Friday Letter: Is 2008 recession a good measuring stick for VC in 2020?

A VC analyst with Thomvest Ventures looks at what will happen to deal activity and valuations in the short term following the pandemic.

In my discussions with investors the past couple of weeks, a lot of comparisons are made to the global financial crisis as an indicator of how venture capital will emerge from the current economic slowdown brought on by the covid-19 pandemic.

It’s not a perfect analogy, I know. We’re in an era of a lot of uncertainty, with lives at risk. And we don’t know when shelter-in-place orders will be lifted or when financial recovery will begin. But there are lessons from 2008 that could indicate how covid-19 could impact activities in the near future.

So says Eddie Ackerman, who heads up financial analysis at Thomvest Ventures. Ackerman dove into the events of 2008 to see if he could glean what we’re in for in the next few quarters.

“What I wanted to do was take a microscope and say what happens to valuations the quarter after a big shock,” Ackerman said.

Spoiler alert: there are a lot of negatives in his analysis, which you can read in his Medium blog post. On the plus side, in 2008, once the initial drops were done, there was an eventual rebound in deal activity and valuations as the strong companies survived.

Ackerman found that after Lehman Brothers filed for bankruptcy on September 15, 2008, the shock-waves led to a steep stock market decline. “What I found was interesting: the quarter after an event and the resulting market crashes, the interquartile range (IQR) was compressed 40 percent from $9.7 million to $5.7 million,” he said. “Two quarters after the event, the IQR reappeared but deal count and overall valuations were still down.”

Ackerman said he worked with PitchBook to get the raw data for more than 3,000 data points and was able to break down and analyze different periods by looking at quartiles.

“There are obviously many nuances so this is something that we will be tracking closely,” he said.

I would love to hear how covid-19 is impacting you and your activities. Are you anticipating steeper declines in valuations and deal counts than in 2008? Share with us at agoldfisher@buyoutsinsider.com. Happy to hear more and I’m open to any Zoom meeting invites.