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- #161 The 2024 VC Vintage & Power Law - Time to Invest?
#161 The 2024 VC Vintage & Power Law - Time to Invest?
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“Is now a good time to allocate to VC?” That’s a common questions LPs are asking GPs these days. Today, we dive into a recent report from Stepstone that examines what returns looked like for VC investors in various vintage years.
“We believe 2024 very well could be a power law vintage.” Read more here (full report linked below):
“In VC, we often observe two behavioral phenomena hindering successful outcomes that are closely linked: recency bias and the fear of missing out. Quite simply, investors tend to allocate more heavily to the asset class during periods in which recent performance has been strongest. Concerns over not capturing upside when the stars seem to be aligned can further exacerbate aggressive investing at market peaks.”
“Take 2021 as a prime example. At the end of 2020, the performance of venture capital funds over a one-year period exceeded the S&P 500 by 33%, one of the widest margins in venture history. Performance had also outpaced the S&P 500 by nearly 14% over the preceding three-year period.2 US venture funds raised $168 billion in 2021, 1.9x more than the prior year and 2.5x more than the average raised during each of the prior five years.3 The fundraising totals clearly show investors flocked to the asset class like never before. 2021 also coincided with the highest valuation environment in venture history (Figure 3). Average early-stage valuations rose 64% from the prior year and surpassed five-year averages by 124%. Later-stage valuations followed suit, rising 93% from 2020 and 150% versus averages over the five prior years. Further, $340 billion was invested in venture-backed companies, 2x more than any other year in the history of the asset class.”
“With an overabundance of capital pouring into venture, plus a zero-interest-rate environment (leading to an insatiable demand for risk assets), valuations peaked. Consequently, we think it is safe to say that 2021 will not be a power law vintage year.”
“Conversely, we believe 2024 very well could be a power law vintage. We expect US-based venture funds to raise approximately $70–80 billion this year and continue at a similar pace in 2024, positioning capital-raising totals just $5–15 billion above five-year averages prior to 2021.”
“As fundraising totals return to normalcy, “dry powder,” or the amount yet to be invested, is expected to shrink. With less capital chasing a similar number of investment opportunities, it is reasonable to conclude that valuations will remain relatively attractive, if not decline further.”
“Finally, if interest rates remain elevated, risk assets will remain less attractive on a relative basis versus safer debt instruments, creating further downward pressure on valuations. All these dynamics have historically created an opportune time to put money to work in VC.”
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