Writing after the 2022 tech downturn, Mads Jensen uses Pitchbook data to argue that venture fund vintages right after a crash have historically outperformed those from the years before it, so the end of the boom is not the end of returns.
- The EMCLOUD index of 75 listed cloud companies was down 59% from its November 2021 peak, though its companies were growing 29% a year on average.
- From 2018 to 2021 EMCLOUD had risen more than 200%, and it serves as a proxy for private SaaS valuations.
- Pitchbook put the average IRR for 2007 to 2021 fund vintages at 20%, and 33% for top-quartile funds.
- The median venture fund returned 19% more for 2010 to 2012 vintages than for 2007 to 2009, and 22.6% more for 2001 to 2003 than for 1998 to 2000.
- The post notes that it is not investment advice and that past performance does not guarantee future returns.
This is not investment advice. Past performance is not a guarantee of future returns. You should always do your own research and speak with your IFA before investing.
Now that the venture boom is over, it’s too late to get returns in Venture Capital.
Or is it?
2022 was a difficult year for tech investors.
EMCLOUD (an index of 75 listed cloud companies) is down 59% from the peak in November 2021. It’s not because the companies are struggling as such. They are growing 29 %/year on average. But valuation multiples are down, and everything is cheaper.
But this collapse is only the flipside of what came before. From 2018 to 2021, EMCLOUD rose more than 200%. A very healthy return for those who bought in on launch, and sold at the top.
EMCLOUD is interesting because it serves as a proxy for private SaaS companies. As public valuations went up, so did private company valuations. And with it, so did the paper returns of venture capital investors and their limited partners.
The attractiveness of venture capital
Measured over a prolonged period of time, venture capital can be an attractive investment. According to Pitchbook, the average IRR for fund vintages from 2007 to 2021 was +20%. And for top quartile funds, 33%. Don’t like averages? The median values were 18.3% and 29.3%, respectively.
Now that the air is out of the balloon, does that mean that the good times are over? Are all the good returns gone?
If history is any guide, the three years right after a correction are better than the three years leading up to a crash. For instance, compare Pitchbook's venture returns data for the periods 2007-2009 and 2010-2012. The median venture fund delivered a 19% higher return in the latter period.
This also holds true if you compare 2006-2008 vs 2009-2011. For top quartile funds, the outperformance is even higher after the cash.
Want to go further back? The median fund return was 22.6% higher for vintages 2001-2003 than for 1998-2000.
The takeaway
This might seem completely intuitive on paper. Yet human nature is such that many flock to assets that are in a bubble (with high valuations). And shy away after prices have corrected.
But in reality, investors are likely better off keeping their heads cool when the bubble fever rages. And to buy in when prices have moderated.
So next time someone is telling you that they are looking to "sit this one out", show them this chart. And remind them that - historically - the vintages right after a crash have been very good for venture capital investing.
Frequently Asked Questions
Is it a bad time to invest in venture capital after a market crash?
Historically, no. The post shows that fund vintages in the three years after a correction delivered better returns than those in the three years leading up to a crash, while stressing that past performance is no guarantee.
Why did SaaS valuations fall so sharply in 2022 if companies were still growing?
Because valuation multiples fell. EMCLOUD companies were still growing about 29% a year on average, but everything became cheaper, reversing the more than 200% rise from 2018 to 2021.
Why do investors often miss the best venture vintages?
Human nature leads many to flock to assets in a bubble and shy away after prices have corrected, when they would likely do better to keep cool during the boom and buy in once prices moderate.