Is now the time for venture capital?    

Peter Hubert writes at PEHub that in order to understand the upcoming venture capital cycle, we need to look at the industry from the right perspective and put it in the proper context.  Don’t consider the industry in isolation.  He writes that venture capital is highly correlated with the ebbs and flows of the public marketsand therefore, in order to understand what type of cycle venture capital is headed for, we need to determine how healthy the public equity market will be. http://www.pehub.com/75336/learning-to-surf-%e2%80%93-the-ebb-and-flow-that-propels-vc-returns/  

Markets work by supply and demand. VCs convert cash into a supply of stakes in startups. Mr. Market either seeks those stakes with demand or doesn’t. Just like the real economy, customers buy products or they don’t. What’s unsold is inventory stranded on balance sheets.   As an industry, venture capital has historically been highly correlated with the ebbs and flows of the public markets…According to Cambridge Associates, U.S. VC funds averaged 3.82% returns from 1984 to 1990. During the same period, the NASDAQ produced an average 5.56% return. From 1991 to 1999, when VC returned an average 55.48%, the NASDAQ also delivered a robust 32.59% per annum.

But the golden age has gone into reverse: U.S. equities have been decidedly out-of-favor for the decade. The broad S&P 500 index has barely moved in nominal terms over the past decade, and that doesn’t tell the half of it. The S&P 500 currently trades at the level of March 1998, when gold was trading at $302 (currently: $1,230). It’s not much better when you compare U.S. equities against a basket of international currencies or even inflation-adjusted dollars. The most appropriate comp—the NASDAQ, teeming with tech and biotech shares—is 10 years later still down more than 55% from its March 2000 peak. Given venture’s high correlation with the NASDAQ, it should come with little shock that median VC returns would resemble the tech-laden index.

Could market factors be leading to a return of money moving to the public equity markets and therefore a return to good times in the venture capital industry? 

Peter Hubert wonders this in his article:

Might the flood of capital seeking safety in fixed income assets reverse? Will inflation rear its head? Will investors cease tolerating 1% fixed income yields? Will sovereign and municipal bond markets see more buyers or sellers? Is the S&P is undervalued? Will global capital flow back into U.S. equities?

If the answer to some or all of those questions is “yes,” we might be in for a very powerful wave in VC.