Industry Experts Talk Private Markets, Venture Capital, & Fintech
Hi all, Julie here. 2020 is strange for so many reasons, one of them being this feeling of a disconnect between what’s going on in the world and the stock market.
Take these stats for example: the unemployment went from about 4% to more than 14% in a span of weeks, hundreds of thousands of people have died, and millions of small businesses have been forced to shut down.
Consumers aren’t doing great either even if they haven’t had Covid. According to new analysis coming later this week from Stilt, a Y-Combinator company focused on loans for non-U.S. students and professionals, credit card payments have tumbled and have yet to see much of a recovery. At the start of the year, payments were up by 0.10%, but it didn’t take long for that to drop, hitting -24.7% of what they had been in December 2019 by April. They’ve stopped trending further downward, likely in part due to government stimulus (which has currently run out and is being negotiated by all the brilliant minds we have in DC), but they are still down 22%.
Meanwhile, the major stock market indices are either unchanged or actually HIGHER on the year. Anyone you talked to back in March and April would have told you we were in for a world of trouble when it came to stocks, but none of that materialized for a variety of reasons (retail traders, tech stock weightings, the Fed, and government stimulus to name a few).
The private sector is harder to get stats for than a stock index is, so I wanted to ask some friends if the same thing was playing out on the private side and if so, why that was the case. I assumed similar trends were going to be playing out, though that it might be a bit more delayed since companies don’t need to raise every day and bridge rounds can help too. Let’s see what the experts had to say:
Satya Patel, Homebrew: We haven’t seen this kind of activity in the venture markets since late 2013/early 2014 when rounds were being preempted with regularity and every new investment opportunity was highly competitive with multiple term sheets and pricing reflecting that demand. The private markets seem completely divorced from the economic reality that the country is facing with mass unemployment, GDP contraction and major company bankruptcies. The VC market is always a lagging indicator so what happens to the public markets in the coming quarters will foreshadow what’s to come in VC land.
Anonymous female: I find it interesting that for the first time we’re seeing a true separation from stock markets and economic data. The only thing I have been able to nail down is that we are seeing volatility reminiscent of 2007, indicating to me that market makers are probably shifting assets quietly in anticipation of what I can only assume to be a massive forthcoming change. It appears that the government bet the house on the pandemic ending this summer, and they were wrong. So we have artificial props sustaining bank accounts and livelihoods. My greatest concern is that millennial investors in the market now were not previously investing in the last cycle and likely don’t fully comprehend metrics. Maybe they assume this is all temporary, and everything has rebounded or will rebound soon. I can’t say for certain, but when most of my friends are using Instagram/Tik Tok day traders for advice on transactions through platforms like Robinhood, I’m worried.
From my perspective at a bank, I’m just beginning to see the hospitality world collapse, so I am betting on a much more severe and deeper recession that we haven’t realized fully. I hope I’m wrong, but if our conservative portfolio is any indication of the future… there’s a lot of damage forthcoming.
Mark Goldberg, Index: I’ve been amazed at the heat in the venture market across stages in the last few months. After a total retrenchment in March & April, the money spigot is open again – fundraising has come roaring back. The combination of public market valuations and lots of dry powder in the venture ecosystem has made this a very favorable market for founders. My two cents – this is a good time to take money because the punch bowl could get pulled back as we get closer to the election in the fall.
Anthony Strike, SteadiPay: A friend of mine runs macroeconomic research at a large fund and recently shares some great thoughts with me. 1: Most of the damage has affected sectors that are very under-represented in the indexes. For example, restaurants are like 1% of the S&P (most are privately held). Airlines are <0.5%. 2. The pandemic has actually helped companies that make up ~30% of the market (FAANG+Microsoft is like 25% all on their own). 3: Think the Fed/Treasury will step up to keep things going for a couple more months and the October GDP numbers will be the best (or close to the best) in history, which will all keep things up/flat til the election. If Trump wins, he predicts a slower decline into a terrible economic crisis. If Biden wins, he predicts a steep drop into a slightly less terrible economic crisis. tl;dr the market is heavily over-representative of industries which are benefiting from people being lonely and forced to order more stuff online, and the Fed is artificially staving off the real effects of the very real recession.
Vaibhav Puranik, Carta and Heracles: The way I think of it is that the stock market is a reflection of future expectations, so I don’t really see a disconnect. Public market is saying “if” the economy rebounds, we are going to see huge growth rates (because denominators have been decimated). Also, all this increased money supply from government stimulus is coming into the markets (not going into people’s pockets as much) and causing financial assets to become expensive relative to real ones, so its inflationary in the sense that your $1 can only buy a fraction of the the Amazon stock that it could buy 6 months ago.
Rohit Mittal, Stilt: I think there is still a disconnect. The size of the disconnect can be debated. The “if” is the uncertainty (the risk) and if there’s risk, that needs to be discounted. The market performance is bifurcated between tech and non-tech companies. The future cash flows are discounted at a lower interest rate for high growth tech companies leading to higher P/E ratios but that won’t sustain if the rest of the economy doesn’t come back.
Alex Steiner, Anthemis: I actually would say private markets never fell quite as much as publics did, so there wasn’t a need for a ‘v’ recovery like there was in public equities. At the early stage (pre seed to series a) valuations largely held steady at pre-covid levels and if anything slightly increased as deals remained competitive and work/live from home accelerated growth & product market fit. There has also been a definite increase in the number of pre seed and seed companies that are starting and going out to raise, especially in the US. Will say that is partially because a lot of the priced series a rounds pushed a bit (and in some cases did quick bridge rounds) so more of the deal volume has been proportionately earlier, but also think that many people are taking advantage of the market cycle to start new adventures and a lot of amazing companies getting off the ground, especially in the last few months… then less on valuations, and more on traction and growth, would say it is a mixed bag. Some companies have found Covid to be a period of acceleration for them, while others have had to figure out how to position themselves in this ‘new normal’. Regardless though, and even looking at Nasdaq as a proxy, I think that the tech space broadly is one that is going to continue doing very well.
Nigel Morris, QED: Fintechs have spent the last 10 years maturing, reaching escape velocity. A number of portfolio companies are seeing how hot the market is right now. The same phenomenon is driving the activity around SPACs.
We are going to see a back to basics in fintech investing. Companies with loads of customers and a stellar NPS will no longer be able to seek investment with profitability merely as an afterthought. The bloom is off the rose for those companies without sound business models and unit economics. What we will likely see is falling valuations, which to my above point is a huge opportunity for banks to step in and partner in order to propel themselves ahead.
Charles Birnbaum, Bessemer: There was a very brief lull when c-19 hit, but at some point in June everyone realized that this was gonna be the new normal for a while. With so much capital sloshing around chasing fintech, the recent public market craziness, and the M&A outcomes earlier this year, the b2b / infrastructure fintech market is as crazy as we’ve ever seen it - particularly for the earliest stage deals.
Arjun Sethi, Tribe: The technology part of the private markets broadly shows strong fundamentals. By and large, tech companies, even early-stage ones, have strong margins by design and are growing through the pandemic for the same underlying reasons that the tech titans are beating expectations. Similar to the public equity markets, the VC ecosystem is showing an exaggerated version of the fundamentals. Companies that have a good story and show strong fundamentals are attracting massive amounts of capital while companies that are unable to show strong fundamentals are having a harder time of it.
While the above describes the disconnect between company-level fundamentals and how equity markets behave, it doesn’t address the disconnect between these worlds and Main Street where most regular Americans conduct their lives. The underlying economy itself is showing clearly struggling fundamentals. While the government and Fed have been, rightfully, primarily worried about Main Street, the reality of the structure of capital markets means that central bank policy directly affects the disconnect between business fundamentals and equity markets as a side effect of trying to improve the underlying Main Street economy. While we watch the headlines as stories unfold of the hardship that Main Street is going through, we remain optimistic that things will get better and that our divided government is able to implement meaningful solutions.
Jai Sajnani, NEA: The first few months of the coronavirus pandemic afforded a unique opportunity to private market investors. Attractive companies who may have not previously been open to VC funding or otherwise were not open to conversations were preparing for uncertainty and looking to bolster their balance sheets. New investors were able to come to the plate with pre-Covid terms on companies they would not have otherwise had access to, and existing investors had opportunities to participate in bridge rounds at more reasonable terms.
Fast forward to today, and we are still seeing the best companies get funded at the best prices. Rounds are being preempted, investors are pulling out all the stops to visit in person however they can, and are selling hard.
This said, many of these companies are still showing some of the phenomenal metrics they were prior to the lockdown and several have even accelerated. With a few months of data locked in, companies can re-forecast and conclude they are either still on track to hit or beat prior estimates. I am seeing the most activity at the earliest (Seed, A) and latest stages (pre-IPO). Many of these companies are playing to the momentum we expected in markets including security, collaboration, remote work, payments, etc as highlighted in our recent Medium post, though opportunities are not restricted to these areas.
There’s a ton to digest here and I love all of the interesting points, many that I hadn’t yet thought of on my own. To think that funding would actually tick up and deals would be more competitive in a time like this both makes sense and is crazy. Everyone is going to be chasing the deals that are showing a lot of traction, even more so than usual. And everyone is going to be more hesitant on stuff that is either suffering or hasn’t had a proof of concept yet. One thing that several mentioned that gave me pause is that they don’t expect this trend to continue. It’s an election year so obviously Trump and team are going to try everything they can to keep the economy going and distract from anything negative (like the GDP report last week). But once that’s over, regardless of who wins, I think things could easily change. Though, on the other hand, maybe the same trend keeps playing out where a few players are holding up everything else and distracts from what’s going on in the rest of the world.