
How venture capital follows the economy down and curtails innovation - hhs
https://www.nber.org/papers/w27150
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davidu
"To analyze how VC deal activity responded to the COVID-19 pandemic and
attendant economic crisis, we use data from Pitchbook, CB Insights, and
Capital IQ. We tabulate VC investment deals in U.S.-based startups by industry
and sector using the Pitchbook and CB Insights data."

Pretty early to analyze this data. I find that both these sources take 20+
weeks to get close to accurate, and they are never really perfect.

FWIW, my view is that I think recent deal activity has been very high at a16z,
Sequoia, Founders Fund, and others but that's just from where I sit.

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adaisadais
I think early-stage VC’s should take a Keynesian approach and should invest
more heavily in recessed periods.

With 35+ million Americans unemployed there are more founders available than
probably ever before. In the next 6~ months rent prices should decrease (or
mass vacancies depending on your area). Now is the time to invest in the
economy.

Not when it’s too expensive.

~~~
gnicholas
Benefits of starting a company in a recession: lower rents, cheaper salaries.

Downsides: lower consumer and business spending.

If you’re trying to start free and grow that base, then perhaps it’s good to
start in a recession. But if having paying customers is important, the
headwinds could be outweigh the tailwinds.

Another consideration: does your company align with how people are
reallocating their time/money during the recession? If you can get a piece of
recession spending, good for you. But if you’re a general-purpose product then
you’re probably in for a tough ride.

~~~
marcosdumay
If you are trying to disrupt a market, a recession is exactly when your
consumers are most willing to switch into a supplier with lower margins.

If you are going into a winner takes it all market, a recession will give you
the lowest amount of competition. (But then, it's just because it's
contrarian, if everybody invested in recessions, this wouldn't be true.)

~~~
dralley
And if you're early enough in the development process, as in pre-launch, the
marketplace won't be much of an impediment.

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olivermarks
This would be a good time for the US (and other countries) Small Business
Administration to play a far more nurturing role in order to help restart and
start new businesses. Many VC investment strategies are designed to destroy
existing business and create network effects monopolies that only benefit a
few people. Aside from VC investment being a tiny fraction of overall new
business funding there is greatly decreased interest in innovative new
ideas/risk taking as this report suggests.

~~~
SrslyJosh
> Aside from VC investment being a tiny fraction of overall new business
> funding there is greatly decreased interest in innovative new ideas/risk
> taking as this report suggests.

And when our economy only works for a small fraction of the population, that
means fewer startups, less diversity of ideas, and fewer successful VC-backed
startups.

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rfreytag
> Given the important role that VC plays in financing breakthrough innovations
> in the economy

I would like to see a comparison of RoI of: government, business, and VC
technical research. I am not convinced that the results will favor the VCs.

~~~
arrosenberg
Agreed. It seems more likely that VC replaced government investment, but with
a profit motive, rather than a national or societal motive.

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say_it_as_it_is
The source of the last few months of data is Pitchbook. Is this a
comprehensive, reliable source for early deal financing?

~~~
hhs
It looks like the authors relied on several sources. They write:

“To analyze how VC deal activity responded to the COVID-19 pandemic and
attendant economic crisis, we use data from Pitchbook, CB Insights, and
Capital IQ. We tabulate VC investment deals in U.S.-based startups by industry
and sector using the Pitchbook and CB Insights data. Pitchbook has the
advantage of broader coverage, while CB Insights has the advantage of detailed
company descriptions, which enable us to assess changes in financing for
particular types of businesses in sectors especially hard-hit by the crisis.”

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mc32
When times are good you can take some chances; when times are lean, you place
less risky bets?

What do they suggest?

~~~
CerealFounder
Thats the main false assumption about venture. Given the stage of venture
investing, there is way less true evaluation and understanding of risk going
on than they care to admit.

~~~
vikramkr
VCs seem perfectly content to point to a power law curve and "admit" that in
their view, "true" valuation is impossible and irrelevant, risk is so high
most companies are going to fail, so all they care about are the outsized
wins. They then turn around and put in a ton of warrant provisions and
downside protection anyway, but they at least claim publically that power law
rules

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andrewla
There's some sort of paradox at work here, and it's not clear where it is
breaking down.

Current interpretation of antitrust law in the US is very pro-consumer, which
is a horrific problem, because it's supposed to be anti-concentration-of-
power. That is to say, selling at a loss to drive down prices and then raising
them once you've put your competitors out of business is only illegal in the
last step -- the undercutting is not an issue. It should be -- the very act of
anti-competitive behavior, like driving out competition or putting up barriers
to competition in the form of uneconomic pricing, is written right into the
text of the laws. But consumers are helped by low prices, and once the
competitors are gone, who is going to say whether the prices are better or
worse than they should be; there's no benchmark.

The main problem with this viewpoint in my mind is that this is clearly
unworkable -- a continuous pump-and-dump can't work; eventually it has to come
crashing down. Arguably it is now crashing down, so that's fair, but
historically we still have things like Amazon in the digital world, not to
mention the traditional big-box retailers that have driven out anything
resembling competition.

So do we need to have a working anti-trust regime in order to counteract this?
Or will such monopolies naturally fail if they are exposed to external
stresses? In some ways that depends on the theory of why we are seeing this
happen; why there hasn't been a huge undercutting of these companies. Or maybe
the problem is just that we're looking at the wrong timescale; and given long
enough these will collapse under the weight of new entrants in to their
markets.

One theory is that regulatory capture is the root of it; that once you have
established your market position by burning money, you can then start spending
money on codifying your business practices as the required standard for all
competitors. Regulators like to deal with fewer entities rather than more, so
the hobgoblin of a foolish consistency start to overwhelm more common-sense
ideas in the space.

Another is that the power dynamics shift and allow you to treat government as
your protector; on the state and local level looking for special treatment
(tax advantages, preferential zoning), at the federal level sometimes even
direct protection or pork barrel spending or even just being able to influence
tax policy.

Another theory is that once you are large enough, the various tax and money-
moving games that aren't worth it for small companies start to scale up; it
costs you a million to legally hide or disguise your profits, so until you are
looking at revenues at that scale you're screwed, so getting over the next
size hurdle is the only thing you can focus on.

Some might say that this is just a consequence of corporate person-hood and
limitation of liability; that in the desire to ensure that corporations pay
taxes, we accidentally tacked on too much power by treating them as entities
rather than collectives, and all such entities are intrinsically psycopathic.

The last theory, and the one that I most dislike (though it may well be true)
is that this is just where capitalism ends up if you allow it to grow
unfettered; r > g, and all that jazz.

I don't find any of these 100% convincing, though.

