I spend a fair bit of time chatting with people about the “bubble.” It’s an interesting enough subject that I’ve even spent some time researching its legitimacy. But the closer we get to 2016, the more I feel that it doesn’t matter one way or another. If we’re on the precipice of a correction, what’s really going to change for the average entrepreneur or investor?
Any self-respecting business school professor would bite my head off for claiming nothing will change. At the altar of the free market, it’s clear that the startup ecosystem will suffer with a contraction. Decrease demand (M&A and IPOs) for these businesses and supply will have to contract (number of businesses being started). And it’s not just academics, LP’s - the pension funds and family offices that provide the capital the startup ecosystem relies upon - also lament the coming correction. For LPs, they look at Cambridge Associates’ VC benchmarking index and realize that fund vintages in times of contraction are the worst. For LPs, contractions mean that average returns will go down. To both sets of onlookers, any change in 2016 seems like one that matters. And I can certainly sympathize with their concerns.
But the fact of the matter is that inside the ecosystem, not much should change. Even in downturns, entrepreneurs will be building great businesses. And when entrepreneurs build great businesses, only the foolish investors shy away due to exogenous factors in the market.
While we spend a lot of time talking about the “bubble,” no conversation about the impact of a correction can exist without talking about entrepreneurs. I started my first web business before I was 20. The last one sucked me in so quickly that I was told I fell off the face of the Earth. At no point in the process of spinning up either endeavor was I thinking about whether the market was right to start a business. It was always just a question seeing a problem worth solving and setting out to do so. Either I was going to build something successful that can sustain itself or I’d fail.
Venture capital is an industry built around supporting entrepreneurs. For individual VCs, what matters most is finding a great company and doing everything possible to help them. While we might think about VCs as portfolio managers, the fact of the matter is that most VCs manage a tiny number of investments. Corrections certainly impact the entry prices VCs pay, the amount of time they may have to hold an investment, and the multiple that a VC will receive on exit - the fact of the matter is that runaway winners typically define the returns of a given fund. So the only relevant question for VCs should be, will these runaway winners be founded in a downturn. If they are, individual VCs will be hunting and investing.
We’ve already established that entrepreneurs will set out to build companies regardless of the macro environment - because the good ones aren’t thinking about optimizing valuation at their seed round, they’re thinking about tackling big problems. Consider Airbnb and Uber. Both companies were founded in the height of the recession. Both companies will define the returns of early investors’ portfolios. It might be easier to get an outsized return through some extraordinary M&A in a frothy environment, but if we assume that there could be the next Uber or Airbnbs popping up over the course of this upcoming correction, we can be sure there will still be great opportunities for individual VCs to swing for the fences.
So where does that leave us?
2016 might very well be the year of a market correction. We might see a contraction in funding, a deflation in prices, and even a handful of “unicorpses.” But the more I think about it, the less I feel any of this matters. With improvements in machine learning, clean energy, and robotics, great companies will be built over the next few years. I’m going to try and spend more time thinking about these things (that matter) and less time thinking about the oncoming correction (that doesn’t).