Raisins in the Sun

Memo to self: check in with the crystal ball repair joint.  (That blasted crystal ball of mine's been in the shop for way too long!  I do have to admit that that it never really worked all that well, but I'd hoped that they could've tuned it up by now.)

In the meanwhile, I've been trying to avoid daring forecasts.  But here's a prediction that's not too saucy: exits of venture-backed companies will continue to be modest for as far out as the eye can see.  Sure, a company or two might ring the bell every now and again, but I suspect that we'll continue to be disappointed with the number of start-ups that crack the hundred million dollar exit mark each year.  And in a bloated overcapitalized world, that just can't be enough return to keep the teeming masses of lottery players interested.

But they continue to play and show no signs of letting up.  And hey, everyone's got a strategy – or at least a rationalization.  Who am I to say that my play's better than anyone else's?  I've got no monopoly on wisdom (and a broken crystal ball, too!)

Here's what I do know, though: markets are price discovery mechanisms and right now things seem a bit out of whack since different markets are sending us wildly conflicting signals.  In exit markets, the stats are daunting: no venture backed IPOs in Q2, M&A volume down considerably, sophisticated strategic buyers beating down valuations simply because they can, dwindling numbers of investment banks available to serve as public offering bookrunners, etc.  Meanwhile, private markets remain firm with round-to-round valuations up meaningfully, according to law firm Fenwick and West.  What's up with that?

I know, I know: we invest for the long term and today's public market gyrations should not affect start-ups that just begun securing reference customers or whatnot.  Yes, yes, I know there's a haves-and-have-not financing market where some companies get multiple term sheets while others go hungry.
Now back in the day, when I was trading public securities, the oldsters would extend a craggy finger our way and admonish us that, "there's a fine line between being right and being early".  Yet, what I've always loved about VC is that you get paid for being early.

All that said, isn't it bizarre that there will likely be aggregate mark-ups in many LP portfolios while liquidity markets are (and will likely continue to be) so bad?  The year-over-year benchmarks keep chugging along in VC; sure, many start-up companies are progressing, but progressing to what?  It's almost as if the train is accelerating into the oncoming wreck.  Cue the surging violins: there's . . . just . . . so . . . much . . . tension!

And at some point, this tension needs to get resolved.  Or does it?  Are the mark-ups a portent of good things ahead or just a snooze bar that allows us to pull the velveteen covers up over our heads and momentarily ward off the pearl-gray chill of morning?  Without an effective price discovery mechanism, it's tough to tell if one's throwing good money after bad.  And in that kind of environment, folks can seek out (selectively) whatever data confirms their hypotheses.

And that’s what keeps the Dollar and a Dream guys coming back.  It can be easy to overlook a lack of distributions when the quarterly reports look rosy.  Like a late-inning rally that energizes those fans that haven’t yet started making their way for the B, D, or 4 trains, there might even be a distribution every now and again to ignite the bonfire of hope.  But that fire needs dollars to keep burning – not just paper – and eventually, the flames will burn down to smoldering embers.  Will investors bail out before we get to that point, or will they continue waiting, watching, hoping?  

"What happens to a dream deferred?" asked Langston Hughes.  "Maybe it just sags like a heavy load / Or does it explode?"  Given the disconnect between public and private markets, I'm betting that the Dollar and a Dream guys are going to get just enough positive feedback that the former of Langston's possible outcomes will be true, not the latter.

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[Andrew Weissman]

Or, as Bruce Springsteen wrote:

"But if dreams came true, oh, wouldn't that be nice, but this ain't no dream we're living through tonight"