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Why the white-hot VC market is nothing like the dotcom-era boom and bust

A global surge in start-up funding has prompted some commentators to draw comparisons with the dotcom boom and bust at the turn of this century. A cursory glance at the numbers does hint at some parallels. Investments in the venture capital sector hit a fresh record in 2021, with almost $330 billion of transactions closed in the US alone, underscoring the frenzied appetite for deals. Meanwhile, the number of start-ups that were profitable at their time of listing over the past four years was roughly as low as in the run up to the dotcom crash (roughly no more than a third of newly listed companies were profitable).


Zoom in closer, however, and things are very different this time round. Start-up financing has evolved significantly over the past two decades. In the dotcom bubble there was a much shorter runway for going public. Now, start-ups remain private for much longer. Tech start-ups, for example, are on average more than a decade old when they finally list. That means they tend to raise more capital via much larger financing rounds, delaying the need to go public.


Another reason things are different this time round is that the VC industry has changed geographically. European funds now perform in line with their US peers. Innovation is also flourishing around the world, with VCs eyeing start-up investment opportunities in Asia, Latin America and Africa.


The tech-race that is unfolding globally means the need for VC funding to fuel innovation is unlikely to slow down, and has the potential to deliver significant financial returns. The spill-over effects from new technologies that improve peoples’ lives mean that everyone benefits. And unlike in the dotcom era, there is a much wider user-base for that innovation. For example, more than eight in every 10 adults globally now have access to a smartphone.


At the same time, the VC ecosystem has also become more robust. Corporations are taking more active roles in innovation, not just by acquiring start-ups but also to finance and nurture new companies.


Finally, more varied exit routes mean VCs are not just limited to public listings when they want to cash out. Leveraged buyouts, for instance, now make up almost a third of exits compared to roughly one in 10 back in 2006.


All of that means that while there may be shadows of the dotcom crisis poking through in the data, the story this time is completely different—the VC industry has matured, the innovation backdrop is more developed and the opportunities are more global in nature.





 

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Footnotes


[1] https://www.whitehouse.gov/wp-content/uploads/2022/02/Capstone-Report-Biden.pdf

[2] https://www.fao.org/worldfoodsituation/foodpricesindex/en/

[3] https://www.imf.org/en/About/FAQ/russia-ukraine

[4] https://www.morganstanley.com/im/en-sg/institutional-investor/insights/articles/post-crisis-private-markets-investing.html

 

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