Venture Beta

Stuart Ellman

Eric Wiesen

The Q1 numbers on Venture Capital investing were released last week. As is often the case with VC numbers, especially when they’re bad, there was no shortage of press and blog attention to the drop in both venture investing (in terms of capital deployed) and venture liquidity. And the general narrative that initially emerged was largely one of panic and, schadenfreude.

Shortly thereafter, however, people started to dig into the data a little bit further. We want to give big kudos to our NYC brethren, Fred Wilson, for his blog post on this topic. Two interesting analytical slices have emerged from this further examination. First, there was a meaningful disparity amongst geographies, with Silicon Valley seeing a much larger drop (even as a percentage of capital) than sectors in the Northeast like New York or Boston. The second was that certain sectors (like CleanTech) saw a far larger decline than other sectors (like health care).

And in looking at these second-order narratives that have emerged from this major change in venture behavior on both sides of the equation, it starts to become clear that there may be a sort of “beta” attached to different sectors within venture capital, much like there are differing levels of beta within sectors of the public market.

Beta, for those who aren’t familiar with the term, means that while most securities move in the same direction as the overall market, some tend to move more than the market while some tend to move less. A stock with a beta of 2.0 will generally increase by a percentage twice that of the overall market when the market is up, and correspondingly will decline twice as much as the market when the market is down. A stock with a beta of 0.5, by contrast, will only be up (or down) half the amount of the overall market. High-beta stocks are great in a go-go market and really bad in a down market. Low-beta stocks are generally less exciting when things are good, but hurt much less when things turn south.

The data emerging out of the down numbers for venture capital start to suggest that perhaps certain sectors (like health care, thought by some to be a safe source of “singles and doubles”) will generally act lower-beta than others (like CleanTech or the consumer web, which enjoyed massive momentum in the years prior to the downturn). Similarly, areas like New York and Boston start to look generally lower-beta than Silicon Valley. There have been fewer massive high-priced companies in New York, but the fall has been far less precipitous. We can only assume that the beta may be directly correlative with the supply of capital in those regions. In NYC, where there are fewer venture firms, there tends to be less upward (and obviously downward) pricing jumps because there are fewer firms to both jump in and jump out of the markets when sentiment changes. In the NY venture market, we have seen pretty rational pricing over the past few years, while other regions were seeing significantly higher pricing as the funding markets picked up steam. Since our region’s pricing never got too high, it has not fallen nearly as dramatically either. It is reassuring to see Fred’s analysis back this up.