The Case for Venture Capital in an Uncertain Market
Everything is down these days except for one thing: inflation. The feared “I-word,” along with a laundry list of macro and micro headwinds, have pushed the S&P 500 to its lowest point in more than a year, crushed the Dow and caused the NASDAQ to officially enter into bear-market territory. Even the celebrated FAANG stocks are off by at least 20%.
Gold? Down. Bonds? Not good. Crypto? It’s bad.
We certainly can’t ignore crypto’s tragic fall from grace. To once again reiterate the point I’ve made several times about Bitcoin and crypto, their recent nosedive (losing over 50% of their value) just proves that they are in no way an inflation hedge or a safe haven, and absolutely correlated to stock market behavior and volatility.
What’s an investible asset class that’s proven to be uncorrelated to the stock market? Venture capital funds. However, it would seem that in the midst of the current market slowdown and the possibility of a looming recession, it’s not the best time to invest in VC funds, let alone launch an entirely new fund. But, If that’s what you’re thinking, then you’ve got VC investing all wrong.
Unlike the equity markets, venture capital has remained steady during this period of volatility — after experiencing record-breaking growth over the past few years. In fact, global venture funding reached $143.9 billion in Q1 2022 — the fourth largest quarter of funding on record even with a slight slowdown from the previous quarter.
Additionally, according to recent research, the share of VC funds in portfolios continues to increase as pensions, endowments, financial firms, insurance companies and family offices are adding VC exposure and seeing it pay off.
From Biotech to Blockchain, VC activity remains strong and continues to offer investors, large and small, opportunities for long-term wealth creation beyond the usual stocks, bonds and crypto.
Diversification is key to avoiding some of the worst of a down market. However, as described above, it’s hard to find assets and/or industries that aren’t correlated In some way to market movements. No matter the asset or the industry, major market corrections are like a tsunami carrying everything with it in the same direction.
Unlike traditional stocks, bonds and the newest asset class, crypto, venture capital funds are not correlated to the equity markets. In fact, long-term correlation between VC returns and the market (Nasdaq and S&P 500) is very weak.
In addition to their equity market independence, VC funds provide diversification by providing exposure to a variety of startups, at various stages in their growth journeys, and across a multitude of fast-growing industries. Whether it’s a niche fund or a fund-of-funds, investors are able to put their money to work and potentially avoid the massive swings, daily dips and emotional market sell-offs by participating in this long-term, diversified asset class.
Having said all of that, VC investing isn’t for everyone. Depending on the fund and its investment strategy, VC investing can be risky. And, because of its long-term nature, it’s fairly illiquid. However, those downsides are also evolving and the VC market as a whole is becoming more accessible and attractive to a wider swath of investors — not just the millionaires and behemoth institutional players.
A New Era of VC Investing
SPiCE VC, the venture capital firm I founded and currently lead, recently launched a second fund, SPiCE II, after a successful close of our flagship fund, SPiCE I — the first fully tokenized VC fund to ever be available to investors. With a 350% increase in security token price in 2021, SPiCE I was named the top performing fund in the tokenization and Blockchain market by Security Token Market, the largest security token financial data and media firm.
SPiCE I’s real market significance is not just in its value creation for investors, but also in how it presented an entirely new way for investors at any level, to fully participate in the private VC market — democratizing venture capital investing by tokenizing it. While most VC funds have a minimum investment size requirement which is typically in the multi-millions and only available to a select few investors, SPiCE I has created greater access through issuing digital securities that are tradable on exchanges like Securitize Markets and INX. This strategy has allowed for much lower minimum investment requirement. The result is an instrument that allows much greater access to a lucrative financial asset that is usually reserved mostly for institutional investors.
While still a small portion of the total VC market, the tokenization trend continues to gain traction, with names like Blockchain Capital and Realio leveraging the power of blockchain technology to benefit investors.
SPiCE II is doubling down on this investment approach using a traditional VC model (to be followed soon with a tokenized version of the same fund), while continuing its focus on identifying innovative companies that stand to benefit the most from the mass proliferation of Blockchain technologies across many industries — the picks and shovels shaping a Blockchain and Web3 future.
Entrepreneurial Innovation Doesn’t Pause for Down Markets
Ideas, breakthroughs and new approaches don’t stop because the stock market is down. Entrepreneurs continue on to create the next generation of companies that will be building the systems and the solutions for our world well before they hit the NASDAQ. Instead of playing this market (which never ends well), it may make sense to consider taking advantage of this dynamic asset class that’s fueling innovation and disruption. It may be simpler and more accessible than you thought.
Originally published at https://www.thestreet.com on May 13, 2022.
