VC Market Dislocation: The Fundamentalists vs The End Marketers

I shared this last month on Twitter and was delayed in posting it here o the blog. I called it “2021 Venture Capital Market Dislocation.” Credit to my friend Leo Polovets who encouraged me to write this out.

  • Adam Nash tweeted this earlier, paraphrased: The VC industry went from looking for $1 billion-dollar outcomes to $10 billion-dollar outcomes to $100 billion-dollar outcomes in less than 24 months.
  • This end-market acceleration has occurred during a time of zero-interest rates (not being touched until 2023, per Fed), high IPO liquidity, huge chip stacks at various VC funds, and making investments via Zoom.
  • Investing in technology feels like the only game in town now in a pandemic world. Public investors are now full in privates; growth investors are doing As and Bs like they’re seeds; traditional VC firms are straddling seed and Series A (tho many have multi-stage arms); and seed investors, angels, rolling funds, syndicates, accelerators are conducting massive experimentation to unearth the next great thing.
  • —> That is a massive mindset-shift for traditional/institutional firms, especially those with long cultures of pegging valuations based on public comps, exit comps, software multiples, etc. This creates a schism:
    • The Fundamentalists: This group’s DNA is hard-wired to valuing businesses based on revenue growth potential. They’re willing to pay a premium, but based on this methodology.
    • The End Marketers: These groups are either newer entrants or established players who have quickly shifted with the current market. They view “slots” for ownership at seed, Series A, or Series B as finite pieces of coveted real estate that they only have 2-3 chances to own. After that, the early land-owners (here, investors) can keep the best companies captive to themselves.
  • We don’t yet know if the “End Marketers” or the “Fundamentalists” will be right. What I personally believe is the FOMO around limited real estate for VC ownership in those earliest rounds is very real and warranted. For billion-dollar plus funds who need $10B+ outcomes to move the needle, the fear of missing the next Snowflake, Zoom, or Airbnb at Series Seed, Series A, or Series B can motivate even the most discipline Fundamentalists to break their own heuristics and pin their hopes on the promise of End Markets.