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OUTLOOK SERIES QUESTION #5: Is there a “bubble” on the horizon?

(EDITOR’S NOTE: We continue our multi-part series sharing the thoughts on the past year and the outlook for 2022 from seven angel or venture investors based in the region.)

TODAY’S QUESTION: There are some who have drawn comparisons to the late 1990s when venture capital investments reached a fever pitch just ahead of the bottom falling out. Are those concerns warranted? If so, why do you think so? If not, why not?

  • Tony Lettich, Managing Director, The Angel Roundtable. These are certainly concerns to be analyzed and discussed. While it is possible that start-up/venture capital investment may be in a bubble, it is our opinion that this bubble may differ from that of the late 1990s as there are numerous other issues impacting the industry and micro economic environment simultaneously. We are in a time of disruption within many industries and within the nation’s economic system. It is, in our opinion, too early to fully understand the ultimate directions or impact.
  • Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital. In my opinion, those concerns are warranted. However, comparing today’s scenario with 20 years ago is not an apples-to-apples comparison because all conditions and variables are not the same. I continue to think about how U.S. fiscal and monetary policy will affect things like inflation, the stock market, and liquidity (cash available for investing) in general. How will the market respond to supply chain challenges and workforce challenges? When I say “market” in this sense, I don’t mean the stock market, I mean consumers, producers, and the various pathways that connect them. All of these variables in combination will help determine whether or not the bottom falls out.
  • Ken Woody, President of Innova Memphis. The stock market is at all-time highs (January 3, 2022). The Fed is balancing continuing QE (quantitative easing) programs against inflation, employment concerns and COVID. New investors are entering the market to put money into IPOs (Initial Public Offerings), Crypto and NFTs (non-fungible tokens). Clearly, we are in a big investment boom stage, if not manic bubble stage. It takes a lot of money to invest into start-up companies if you really want to see them grow. Crowdfunding has proven interesting but rarely a clear option for most start-ups. So high net worth individuals are still looking for ways to deploy their capital in alternative investment vehicles. I don’t see the bottom falling out anytime soon. The challenge in the 90s and then again in late 2000s was firms being told NOT to do capital calls since the limited partners couldn’t make them. Not seeing that on the horizon at this point.
  • David Adair, Managing Partner and Co-Founder of Solas BioVentures. I see the similarities at first glance. But the 1990s were “go-go” and “drunk on the punch, can’t fail methodology.” The advancement in the ability to eliminate information asymmetry via the internet or Google has leveled playing fields. There are trillions of dollars awash in our system, the regular stock market will not be able to be stratospheric and as such money will look to be treated favorably. Private investment builds businesses, our economy and ultimately our country. I strongly believe an innovation revolution is about to happen, at least I hope so. We need to resume our role as classic innovators and net exporters of that innovation. It would allow us to reduce our unaddressed debt burden, improve fellow human lives, and add nicely to a well-balanced retirement portfolio return. The information delta is no longer large (i.e., the haves and have nots). What could derail it? I am very concerned about the 1202 implications and carried interest topics. Changes here could cause some turbulence but given the cash availability, I believe it is manageable and provides the impetus for it to be long in the tooth rather than a “bubble” as implied by 1990’s.
  • Derren Burrell, President and Founder of Veteran Ventures Capital. Great financial opportunities exist within venture capital no matter what will be happening in the broad economy. So even if those concerns are warranted, firms with a disciplined approach to deal flow, valuation, and investment management will thrive in all types of economic circumstances. Keeping focused on the long-term with the right investment partners will prove much more beneficial than the short-term uncertainty that can be caused by zealous sentiment.
  • Eric Dobson, Chief Executive Officer, Sheltowee Angel Network. The masked question here is, “Is the angel investing industry overheated?” I would say not in the Heartland, but there is clear evidence it is heating up fast: larger rounds, higher valuations (seller’s market), and a general understanding of the importance of angel investing to a healthy local economy. Everyone is talking about building ecosystems. The good news is we are seeing greater numbers of angel investors coming into the market and active educational programs to ensure that irrational exuberance does not take hold. We are also seeing an in-migration from coastal money centers to the Heartland, which will have an impact on the industry. Great companies do not precipitate great investors. Great investors precipitate great companies. Investors are the catalyst for change in a community seeking to build an ecosystem and create wealth for entrepreneurs as well as themselves. Without local capital, start-ups move to be close to it or die on the vine. It is a simple Darwinian function.
  • Scott Ewing, Co-Founder and Principal Business Analyst, Appalachian Investors Alliance. Large amounts money must find a place to go – be invested. Jeremy Grantham (Chief Investment Strategist of GMO) observantly says: “The only things that really matter in investing are the bubbles and the busts.” Grantham told CNBC recently that equities in the U.S. are in a “magnificent bubble,” larger even than those in 1929 and 2000. So, with professional and institutional money managers hard pressed to earn two to three percent annualized return over a full market cycle on a traditional portfolio, no one should be surprised that alternative assets classes – including venture equity – are attracting record amounts.

Previous Articles in the Series:

  • Part 1A – A review of the past two years as well as a look into the future.
  • Part 1B – A review of the past two years as well as a look into the future.
  • Part 2 – Quality of deals and size of “asks.”
  • Part 3 – Impact of COVID in past two years and going forward.
  • Part 4 – Thoughts on national trends in angel and venture funding.

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