also, nitpick: the Fed…

> It’s currently in the $10 to 30bn regime and winding down. Double checking this, I think all of our numbers are off. My initial number was very outdated, your amount is just the amount of the reduction. I'm reading January was [to be] $60bn in purchases.

> I'm reading January was [to be] $60bn in purchases

January was $40bn, February is $20bn [1]. (There is a January release pointing to $30bn [2] from which I was remembering my figures.)

[1] https://www.newyorkfed.org/markets/domestic-market-operation...

[2] https://www.newyorkfed.org/markets/opolicy/operating_policy_...

Re: Minsky Moments in Venture Capital

#20

Post by vmception »

JumpCrisscross wrote: post #19
vmception wrote: post #18

Earlier quoted context omitted.

> It’s currently in the $10 to 30bn regime and winding down. Double checking this, I think all of our numbers are off. My initial number was very outdated, your amount is just the amount of the reduction. I'm reading January was [to be] $60bn in purchases.

> I'm reading January was [to be] $60bn in purchases January was $40bn, February is $20bn [1]. (There is a January release pointing to $30bn [2] from which I was remembering my figures.) [1] https://www.newyorkfed.org/markets/domestic-market-operation... [2] https://www.newyorkfed.org/markets/opolicy/operating_policy_...

Thanks, right! And the taper goal is to continue reducing this month over month

As well as potentially selling some of the stuff it has already bought, but more likely just holding things till maturity, or maybe a combination

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