Dot-Com Bubble Lessons Left to Learn in 2022

“The venture business is all about excess and then correction.”

Steve Bengston, a managing director at PricewaterhouseCoopers, said those wise words.

Bengston continued:

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“A lot of companies that don’t have path to profitability or a leading position in their market will be shut down rather than receiving second or third rounds of funding.”

Those quotes were taken from an article published over two decades ago, in reference to the dot-com bubble. Despite the age of the message, it’s something that investors should start to think about today…

For the past several months, we’ve seen increased volatility in the markets. Inflation is the highest it’s been in 31 years, the emergence of the omicron variant has delayed everything going “back to normal” (whatever that means now), supply chain issues are causing shortages of everything from produce to meat to milk at the grocery store… and that doesn’t even cover the half of it.

Investors in the public markets have seen their portfolios get clobbered.

And, unfortunately, venture capital investors are not immune. But a shift in mindset can help us survive…

Today I’ll share where the VC market stands right now… and what it means for us as investors.

Money Pours into Private Companies

2021 was a record-breaking year for venture capitalists. Billions of dollars flowed into early-stage private companies. Although I’ve already highlighted some of the mind-boggling numbers, there’s something alarming going on…

To me, it’s the actual rate of value increases that spells trouble. Take a look at how many companies became unicorns (worth more than a billion dollars) in early funding rounds.

Source: Crunchbase News

To put this into perspective, it’s important to understand how funding rounds work…

Typically, startups raise money from investors at different stages. Usually, there is an “angel” or “seed” round of funding, which is exactly what it sounds like… it’s the first outside money that a company takes in to fuel its growth.

After that first round of funding, a company will raise a Series A, then a Series B, and so on.

The above chart shows that in 2021 over 100 startups became worth more than $1 billion within their first three rounds of funding. This number doesn’t even compare to previous years.

Are there that many great startups? Or is this a case of too much money chasing too few deals?

Unfortunately, I believe it’s the latter…

Fintech Struggles

I spoke about this issue in the fintech sector:

“One area of particular concern, for me, is the fintech sector. One out of every three new privately held startups that became a unicorn (valued at $1 billion or more) in 2021 was fintech related.

Worldwide, nearly 50 new fintech companies entered the unicorn club.

That’s right. Dozens of brand-new fintech companies (many of which are barely generating revenue) are valued at over $1 billion.”

Keep in mind that even though private fintech companies have raked in record amounts of funding, they do, someday, need to actually survive on their own… as in, turn a profit and not survive off of venture capitalists’ money.

And based on current publicly traded fintech companies, there could be problems ahead.

You see, current fintech companies trading on public exchanges are a bellwether for private companies that consider an IPO. Not only that, current public fintech companies are potential acquirers for private fintech startups.

And things aren’t going so great for public fintech companies.

Just look at Robinhood (NASDAQ:HOOD) and Coinbase (NASDAQ:COIN).

One of the most anticipated IPOs of 2021, Robinhood got swept up in the meme stock mania. The brokerage app is now down 85% from last year’s high.

While seeing a surge in November during Bitcoin’s climb higher… crypto exchange COIN isn’t fairing any better. The stock sits down about 45% from its high as I write.

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So if public fintech companies aren’t doing well, then what happens to the private fintech companies?

It doesn’t look good.

Bottom line, the private markets are not completely immune to the daily market gyrations.

And the recent selloff has effects on private companies making their next move, whether by lack of acquisition or delaying an IPO.

Virginie Maisonneuve, global chief investment officer for equities at Allianz Global Investors, says:

“While the selloff removes some of the froth from the market and will likely create many opportunities in growth stocks for the long term, it would be a brave decision for a corporate to push for an IPO in the current climate.”

So, what now?

Keep a Long-Term Perspective

Nothing changes in our mindset. VC investing isn’t about making money overnight… it’s about investing for the long haul.

Ignore the noise. Focus on the long term. There will always be another market-moving headline… but companies with breakthrough products will outperform in the long run.

As a VC investor, you’re investing in early-stage companies that will take several years to exit.

While investments in the public markets struggle, you can rest assured that your private investments are working hard behind the scenes…

And if they are successful, they can offer enormous returns that will dwarf any public stock investment made.

Those are the types of investments we follow here at VC Digest.

In fact, I put three of my favorite private investments for 2022 in a free report for you.

It’s called Top 3 Private Company Investments for 2022.

If you haven’t already, you can check it out here.

On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.