Venture Capital Investing in Recessions

While the financial markets have enjoyed a healthy rebound since their lows in March, the data on Main Street continues to deteriorate. The initial damage has been troubling and public health officials are uncertain when the virus’ infections will slow. While most states are in the process of lifting lock-downs and other restrictions, public officials and investors alike are without a blueprint for what might come next.  

While the dust has yet to settle, the data is clear about one thing; the United States is facing its first recession in over a decade. Therefore, the ’Cane Angel Network analyzed venture capital returns at different points during the economic cycle, and there is cause for optimism for investors. In addition to famous success stories of start-ups beginning during the Great Recession, we found the data points for venture capital as an asset class to do well at the time of, and after, a recession. Aside for the inherent advantage of the long-term time horizons, we found average venture capital investments held up better in the thick of the last two recessions than its public market peers.  

Entrepreneurs know that downturns are inevitable in the economic cycle. Recessions should not sink a strong business, nor should they impede one from starting. This was demonstrated through the Great Recession as many unicorns began operations in the heart of the downturn. To name a few – Instagram, Uber, Venmo, Square, Slack and WhatsApp – thrived despite starting in an uncertain time. 

In addition to the lucky few firms who invested early in the above household names, market conditions were favorable to the entire venture capital industry. According to data compiled by Pitchbook, the average venture capitalist was still able to produce strong returns during the Early 2000s Recession as well as the Great Recession (Exhibit 1 below). 

Venture capitalists were also able to post better returns in the worst part of recent recessions compared to their counterparts in the public markets (Exhibit 1 below). Typical venture firms are priced quarterly, while public equities are priced anytime there is a transaction. However, the resilience in recent recessions was not simply due to the illiquidity of the venture capitalists’ investment vehicles. Rather, the average firm counted the short-term pain within their portfolios and positioned themselves for long-term success.  

The resilience in recent recessions along with the overall returns makes venture capital a very attractive home for investors. Despite historic bull runs of the early 2000s and 2010s, venture capital still outpaces the S&P 500 and NASDAQ’s average annual return. Per data compiled by Pitchbook, the average venture capital firm returned 14.16% from 1996 to 2017, while the S&P 500 and NASDAQ indices returned 8.49% and 12.93% respectively. 

The last trend we identified is perhaps the most powerful. The average venture capitalist actually did better in the midst of the Great Recession than during the economic boom that proceeded it (Exhibit 2 below).  

The ’Cane Angel Network views this as an opportunity for our start-ups. As capital becomes scarce in economic downturns, the best ideas stand out. We seek to work with entrepreneurs that stand out and view this short-term stress as a fantastic opportunity.  

This page was written by Jason Teitelbaum and Jeffrey Camp. Mr. Teitelbaum is a member of the Cane Angel Network investment team and is pursuing his MBA at UM graduating in 2021. Mr. Camp is the Managing Director of the Cane Angel Network.