There’s been a lot of talk recently about what will happen to startup financing in 2016, including here on this blog. The consensus is definitely negative, but one thing that has buoyed my optimism about the prospects for our portfolio is the number of new funds raised in London recently. A lot of them are focused on Series A investing and favour the ecommerce and marketplace sectors that Forward Partners focuses on. Moreover, most of them are only a small way into their funds and under most scenarios will want to maintain a steady investment rate through 2016.
I just saw a great presentation from Mark Suster/Upfront Ventures on the State of the Venture Capital in 2016 which explains the discrepancy between the sentiment in the market and the observation that there are lots of funds out there which need to deploy capital.
With this slide he’s explaining that in 2006-2007 investments into startups were equal to the funds raised by VCs, implying that only minimal amounts of non VC cash was invested in startups, but by 2014/2015 the situation had changed dramatically. In the last couple of years the ratio of money into startups to funds raised by VCs was 2.5 implying that an awful lot of non-VC money flowed into the ecosystem (the column headings in the charts are a little ambiguous, but the explanation I’ve given matches what Mark wrote here).
Mark also notes that startup valuations went up 3x from 2006-2015, and simple supply and demand logic suggests the non-VC cash in the market was important in driving prices up. He also surveyed 72 institutional investors in VC funds who said they think they will maintain their rate of commitments to new funds this year.
Pulling all this together it seems to me that any correction in the market we see this year won’t be because VC funds are investing less but because non-VC sources of capital are pulling back. That makes sense given that a lot of the froth was in big late stage deals where hedge funds and big fund managers like Fidelity were playing, and that is the sector of the market most closely affected by the downticks in public markets we have seen this year.
There will be a trickle effect down to earlier stages of investment, but most of our portfolio is still very young and the Series A market that’s most important to us in the short term is almost entirely comprised of VCs, and with a bit of luck will be less hit by any downturn than the later stages of investment. That fits with my observation about the number of funds in the London market and tallies with our experience in the first 5-6 weeks of this year, which is that our companies aren’t finding it noticeably harder to raise capital than they were last year.