Earlier this year, we all saw the broader stock market hit new scary lows and many were wondering where it would stop. The overall downturn in the economy prompted us at Trinity to have a broader strategic discussion around our investment strategy. We wondered internally whether we should pull back and expect to make fewer investments in 2009? Or, should we pour on the gas and “double down”?
During this debate, we looked at the investment activity of ten VCs from the last downturn of 2001 – 2003 to see if there were any lessons to be learned. Here is one of my own takeaways and the data (caveat – this analysis is not scientific, just for discussion purposes):
2002 Was the Best Year To Make “New Investments” During the Last Downturn
After parsing the data, we found that 17 of the 73 (23%) ”new” investments which were made across these ten VCs in 2002 ultimately yielded a $100m + exit in (vs. 15% in 2001 and 8% in 2003). 73 “new investments” was also clearly a dip in investment rate as one can see in the following chart that shows pre and post ‘01-03 downturn # of new investments/year. 2002 was the nadir of that downturn in terms of investment rate, yet yielded the highest rate of winners during that ‘01-’03 period.
Broadly speaking, what could this mean for today? Having worked at a startup (PolyServe) in the Valley during the last downturn, I personally liken 2008 to 2001 (both had cataclysmic events happen in mid September that truly pushed the economy over the brink), 2009 to 2002 (both seem like the real trough year when the economy bottoms out) and 2010 to 2003 (hopefully the year of the start of actual recovery). So, if we really are in the midst of “2002 all over again”, one should expect VC funding pace to slow down (as it certainly has to mid 1990’s levels) but I’d echo the now well documented sentiment (here and here) with some new concrete data that this is indeed the time to seize the day. I believe 2009 will be like 2002 and some great new companies will get founded and funded, despite the gloomy macro environment. I thought I’d share this with the hopes it emboldens the “Iron” spirit in entrepreneurs and investors alike.
Notes:
- “New Investments” defined as the first time one of the ten VCs funded a company in a given year, regardless of round (e.g. could have been a Series A, B, recap, etc)
- Data considered new investments only, publicly disclosed exits, domestic US early stage funds only, and leveraged VentureSource data which has a bit of a time lag to it.
- Thanks to my colleague Patricia Nakache and our intern, Atul Kumar, who assisted in pulling together the data and analysis.
6 Comments
January 11, 2010 at 4:54 pm
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January 11, 2010 at 4:45 pm
[...] “invest aggressively during the downturn” strategy that my colleagues and I at Trinity decided to execute on a year ago will ultimately bear fruit and this expected online ad rebound may be a helpful step toward [...]
September 22, 2009 at 10:44 am
Great analysis Jim! This confirms my unresearched intuition…there are four stages to the startup cycle, and the trick is knowing what to do during each phase.
We’re currently at the trough of the cycle, trending upwards, which is the best time to start and invest in companies.
As the recovery continues, the cycle will shift so that it becomes the best time for entrepreneurs to raise money.
When we approach the frenzied heights, it’s time to sell your company and raise a venture fund.
And when the crash starts, you should either buy puts, or go on a 3-month sabbatical…
September 17, 2009 at 12:27 pm
Jim, I totally agree with you- I should be wrong in predicting 2010=2002.
As I look around here, it’s not there yet.
-Uday.
September 16, 2009 at 7:43 pm
Jim,
The following are the reasons for my earlier comment about 2009=2001 & 2010=2002:
[1] In March of 2000, NASDAQ reached it’s (dotcom) peak and started declining. But it was only early 2001, we all felt the pain. (e.g. Cisco 8000 layoff in Apr’01)
Similarly, though we hit the financial crisis in Sep 08, we started feel the pain only this year. (e.g. Cisco 2000 layoff this year)
[2] I remember 2002 was tougher than 2001 and only 2003 was starting to feel better.
Just based on last recession, I think 2010 will be more like 2002.
This UCLA Anderson forecast says some thing along the line…
http://www.anderson.ucla.edu/x22727.xml
“expects the unemployment rate for California to rise to 11.9% in the second quarter of 2010 & ……California economy will be growing in 2011″
I don’t mean to say that this is complete/accurate and this is my observation.
In Feb 08, I made a comment and it turns out to be true!
http://uds-web.blogspot.com/2008/02/is-2009-2001.html
-Uday.
September 17, 2009 at 11:02 am
Uday, thx for the comment. You were quite prescient with your Feb 08 post. I’m hoping you are wrong this time though and I believe that 2010 will show more signs of sustainble growth than 2002 did. I am in total agreement that unemployment will peak next year but I am in the camp that unemployment rate is a lagging indicator of where the overall market is headed.
With that said, more detail on how to think about unemployment rate as an indicator can be found here:
http://latimesblogs.latimes.com/money_co/2009/07/wall-street-opens-this-week-less-confident-that-a-turning-point-for-the-economy-is-on-the-near-horizon-after-last-thursdays.html
and here:
http://seekingalpha.com/article/154424-is-employment-a-lagging-indicator
What do others think?