My latest Guardian column asks whether we’re in a bubble (link without registration here).
Bubble 2.0, if there is one, is in the oversupply of VC funds, and undersupply of return/exits.
VC funds are enroute to raising, what, $25 billion this year (or more.) this seeming oversupply has now been going on for a few years and shows little if any signs of abating.
Without getting too technical, using the Rule of 72 (years to double = 72/IRR) and assuming 1) total public equity market returns at 7% per annum, and 2) VC fund management fees at 2% total committed capital per annum (or 14% total committed capital during 7 years management), then that $25 billion will have to essentially triple in value in 7 years — that is, all of it, at 3X — to provide VC LPs reasonably above-total-market, net-of-management-fees returns — the type of returns which justify the asset classes existance in the first place.
And remember thats just for VC funds raised this year. $25 billion PER YEAR is/has been going into VC funds at current rates (and is/has presumably going *out* of the public markets, btw — the dough has to come from somewhere).
Then factor in that, even in the best of times, VC is a hit driven biz, with maybe 20% of portfolio companies creating 100% of returns.
Then factor in the scarcity of exits these days, and perhaps puzzling but seemingly unending distaste for new technology issues in the public markets.
Then finally, factor in increasingly accepted notions about the need for making small investments, which, while creating VC-like high IRRs, also create very un-VC-like small absolute returns (“cash on cash” in the VC parlance).
If there is a bubble, thats it.
In Bubble 1.0, the retail public market investor was the greatest fool in the greater fool game. But this time around it will be the institutional LP, as well as a huge number of VC partners and firms who can’t possibly justify their own existance unless somehow Garrison Keiller’s fantasy notion of a sweet place where “everyone is above average” — lets call it “mega irrational exuberance” — becomes VC fund reality.
IPOs, where are you when we need you?
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