Quote of the Week
“Life’s like a movie: write your own ending, Keep believing, keep pretending.” – Jim Henson
It couldn’t last forever. The markets broke their four week winning streak with all indexes down less than 1.0% last week. Since we are in Quad II with growth increasing, this is a good sign. I look at it as a consolidation of the trend before we start moving up again. If the markets had fallen substantially, it would be a different story.
Corporate earnings have been especially strong beating expectations. Consumer spending increased 1.7% last month, which was well above predictions. Possibly it might have something to do with $4.25 trillion sitting in the pockets of consumers? You think? We are expecting a strong holiday buying season this year.
There has been a lot of news about bottlenecks in the system. They certainly exist, but think about this, today’s bottlenecks are tomorrow’s spring loaded purchases.
Inflation surged in the U.S. in October. Much of the inflation came from the volatile food and energy sectors. Energy prices are up 30% in the last year and food prices have jumped 5.3%. Core inflation, which excludes food and energy, increased 0.6%. Core prices are up less than overall inflation, but prices are still rising more rapidly than the Federal Reserve desires. The shortage of semiconductor chips is forcing auto manufactures to raise prices. New vehicle prices jumped 1.4% last month and used car prices rose 2.5%.
People wonder why inflation is picking up so fast after being so low for so long. The best answer is the economy is trying to adjust to the items demanded from the pre-COVID economy. Shifts toward consumers buying more goods have pressured the capacity of the global supply chain, which suddenly feels elongated and vulnerable to shutdowns.
Everyone is blaming President Biden for this inflation. This inflation is the by-product of the economy coming out of the shutdown. It is a fact that presidents have almost no control of the economy or inflation. Prior presidents including Richard Nixon, Gerald Ford, Jimmy Carter, Ronald Reagan, George H. W. Bush, and now Joe Biden have been in office during periods of rising inflation. As you can see, it didn’t matter which political party was in office.
The good news on inflation comes from our data provider. They expect inflation to start to moderate starting in the first quarter of 2022. The economy is strong, and it is getting stronger going forward, so Quad II should last a while longer.
One of our strongest performing investments in the Model we use to invest your money has been Venture Capital. The Model invests in late-stage private companies before they either go public or are bought by a larger company buying their technology. This asset class has been our only buy-and-hold fund. Venture Capital has been the number one performing asset class over the last ten years. I don’t see this trend stopping.
In booming year, venture capital shows no signs of slowing
The venture capital ecosystem is stronger than ever and shows no signs of slowing down, data through the third quarter of the year shows.
As of Sept. 30, global VC funding for the year was at $437.7 billion, 158% higher than 2020’s calendar total, per CB Insights. In the United States alone, $82.8 billion of capital was deployed in the third quarter, bringing the year-to-date amount up to $238.7 billion. This means the United States accounted for over half of all venture capital dollars, according to PitchBook.
Public listings in the United States generated $582.5 billion in exit value as of Sept. 30, topping the previous initial public offering record of $289 billion set in 2020 by 102%. In the United States, venture-backed listings made up more than two-thirds of all public listings in 2021 through the end of the third quarter, giving credence to venture bets paying off.
U.S. venture capital fundraising overall has also set annual records as of the end of September. VC funds have raised a whopping $96 billion, shattering the 2020 record at $85.8 billion and bringing the average fund size up to $194.7 million (2020 also held the previous record on this metric, at $165.9 million).
In 2021 so far, 40% of all VC funds are midsized, with between $50 million and $500 million. This percentage is up from only 31% in 2020, showing the strength of the middle market. Silicon Valley holds the top spot in garnering the most VC dollars (48% of the U.S. year-to-date total). New York, the Washington/Baltimore/Arlington area, Atlanta, and Denver saw year-over-year growth between 65% and 89%, indicating dispersion of capital.
Driving the growth are corporate venture capital investors and private equity investors who are betting on early-stage startups. Investments at the angel and seed level had already surpassed $11 billion by the end of the third quarter, showing that investors eager to find alpha are betting on companies that previously may have seemed too risky. As these non-traditional investors enter the VC space, according to PitchBook, they are showing less sensitivity to prices (thus driving up valuations), offering less stringent deal terms and often not requiring a board seat.
Funding for women-founded companies
Also notable in the VC landscape is the role women play in receiving funding dollars or writing checks as general partners, a topic that has drawn more attention as companies, funds and the public increasingly prioritize issues of equity and diversity.
It has been well reported that the pandemic negatively affected women in the workplace during 2020, and the VC space reflected this as well. In 2020, only 2.2% of all of the dollars invested in startups went to companies whose founders were all women. While this percentage dipped to 2% in 2021, there are some bright spots in terms of deal value and deal count in 2021 for female founders in tech, health care and fintech. According to a recent report by PitchBook, deal value for female-founded companies in tech and health care as of Sept. 30 was already up 82.9% and 106.3%, respectively, compared to 2020. In fintech, female-founded companies have raised over $6 billion, which is three times the amount raised in 2020.
Moreover, total investment in female-founded companies rose from $23.3 billion in all of 2020 to $39.4 billion in 2021 through September. When looking at investment in companies with all-female founders, there is a healthy increase from 2020 when that figure stood at $3.5 billion for the entire year compared to $4.6 billion as of Q3 this year.
There is no doubt that investment in female-founded companies is still lagging, but the modest increase in female general partners as a percentage of all GPs is an indication of improvement. As of the end of September this year, approximately 15.4% of GPs were women, according to PitchBook. This is up from 12% in 2019.
Venture capital has had a strong showing so far through 2021, but some uncertainties could still affect this landscape. These are the usual suspects related to possible tax increases (whether in the form of a capital gains rate hike, changes to the carried interest holding period, or deductions related to qualified small business stock) or Fed policy changes that could affect interest rates—especially now that Federal Reserve Governor Lael Brainard has been reported as a potential replacement for Fed Chair Jerome Powell. However, the speed at which Washington is moving is unlikely to affect the VC ecosystem this side of 2021.
The recently passed hard infrastructure bill will also provide some upside to the VC community, especially the $65 billion slated to improve broadband infrastructure across the country and the $7.5 billion to help build out the national network of electric vehicle chargers. Other provisions of the bill that support hard infrastructure projects, making infrastructure resilient against the effects of climate change and cyberattacks could also present opportunities to VC players.
It’s worth noting that this bill didn’t require raising taxes, but the second part of the bill—which addresses more social infrastructure projects—could revive discussion on the topic.
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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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