The venture capital boom is the private remake of the dotcom era

venture capital

Yves Bonzon (Julius Baer) | One of the unintended consequences of zero / negative interest rates is the fuelling of a broad-based start-up / venture capital (vC) boom. This carries the seeds of a huge capital misallocation. Investors are relentlessly funding non-profitable companies on the hope of surfing the next disruptive business model. Yet, venture capital is a game of capital scarcity not of capital abundance.

Recently, the IPO window for non-profitable businesses has almost closed. In many ways, the current start-up frenzy mirrors the 1998- 2000 bubble, but this time within a private con- text where price discovery is delayed. It is unlikely to be any less painful though.

Meanwhile “de-equitisation” is being superbly ignored. As the cost of equity remains significantly above the cost of debt, outstanding public equities (the share count) are relentlessly shrinking. S&P 500 dividends and share buy-backs combined amount to approximately USD 1.4 trillion. This is a cash yield of more than 5%. US large cap banks (as defined by a market cap in excess of USD 50 bn) currently have an average such cash yield of 12%. It has been a long-standing investment theme of ours that public equity markets have transformed from a cash-raising to a cash- returning mechanism.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.