Financial market takeaways and impact on tech venture capital
There have been few places for investors to hide in 2022. Commodities, energy stocks and a few other areas of the global equity market have been among some of the only assets that have seen gains.
Otherwise, we’ll go ahead and say it: bear markets everywhere, including crypto. If the year ended today, investment-grade sovereign and corporate bonds would have posted their worst year in the history of the Bloomberg Aggregate Index. The S&P 500 has the worst first half of a year in over 50. If it ended today, there would only be two years in the last 30 that would have been worse for stocks: 2002 (-23.8%) and 2008 (-37.6%). And the same is true for crypto. Bitcoin is down 60% YTD, Ethereum is down 71% YTD.
The good news is that the year doesn't end today. The three other years that finished the first half with a 20%+ decline (1932, 1962 and 1970) all posted gains for the second half.
After years of record development related to valuations and volume of transactions, venture capital markets have not been unaffected by global socio-economic effects and public markets. A chill has descended onto the global startup market, venture capital totals are sagging in most geographies, and falling share prices for public tech companies of all sizes have soured sentiment on the future value of high-growth and often cash-hungry startups. The blockchain tech VC market, which has seen even higher valuations and stronger growth dynamics in the last 12 – 24 months, is no exception.
At CV VC, we consider the blockchain VC market dynamics a healthy correction (unjustified above-average valuation multiples for blockchain tech). In another part, a reason for caution for the coming 6 – 12 months. As a result, we will look at new transactions more conservatively as it relates to:
- ease of funding mid-term,
- more conservative assumptions as it relates to scaling and funding overall.
Our pipeline of new projects, however, remains strong. In addition, we will work closely with our existing startups in the current and planned funding rounds and should reserve ample capital for our long-term, most promising existing projects.
Many of our existing portfolio companies seem to proceed well on the operational side and current funding plans. Our investment philosophy to focus on startups that use blockchain technology to build applications across a range of growth industries is paying off because we are not directly exposed to crypto markets with most of our portfolio. The current performance of the VC portfolio, including "hidden reserves" (i.e., through fully funded convertible rounds with valuation upside but not yet reflected in equity price), remains fully intact.
Our recent experience with investor appetite is mixed. While some consider long-term investments in tech VC an attractive means to deploy capital in the current environment, many investors observe the markets and want to retain a high level of liquidity, shying away from sizeable long-term commitments.
The challenging question as to the reversal of macro trends hence remains. In the mean time, our focus will remain on portfolio optimization, a careful review of new opportunities amid an attractive pipeline, and selective investor reach-out with a particular emphasis on long-term-oriented tech investors.