5 reasons why 2021 will not be the new 2000

Despite valuations at nosebleed altitudes, 2021 is likely to be remembered as a very good venture vintage indeed when we break open the bottles to sample the returns in 2030.

As we ride the 2021 market roller coaster through wreckage and recovery, accompanied by a raging bull market in tech stocks, some people are wondering whether we might be re-living the dreadful dot-com boom and bust of 2000-2001.

Is 2021 the new 2000? Is venture investing too risky in the current climate? Are we heading for another bottomless crash?

No. Here are five reasons why.

1. Venture investing is the new normal

The 2000 crash almost wiped out venture investing. More than $100 billion in venture capital was raised in 2000. It slumped to half that amount in 2001 and a fraction of that in 2002 – lost years for venture capital.

2000 was my second crash. In 1987, as valuations soared and price to earnings ratios climbed above 20, I was getting ready with my late father to take our first startup public. We had an underwriter. We were days away from pushing the button. Then came October 19: Black Monday. I was only 32 years old. In my innocence, I called the underwriter and asked him what the crash meant for our IPO.

“You’re f***ed,” he growled. “Don’t bother me again.” He hung up. We never heard from him again.

By 2000 I was well into my venture career at Israel Seed partners. We had just invested in a promising company called Tradeum at a $3 million valuation. Six months later, we sold it to VerticalNet for $440 million.

As sophisticated venture capitalists, we accepted stock instead of cash from VerticalNet, which promptly proved true to its name as its shares, together with the rest of the dot-com market, went vertical in the wrong direction.

The following couple of years were brutal, but those who managed to survive found themselves in a strong position. Following the 2008 crisis, U.S. venture investing steadily regained its pre-crash levels, reaching $134 billion in 2018. In 2020, despite the pandemic, it soared to a new record of $156.2 billion. KPMG attributed the surge to “the sheer weight of dry powder across US venture.”

Public markets rose, but private investment rose faster. In 2018, the $1.4 trillion of new capital raised through U.S. registered offerings was dwarfed by some $2.9 trillion raised in the private markets, according to SEC estimates.

It can be a risky ride, but even conservative investors are booking private return tickets. Venture capital is the best-performing 10-year asset class in the Yale endowment – where it now makes up 23.5 percent of the institution’s total investments – with returns of 21.3 percent. Over 20 years, venture is Yale’s second-best performer at 11.6 percent.

2. In 2021, technology is the economy

The world economy has fundamentally changed since 2000. Technology is the economy, essential for every business in every industry. Back at the dawn of the new century, the internet was young and largely irrelevant to the world’s biggest businesses. In 2000, almost no self-respecting internet company made any profit and no-one was quite sure where it was all going. General Electric was the world’s biggest company by market cap and the Top Ten featured traditional businesses like Exxon Mobil, Walmart, Royal Dutch Shell and Toyota. The tech companies in that select group were not stand-alone internet companies, but business service providers: Microsoft, Cisco, Intel and IBM. By the end of 2020, the Top Ten was headed by Apple, with Microsoft, Alphabet, Facebook, Tencent and Tesla dominating a list of newcomers in which Berkshire Hathaway was the only remaining trace of the old guard.

Amazon, Alphabet and Apple may be highly priced, but they are not going to disappear. They are the new economy, and they are inspiring new entrepreneurs to new heights. The tech giants have found that the smartest, quickest way to innovate is to buy the startups developing new technology. Traditional industries are now doing the same.

The developments we are now witnessing in artificial intelligence, next-generation mobility, food tech, ag tech, ecommerce, telemedicine, digital health, nanomaterials, quantum and clean energy are not fanciful notions. They are real technologies performing concrete functions. Thousands of startups developing these technologies are already providing services to paying customers and many of them are already turning a profit. These young tech companies are bringing about real changes that affect our lives and we have only glimpsed a fraction of the huge potential.

The rise in technology valuations is not a wild bet on a shiny new plaything or a passing fad – it is an informed investment in the driving force behind the future of the world economy. From agriculture to the automotive industry, innovation and entrepreneurship are transforming every aspect of business and commerce. Innovation is the key to success. The survival of every business – even oil and retail companies – depends on tech. Everyone must innovate. Technology is the new oil, data is the new gold. No industry can function or prosper without them.

3. No other place to grow

In the old days, risk-averse investors in search of growth could simply put their money in the bank or buy government bonds and enjoy healthy, if not spectacular, returns. But, as my colleague Alec Ellison points out, based on the Bloomberg chart here, yields on long-term U.S. Treasury bonds have fallen from around 14 percent in the 1980s, to 6 percent in 2000, to under 2 percent today. Investors looking to make their money work have few alternatives.

By contrast, since 2003, according to data from Cambridge Associates, venture capital vintages have been giving outsize returns. This has not, and most probably will not, stop.

4. The SPAC effect

Special purpose acquisition companies – SPACs – are creating a new wave of opportunities for private companies to return money to investors. According to Bloomberg, SPACs sold nearly $26 billion shares in January, a new monthly high that helped drive the total amount raised in IPOs worldwide so far in 2021 to $63 billion – more than five times the same period last year, before the pandemic.

That is just the tip of the iceberg. According to SPAC Research, there are now more than 400 SPACs with a combined funding of nearly $130 billion hunting for the richest pickings from the private market. Since a SPAC invests about one-fifth of the total value of each IPO, that represents a war chest of $500 billion of potential market value waiting to be unleashed. SPACs not only provide a clear view to an exit, they reduce the lead time for a company to go public because each SPAC must be used within two years of its incorporation. The sheer amount of funds available that must be deployed within the next two years is likely to fuel a SPAC-led boom in venture investing.

5. Stimulus Infrastructure and Green New Deal

The Biden Administration’s proposals for a Green New Deal to spark a “clean energy revolution,” combined with its enormous infrastructure-focused American Rescue Plan to help post-pandemic recovery, is a huge opportunity for innovative technology – both directly and indirectly.

First, the Administration is committed to reducing harmful emissions, cleaning up the environment, and reducing dependency on fossil fuels. There will be government funding – and tax breaks – for alternative energy, cleantech, micromobility and other green technology that will provide an enormous boost for startups in these sectors.

Second, as Prof. Louis Hyman of Cornell persuasively argues, Roosevelt’s original New Deal helped shape modern American capitalism by creating a public-private partnership in which government funding was targeted at vital new infrastructure projects like electricity and transport, and emerging growth industries like electronics and aerospace.

A 21st century New Deal could have a similar foundational impact for a new, tech-driven economy. If the Biden Administration can help extend the broadband network like Roosevelt extended electrification, it could transform the economy of rural America. Since every business from extraction to entertainment now depends on technology to develop and grow, trillions of dollars of potential stimulus, even allowing for government bloat and waste, equals an awfully large amount of innovation in the industries that need to prosper.

So while I think we are clearly approaching nosebleed heights of valuations and stock pricing, comparisons to the year 2000 do not hold up – especially for the long-term investor focused on true venture capital, whose time horizons are measured by decades, not years. 2021 is likely to be remembered as a very good venture vintage indeed when we break open the bottles to sample the returns in 2030.