Market downturns are a good time to participate in the innovation economy
In early 2020, I penned a note to my colleagues at Alumni Ventures that the 11-year bull run had finally ended. While the COVID-19 recession was the shortest in U.S. history, the pandemic continues to create economic distortions.
McKinsey found that just 11 percent of global executives still considered the pandemic a top concern in March 2022 as compared to 47 percent in 2021. Yet it’s the pandemic that forced governments to (over) spend when the private sector could not, whipsawed our labor markets, and bungled global supply chains. Add geopolitical uncertainty, global food shocks, and skyrocketing energy prices with Russia’s invasion of Ukraine, and the stage is set for accelerating core inflation on multiple continents. Many economists now predict a recession — if not now, then soon.
The truth is, no one knows how the economy will perform in the short term. And its performance is much less meaningful when taking the long view, which is required to build an enduring business. Through this lens, predicting the depth and duration of a downturn is much less relevant than knowing there will be a recovery.
And recover we shall. For well over 100 years, it has always been a good strategy to bet on the U.S. economy with innovation as its engine. For more than half a century, disruptive entrepreneurs and sophisticated venture investors have been the key drivers of America’s vitality.
Why Recessions Can Benefit Entrepreneurs & Investors
Counterintuitively, it’s in periods of market turmoil that transformational innovation often presents. We only have to look back to the Global Financial Crisis in 2008, when public and private markets bottomed in 2009, to find the start date of some of today’s most promising companies. Airbnb, Slack, Uber, Twilio, Block, Pinterest, Okta, Cloudflare, and many others, were either founded or raised their seed rounds in 2008 / 2009. It’s no surprise that 2009, 2010, and 2011 produced some of the strongest venture returns of all time.
Market adversity does not ward off the best entrepreneurs. They do not dwell on market whims, or their bank accounts. They are builders, often engineers, compelled to solve problems to things they’ve experienced, and to see their visions fulfilled. But they need help. They need venture capitalists to believe in them when nobody else does, to give them money, to help them find early customers and teammates, and to develop go-to-market strategies. Entrepreneurs are special people. Venture capitalists are too.
It’s a good time to start a business. COVID accelerated the digitization of many of our behaviors. Whether ordering online groceries, accessing healthcare, access to education, consuming entertainment, working remotely, etc. our patterns have been sustainably changed. We demand ease of access and speed, we’re willing to try new things online, and to pay for them.
Corporate customers are no different. According to a 2022 Gartner Report, Chief Information Officers are accelerating investments in cybersecurity, big data analytics, artificial intelligence, machine learning, cloud technologies and other sectors. Online threats, supply chain challenges, and sustained dual remote and hybrid work environments are largely unaffected by this downturn.
Moreover, when Tesla is worth as much as the combined values of up to nine of the largest carmakers in the world on any given day, Boardrooms are forced to pay careful attention to disruptive, early innovation before it’s too late. This spells opportunity for entrepreneurs regardless of the market cycle.
And from a cost perspective, it’s never been easier to get a business off the ground. Babson College found that the average investment needed to launch a business dropped from $65,000 in 2006 to just $13,000 in 2015. In the meanwhile, startup infrastructure has only improved. Computing and digital storage capacity and associated costs have been reduced for end-to-end platforms like AWS and Stripe. More bandwidth, more data, more open source platforms, and advancements in AI are leading to better products with more applications powering everything from image recognition to language processing. Entrepreneurial ideas are boundless, and the infrastructure is there to support them.
Perhaps most importantly, attracting quality technical talent in an economic downturn becomes easier. From Coinbase to Robinhood, layoffs are now common, and with it comes the opportunity to recruit a builder with a shared resolve.
Pursuing Outsized Returns
As public companies become older and fewer, and private companies stay private longer, the investment return potential for the astute private investor has surged. This is particularly true for the earliest venture-backed companies at the seed stage. In 2021, a record 4,000+ seed-stage startups were funded in the U.S., and notwithstanding the 2022 downdraft in public markets, seed investing remains vibrant.
One reason for this is that seed-stage companies provide investors and founders with the potential for considerable returns. As one extreme example, consider First Round’s seed investment of $510,000 in Uber’s seed round in 2010 (the last meaningful down market in the U.S.). They paid $0.009 a share. Post-IPO, the value of their stake was worth $2.5 billion — a 4,901x return.
We were not in Uber’s seed round, but certain AV Funds were early in another company called JUMP Bikes which was acquired by Uber for a mix of cash and stock six months after our investment. Once Uber IPO’d, we were able to sell the Uber holdings and deliver a strong return for investors. One of the hidden beauties of investing in venture-backed companies is that they tend to buy each other as a means to capture innovation, product / market fit, market potential, and talent. In this way, one successful venture company may positively impact many other startups.
Of course, venture capital is not without its risks. For every success story, there are hundreds that do not succeed. But let me break down a misconception: people sometimes think that when investing in the venture asset class, it takes outsized personalities or risk to generate outsized returns. We see it differently. We build very large portfolios, in a disciplined and diversified way, alongside the most well-established VCs.
And we always, always seek to back great entrepreneurs. It is they who have all their eggs in one basket, and who work tirelessly to put their imprint on the world. All to our benefit.
Creativity is limitless, and the human spirit indomitable. Despite — and, in fact, because of — all this adversity, recessions are as good a time as any to participate in the innovation economy. And as the old saying goes — all past market declines look like opportunities, all future market declines look like risks.
About Anton Simunovic
Anton Simunovic is Chief Investment Officer at Alumni Ventures. Anton has 25+ years of technology experience as a proven venture capital investor, entrepreneur, and operating executive in companies ranging in size from startup to Fortune 10. Most recently, he founded and led Vener8 Technologies, a technology commercialization company he started with GE. Previously, Anton led the Software and Internet Infrastructure Group at GE Equity, where he directly invested $72 million in 10 companies generating more than $500 million of realized gains. Anton has substantial international experience in Canada, China, Europe, and Israel, and has served on the board of directors of more than 20 private and public companies. Anton has a BSc Engineering from Queen’s University in Canada and an MBA from Harvard Business School. The statements and opinions stated herein are his own.