Spring 2015

The idea that Venture Capital activity is a lead indicator of “Boom Times” in the sector is well documented. When the “thought leaders” of Venture Capital are in full song experienced investors are quick to size up the market.

The reason being that, when it comes to attracting funds, Venture Capital funds are the last place investors go looking to play the game of riding the "next economic wave".

So venture capital is better understood as a lag, rather than a lead indicator, of economic growth across the sector. So much so that one could make a case for Venture Capital being the "Shoeshine Boy" of Tech Investing (i.e. once the VC's are investing in the sector it is probably a good indication it's time to be selling or at least brokering a strategy that takes full advantage of their presence).

No better example of this being the year these so called "funds of the future" pivoted into the software sector - 1995 and the emergence of the network economy - Just as it transitioned from being a "licence to print money" to something of a "money pit".

History has shown us time and again, when the VCs are singing the song of disruptive innovation, there is money to be made – at least for those smart enough to cash out when the choir hits the highest notes of the crescendo.

The challenge today however is the VC’s are in full song but nobody appears to be listening.

In the 5 year after the GFC, despite the fact the US Federal Reserve pumped $3.5 Trillion into the financial markets, the industry managed to raise $7 Billion less than it did in the same period prior to the collapse of the financial markets.

And it raises the question is the market now dancing to the tune of a different pulse?

To answer that question let’s scrape some “big data” so we can mash up a new “disruptive innovation” tune. Let’s see what we can discover in the networked harmonics of the hyper connected economy.

Here then is a new map of the investment in innovation. Or, more accurately a map of who is buying into the disruptive innovation narrative.

As you can see VC and IPOs only tell half the story of the networked innovation narrative. The other half is the M&A activity of the incumbents as they battle to ward of the “barbaric hordes” of innovation beating at their doors.

Looking at this one gets an impression of amplitude. VC’s sing and the market spends. Think of it as a 1950’s pop Call and Response chorus. Who’s buying? We’re buying! You’re buying? Everybody’s investing! Yeah? Yeah! Baby Yeah!

Everybody Dance now...

And they do. With unbridled joy and much enthusiasm.

But like all dances there are steps. This one comes with seven. Then we all race to find a chair. Sigh with relief as we pause for a moment before the dance begins again.

Remap the data over the 7 year average and a new three part harmonic appears.

The insight? Factor in an estimate for this calendar year and we find no boom. Perhaps even stagnation.

Factor in the cost of inflation and we find even the possibility of a slippage in the great disruption.

Could it be we have spawned a new generation of wunderkinds well versed in, if not well equipped to profit from, the ever increasing rate of disruptive technology? Clearly, each time the music stops, a chair or two is being removed. the question is: Who is out there making chairs?

So back to the question are we in a tech boom? Perhaps not. Well at least no more than usual at this stage of the dance.

Are we in a crescendo of ‘disruptive innovation’ of our own making? Most definitely.

Will it be over soon?

Well the answer to that dear reader, as we all know, is "it's not over until the fat lady sings”.

And she is busy performing out there on the main stage. The Nasdaq and the NYSE.

Take the time to listen to the song she is singing and overlay it with the "Never mind the quality. Feel the width" chorus of the Venture Capitalists and you'll find some interesting harmonies echoing across the landscape. For example, although the sum of VC, IPOs and M&A investment averages out at around just 15% of the Nasdaq at it's peak during each seven year cycle, the long term average of the investments made roughly equals the long term average for growth in the Nasdaq . Indicating the level of VC & M&A activity over the past 21 years tends to mirror the market in 'productive' value.

Adding yet again another layer to the "call and response" song of the market. But we'll leave a deeper analysis of that harmonic for another day.

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