Venture investing shouldn’t be correlated to the public market. Private equity securities are by their nature illiquid; startups take between 5-8 years on average to achieve a liquidity event; venture investors have exclusivity over the capital committed to a fund.
But venture investments are highly correlated to the public market.
Below is a chart depicting four key metrics: the S&P 500 close price, the total number of venture investments, the total dollars invested and the median investment. All these figures are normalized to their values on Jan 1, 2003 to changes on a percentage basis; e.g., a 1.2 value for the S&P 500 in Q3 2003 indicates the value of the S&P was 20% higher than in Q1 2003. Yahoo Finance provided the S&P 500 data and VentureSource, the venture financing data. See my full analysis here.
Immediately, you’ll notice similar patterns to the different data sets. And if in fact, one performed a correlation analysis, one would find the correlation coefficient of these three metrics to the S&P 500 vary between 0.69 and 0.84.
The median investment has plummeted over the past 24 months. This drop is not due to a vast increase in seed investments or any other correlations that I could find, but I will attribute it to the vast reduction in capital required to start a company because of the cloud. In March 2008, Amazon released 3 key new features for EC2. Six months later, the product would be out of beta.
VCs should invest independently of the public markets
VCs should invest independently of public market movements for the points delineated above. As for entrepreneurs, often downturns are the best time to start companies, hire talent and disrupt industries that have hibernated for the proverbial winter. Bull markets bring the benefits of higher valuations as public comparables rise. A wise entrepreneur should found a company in a downturn to ride the bull market to lower dilution, more capital or both.