By Daniel Shin
There is no shortage of remarkable ideas. Real work always comes with timely execution. Ideas are just theories if entrepreneurs do not spit them out. What makes the difference is an entrepreneur's will to execute and carry on no matter what the circumstances are.
The market is tough right now. Valuations have come down. There are no glorious venture exits in the pipeline. Startup entrepreneurs tend to lower the size of their next funding round. As a consequence, it lowers pre-money valuations. In addition, it is not only Twitter that has signaled a huge wave of layoffs and hiring freezes in the coming weeks.
Entrepreneurs are facing headwinds. Ventures can take a few years until they are fully mature to go public or become an acquisition target. Any formidable venture exit would come back when the economy becomes more vibrant a few years later. When it comes to startup funding, a default option is a failure. Why do you even bother creating a business profit if there is no sufficient funding? As a matter of fact, winter might have already come.
College endowments in the U.S. posted their biggest gains last year. But, this year, college endowments marked their biggest losses since the last major global financial crisis, owing in part to double-digit losses in the U.S. equity markets during the first half of 2022. Harvard and other elite universities were no exception.
Harvard University's endowment lost $2.3 billion, blaming the loss on the global market downturn. More than one-third of Harvard's annual operating revenue comes from contributions from the endowment. Hence, these losses are significant and adversely affect nearly every aspect of the university's work.
In contrast, Yale University is the only school in the Ivy League that reported a positive return on its endowment in the last fiscal year. All Ivy League universities saw endowment slides. Yale's 0.8 percent return is its lowest since 2009. It is a toothpick return compared to its incredible investment result in 2021, which marked a whopping 40.2 percent return. Like other elite universities, Yale saw huge volatility in its portfolio construction and the declining market's effect. Though, Yale's positive result is unique among eight elite universities in the Ivy League. Gain is always better than loss.
What makes a real difference? Yale was the first major university endowment to fully embrace the concept of alternative investing. The Yale model follows broad diversification of assets in principle, allocating less to traditional U.S. equities and bonds while investing more in alternative investments like private equity, venture capital, hedge funds, and real estate.
Over the years, Yale has established strong relationships with the preeminent alternative investment managers, providing them with a durable and long-term advantage. With that, Yale has once again produced investment returns that can only be rated as excellent in the context of the rough market volatility and uncertainty.
Venture capital has turbocharged endowment returns. Historically, high-performing university endowments have religiously backed venture capital and enjoyed unprecedented levels of returns thanks to the growth of technology and innovation adoption, which are encompassing every facet of a business and the economy.
Particularly, Yale's interest in venture capital has been persistent. 22.6 percent of Yale's endowment was allocated to venture capital in 2020. The target allocation for venture capital was even set higher at 23.5 percent. On average, the U.S. university endowments have approximately 7.7 percent in venture capital. So, Yale's exposure and enthusiasm for venture capital is quite significant. At Yale, the venture capital portfolio earned an annualized return of 21.3 percent for the ten years ending June 30, 2020.
It is a challenging time for venture capital. Venture funding in Asia sank to its lowest level in four years. Global venture funding for the third quarter of 2022 was also down by 53 percent year over year, hitting the lowest in many quarters. Despite this slow-down, there is yet significant dry powder that is already committed to venture capital, raising over $150 billion to date this year. It shall be deployed in early-stage companies in various forms in the coming months.
To weather the economic downturn, entrepreneurs ought to focus on execution, customer acquisition & retention, and unit economics. Every customer counts and every single dollar matters. Venture capital is supposed to offer valuable advice to entrepreneurs simply beyond cash. Venture capital needs to bring relevant experience, extensive business networks, and critical managerial support to the table when the market significantly slows down and the funding landscape is not promising. Entrepreneurs should put every effort into execution demonstrating a path to profitability and early maturity.
Venture capital with lasting support from backers like university endowments certainly adds value to entrepreneurs through its own business acumen, often providing decades of experience in founding and scaling businesses that could be used to develop strategies for success at every stage of the venture lifecycle. The reputation of venture capital that goes along with investment, therefore, should not be underestimated. Such associations for startups early in their lifecycle with reputable venture capital can be a valuable resource for them to cut through the noise and establish their firm ground in the industry.
The last three months of 2022 will offer a good proxy for what the new normal will look like. Slow investment activities over the past summer will likely result in a much slower season because it will take longer to get up to speed into the deal pipeline. Full-year VC activity will finish strong, though, well above the $200 billion mark in 2022. However, the narrative for the venture capital industry continues to change dramatically.
This current down period is like a period of only two seconds in multiple sequels of drama. Innovation isn't correlated with the markets. VC returns are not highly correlated to public equities, either. The market will bounce back, and investors will continue to direct funding to early-stage companies with proven business models, strong market dominance, and compelling value propositions. We often forget it when the market is good. Therefore, it is time to challenge the business execution, not the venture capital model itself.
Daniel Shin is a venture capitalist and senior luxury fashion executive, overseeing corporate development at MCM, a German luxury brand. He also teaches at Korea University.
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The market is tough right now. Valuations have come down. There are no glorious venture exits in the pipeline. Startup entrepreneurs tend to lower the size of their next funding round. As a consequence, it lowers pre-money valuations. In addition, it is not only Twitter that has signaled a huge wave of layoffs and hiring freezes in the coming weeks.
Entrepreneurs are facing headwinds. Ventures can take a few years until they are fully mature to go public or become an acquisition target. Any formidable venture exit would come back when the economy becomes more vibrant a few years later. When it comes to startup funding, a default option is a failure. Why do you even bother creating a business profit if there is no sufficient funding? As a matter of fact, winter might have already come.
College endowments in the U.S. posted their biggest gains last year. But, this year, college endowments marked their biggest losses since the last major global financial crisis, owing in part to double-digit losses in the U.S. equity markets during the first half of 2022. Harvard and other elite universities were no exception.
Harvard University's endowment lost $2.3 billion, blaming the loss on the global market downturn. More than one-third of Harvard's annual operating revenue comes from contributions from the endowment. Hence, these losses are significant and adversely affect nearly every aspect of the university's work.
In contrast, Yale University is the only school in the Ivy League that reported a positive return on its endowment in the last fiscal year. All Ivy League universities saw endowment slides. Yale's 0.8 percent return is its lowest since 2009. It is a toothpick return compared to its incredible investment result in 2021, which marked a whopping 40.2 percent return. Like other elite universities, Yale saw huge volatility in its portfolio construction and the declining market's effect. Though, Yale's positive result is unique among eight elite universities in the Ivy League. Gain is always better than loss.
What makes a real difference? Yale was the first major university endowment to fully embrace the concept of alternative investing. The Yale model follows broad diversification of assets in principle, allocating less to traditional U.S. equities and bonds while investing more in alternative investments like private equity, venture capital, hedge funds, and real estate.
Over the years, Yale has established strong relationships with the preeminent alternative investment managers, providing them with a durable and long-term advantage. With that, Yale has once again produced investment returns that can only be rated as excellent in the context of the rough market volatility and uncertainty.
Venture capital has turbocharged endowment returns. Historically, high-performing university endowments have religiously backed venture capital and enjoyed unprecedented levels of returns thanks to the growth of technology and innovation adoption, which are encompassing every facet of a business and the economy.
Particularly, Yale's interest in venture capital has been persistent. 22.6 percent of Yale's endowment was allocated to venture capital in 2020. The target allocation for venture capital was even set higher at 23.5 percent. On average, the U.S. university endowments have approximately 7.7 percent in venture capital. So, Yale's exposure and enthusiasm for venture capital is quite significant. At Yale, the venture capital portfolio earned an annualized return of 21.3 percent for the ten years ending June 30, 2020.
It is a challenging time for venture capital. Venture funding in Asia sank to its lowest level in four years. Global venture funding for the third quarter of 2022 was also down by 53 percent year over year, hitting the lowest in many quarters. Despite this slow-down, there is yet significant dry powder that is already committed to venture capital, raising over $150 billion to date this year. It shall be deployed in early-stage companies in various forms in the coming months.
To weather the economic downturn, entrepreneurs ought to focus on execution, customer acquisition & retention, and unit economics. Every customer counts and every single dollar matters. Venture capital is supposed to offer valuable advice to entrepreneurs simply beyond cash. Venture capital needs to bring relevant experience, extensive business networks, and critical managerial support to the table when the market significantly slows down and the funding landscape is not promising. Entrepreneurs should put every effort into execution demonstrating a path to profitability and early maturity.
Venture capital with lasting support from backers like university endowments certainly adds value to entrepreneurs through its own business acumen, often providing decades of experience in founding and scaling businesses that could be used to develop strategies for success at every stage of the venture lifecycle. The reputation of venture capital that goes along with investment, therefore, should not be underestimated. Such associations for startups early in their lifecycle with reputable venture capital can be a valuable resource for them to cut through the noise and establish their firm ground in the industry.
The last three months of 2022 will offer a good proxy for what the new normal will look like. Slow investment activities over the past summer will likely result in a much slower season because it will take longer to get up to speed into the deal pipeline. Full-year VC activity will finish strong, though, well above the $200 billion mark in 2022. However, the narrative for the venture capital industry continues to change dramatically.
This current down period is like a period of only two seconds in multiple sequels of drama. Innovation isn't correlated with the markets. VC returns are not highly correlated to public equities, either. The market will bounce back, and investors will continue to direct funding to early-stage companies with proven business models, strong market dominance, and compelling value propositions. We often forget it when the market is good. Therefore, it is time to challenge the business execution, not the venture capital model itself.
Daniel Shin is a venture capitalist and senior luxury fashion executive, overseeing corporate development at MCM, a German luxury brand. He also teaches at Korea University.
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