Last year Tim Recker was asked whether venture capital was in a bubble.
Back to venture, is it a bubble? I don’t know. I think valuations may be ahead of themselves, but I don’t think it’s an issue of real companies not being created. This is not 98-99 of just things that are a flash in the pan. There are real businesses and real activity with the ability to make profits. Are there a lot of other companies that have elevated valuations as a result? Probably. It’s the ones that aren’t going to achieve a great outcome where you’re going to feel the pain. It’s the handful that makes it that are going to justify the portfolio. This goes back to access and how many of those great companies are your managers able to capture.
Let’s look at it from a different lens. If you invested at today’s valuations, the sort of gain that you would have is nowhere near what people made from investing in venture companies in 2011 and 2012. In the buyout realm, if you look at purchase price multiples and think about the implications and say, “Wow, it’s really at peak pricing.” Venture is about what ownership you get for the dollars you put in. Currently, it[‘s] quite expensive by historical standards, so you get a lot less ownership for more money, and that means effectively you’re paying a higher price. Even if you pick right, will you make the same attractive returns in the future? It will definitely be lower than what it has been for equivalent companies. But the question is, is there enough innovation, enough value being created that justifies that pricing?
We will eventually find out.
Reading into the history of the foundation’s namesake, you will find a rags-to-riches story.
James Harvey Irvine, Sr.’s father, James Irvine I, who had immigrated to America from Ireland during the potato famine, once wrote, “I tell you a boy cast upon the world with not a dollar in his pocket, with none within reach … but absolute strangers and without … a claim upon any of them, is in a position to appreciate the value of a helping hand.”
Though the first James Irvine did indeed start out “without a dollar in his pocket,” he accumulated and passed on to his son the vast acreage of the Irvine Ranch, and also left a fortune in San Francisco real estate to his wife and son. James Harvey Irvine, Sr. then developed the Southern California property into an agricultural empire which, along with the San Francisco properties, enabled him to become one of the wealthiest men in California. Hanging over a door in his office, perhaps a reflection of Irvine’s understanding of his family’s humble beginnings, was a large red sign that stated: “Often the best way to show warm sympathy is with cold cash.”
To learn how the James Irvine Foundation invests in venture capital and other asset classes, listen to Tim Recker on Capital Allocators.
Post by Marcelino Pantoja