Writing at the end of July 2022, SuperSeed argues that falling tech valuations mark a healthy reversion to the mean after the 2020–21 bubble, and sees the downturn as a good time to invest rather than pull back.
- By the end of July 2022 the Nasdaq 100 was down 22% year to date, the S&P 500 down 14% and the BVP Emerging Cloud Index down 42%.
- The cloud index had risen about 200% between March 2020 and November 2021, a bubble the post attributes to Covid lockdowns and quantitative easing.
- According to Pitchbook, $60bn was invested in US venture capital in Q2 2022, more than in any quarter before 2021.
- Because SuperSeed did not chase inflated later-stage valuations, its portfolio was not suffering large down rounds.
- Pointing to Airbnb, Slack and Stripe emerging from the Great Financial Crisis, SuperSeed saw the 2022 climate as a time to invest.
We follow both public and private tech markets closely, and 2022 has been an interesting year for both companies and valuations.
As of the end of July, the Nasdaq 100 (the tech-heavy index of large US companies) is down 22% YTD. Meanwhile, the broader S&P 500 is down 14%. But the cloud-focused BVP Emerging Cloud Index (EMCLOUD) is down a whopping 42% YTD (EMCLOUD contains a range of great B2B SaaS companies like Adobe, Salesforce and Shopify).
However, from March 2020 to the peak in November 2021, EMCLOUD was up a whopping 200%. That’s 200% in about 18 months for an index – an almost unbelievable appreciation in such a short amount of time. And as we know in hindsight, this bubble was driven by the unique combination of Covid-induced lockdowns and massive quantitative easing.
However, someone investing in the EMCLOUD Index at the start of 2020 (i.e. before the pandemic) would still be up 15% today, and if you’d invested in 2018, you’d be up a respectable 50%. Not an astronomic return over four years, but also not a complete disaster.
In parallel, venture capital investment continues at a healthy clip. In fact, according to Pitchbook, there was $60bn invested in venture capital in the US in Q2 of 2022, more than in any quarter before 2021 (perhaps bar the dot-com bubble at the end of the 1990s). So, the venture capital market remains healthy.
In effect, what has happened is that the bubble we saw in particular in late-stage valuations (growth / pre-IPO stocks) over the past two years has “reverted to mean”, and we are now back on a healthier trend. We think this is overall a great thing for the venture ecosystem, as it means less capital going to unproductive companies (and sucking up talent, customer attention etc.)
What does this mean specifically for SuperSeed?
As we didn’t participate in the “pay above the odds” bubble in later-stage companies, our portfolio companies are not suffering the backlash from large down rounds.
And as we continue to invest in healthy software companies that deliver tangible ROI to their customers and drive solid, recurring revenue, our forward-looking view remains extremely positive. In fact, knowing that many of the best companies come out of crises (the Great Financial Crisis led to companies like Airbnb, Slack and Stripe), we see now as a great time to invest. So while we continue to stay disciplined and look to only invest in companies with great founding teams and solid technologies, we see the current climate not as a time to pull back but as a time to invest and back the amazing founders that are going to build the tech giants of the coming decade.
Frequently Asked Questions
What caused the fall in tech valuations in 2022?
The post describes it as the late-stage valuation bubble of 2020–21, driven by Covid lockdowns and quantitative easing, reverting to the mean and returning to a healthier trend.
How did the 2022 valuation reset affect SuperSeed's portfolio?
SuperSeed had not taken part in paying above the odds for later-stage companies, so its portfolio companies were not facing large down rounds, and its forward-looking view remained positive.
Was venture capital investment drying up in 2022?
Not according to the post. Pitchbook data showed $60bn invested in US venture capital in Q2 2022, more than in any quarter before 2021, perhaps bar the dot-com bubble.