Will the “golden age” of technology investment last? Three venture capitalists engage in conversation moderated by Steve Kaplan of the Polsky Center

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By all accounts, 2021 has been a banner year for technology investments and returns. And more and more money is flowing to markets like Chicago, in part thanks to a remote business environment that encourages venture capitalists to look between the coasts.

“It was a city sky-high when it comes to technology, unequivocal,” said Sach Chitnis, co-founder and partner of Chicago-based venture capital fund Jump Capital, of Chicago’s pre-pandemic appeal for investors. technological. “When people don’t fly, they don’t fly. “

But will the boom that hits new unicorns every day last? And does the deluge of capital present certain dangers?

These were among the questions discussed at last week’s sixth annual Tech Outlook, a virtual panel discussion hosted by the Executives’ Club of Chicago exploring the direction the tech market is heading.

Chitnis, one of the first three venture capitalists to participate in the panel, shared his insights with fellow panelists Mar Hershenson, co-founder and managing partner of Pearl Ventures in Palo Alto; and Dana Wright, Managing Partner of Chicago-based MATH Venture Partners. The conversation was moderated by Steve Kaplan, Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business and Kessenich EP Faculty Director at the Polsky Center for Entrepreneurship and Innovation.

Kaplan has led the way by browsing numbers that show astonishing growth in trade value and returns.

“We are indeed in the midst of a golden age,” Kaplan said.

In the first three quarters of this year, venture capital investment in the United States reached $ 238.7 billion, up from $ 166.4 billion for the whole of last year, as the size of the towers of funding has exploded. The exit values ​​of tech startups, which have been slowly increasing since 2016, soared to $ 582.5 billion in the first three quarters of 2021, from $ 289 billion made in the entire last year.

Meanwhile, venture capital funds are recording average internal rates of return of 40% per year, and investors, even in median funds, are doing better than they would have if they had. invested their money in traditional index funds.

“What’s amazing is… the average (venture capital) fund has beaten the S&P 500 by 60% to 100% over the past 10 years,” Kaplan said.

Public tech stocks have also significantly outperformed the market, with the iShares Technology index rising 75% since early January 2020, compared to a 36% increase for the S&P 500.

Chicago can claim a small but growing part of the gold rush. So far this year, 12 Chicago-based tech startups have become unicorns – meaning they’ve reached a valuation of $ 1 billion – bringing the city’s total number of unicorns to 20. In the third quarter, Chicago-area startups raised $ 5.5 billion, up from less than $ 3 billion in all of 2020.

Chicago can attribute the growth in part to its concentration of transportation and logistics companies, which have become attractive investments amid disruptions in the global supply chain, as well as investments planted years ago that now bear their fruits, said Wright of MATH.

But the pandemic-fueled shift to remote working has also erased geographic barriers and pushed investors to seek good founders with good solutions and measures in all parts of the country and the world, Chitnis said.

Hershenson said it’s rare to have a first face-to-face meeting with a startup, and a company’s seat matters less when Zoom’s track record puts founders on a beach in Hawaii or floating above. a national park.

“It got us all in the Bay Area to invest further away from home,” Hershenson said.

Does this mean that the Bay Area is going to be less dominant in venture capital? Kaplan asked.

“I don’t want to be recorded for saying that,” Hershenson said with a laugh. “Yes, of course we see it. It’s already happening. A lot of the venture capital’s money is still there, especially these big growth cycles, but it’s spreading, no doubt. “

Certain areas of growth in technology have particularly excited VCs.

Hershenson’s company invests in technologies that tackle climate change, the evolving nature of work, and cryptocurrency.

“Which sounds crazy, but we made a decision about a year ago, either we’re getting on the boat or we’re going to get off the boat,” she said of the crypto craze, which she believes might be overkill.

“It looks a bit like dot com right now in this space. It’s really out of control, ”Hershenson said. “There will be great companies built, it’s just that everyone’s there.”

At MATH, investments tend to target companies focused on customer acquisition, and Wright said it’s often wise to explore “unsexy” opportunities where others aren’t looking. The company is also starting to look at Web 3.0 and the potential for a more distributed Internet.

Jump focuses on technologies dealing with banking relationships and changes in consumer behavior, in addition to making large investments in cryptocurrency infrastructure and enabling technologies.

“A lot of people say it’s going to be the next internet, but that’s diminishing it,” Chitnis said. “It will replace the financial system and capital markets. As with the natural sciences and biotechnology, investing in cryptocurrency is a long game, he said.

There is no indication yet that the inflow of capital or the pace of investment will slow down. Investors who usually invest at later stages arrive earlier and take a ‘spray and pray’ approach to Series B rounds, putting large sums of money into multiple companies to create an index that spreads their risk, Wright said. .

This is causing some concern, as many of these investors don’t sit on startup boards or help them strategically. By getting so much money up front, rather than incrementally at points of proof, founders can try to scale before they have a solid unit economy, customer acquisition strategies, and other building blocks for them. their businesses, and will spend a lot more capital, Wright said.

“Business is more than money,” Wright said. “There’s a lot of construction going on behind the scenes. “

Money is the source of other challenges for VCs. Choosing companies is much more difficult than it was 10 years ago because investments are finalized faster, Hershenson said. With higher valuations come higher expectations and execution pressure, Chitnis said. And everywhere it is the war for talents.

Nonetheless, panelists are optimistic that betting on the technology will be successful in the long run. Chitnis found that the companies in his portfolio used capital efficiently and met their income targets sooner.

“If you’re looking for where the disruption opportunities lie, are you betting on JPMorgan? Said Chitnis. “Or on JPMorgan buying these startups to really transform their industry? “

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