Finding Opportunity in a Slowing Market

Stock markets tumbled in 2022 with the S&P declining by almost 20% on the year, and venture capital has followed suit with performance turning negative as values fell in late 2022 and early 2023.

Commensurately, venture-capital investment activity has slowed considerably. Deal activity for startup companies has fallen for five consecutive quarters, both in the number of deals completed and the amount of capital invested. With that, an index of activity published by Pitchbook suggests that deals are more favorable to investors now than they have been in the past 10 years.

So how should folks assess opportunities in this arena? Perhaps the best answer is to revisit key tenets that tend to make venture allocations successful long term:

• Innovation is persistent. A number of good companies have been formed in difficult times, and surviving obstacles is often a quality of great companies. It is not unusual for the long-run benefits of an innovative company to initially go unnoticed but be recognized over time.
• Vintage year diversification is critical. As with public markets, private markets are subject to cycles. Given the long-term horizon of private investments, it is difficult to know where in the cycle to begin investing and the timing of any turn. By maintaining an allocation across time, investors might mitigate the downside and aid exposure to the upside.
• Valuations matter. Frenzied markets can rapidly lead to overvaluations as momentum takes hold, but an approach of investing at any price is unlikely to be an enduring strategy. Discipline around valuations is critical.
• Rushed decisions are often poor ones. In a turbulent market, investors often feel pressure to make decisions in a hurry, which can lead to regrets.

So, while there is a slowdown in overall venture-capital activity, there are still areas of frenzy and great promise, such as artificial intelligence and climate technology. Savvy investors are well served to maintain a disciplined, consistent allocation to private markets.

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