Study the Past to Define The Future

“History rhymes, it does not repeat.” 

                        Mark Twain

“The only thing new is the history you don’t know.” 

                        Harry S. Truman

“Study the past, and you will define the future.”

                        Confucius

I mentioned in the second Ocampo Capital newsletter that I worked in the Venture Capital Services group at J.P. Morgan during and after the dot-com bubble.  Having met regularly with many of the most prestigious venture capital funds on Sand Hill Road – and over 100 of the lesser-known ones- during that time period was an incredible experience.  I was aware how lucky I was to be interacting with and learning from leading venture capitalists during such an historic time period[1].  But I also suspected that the dot com bubble wouldn’t last forever– a suspicion which subsequently and abruptly came true in the months preceding September 11^th 2001.

What I didn’t anticipate was how much I would learn in the subsequent year.  According to the Federal Reserve Bank of Atlanta, 2001 marked the “biggest ever decline” in the venture capital industry, and I agree based on my experience: me-too internet businesses imploded almost daily, the San Francisco office market went from under 2% vacancy to over 25% in less than a year, the number of startup business plans showing up on my desk dropped precipitously, and many of those same venture capital firms hunkered down to try and survive the lean years that followed.  In that same Atlanta Federal Reserve report released in 2002, the authors stated “this decline has raised alarm bells with many questioning whether this trend signals the eventual demise of venture capital.”

I recently found my old J.P. Morgan rolodex, circa 2001, in a cardboard box and flipped through the hundreds of venture capitalist business cards therein (a picture of a representative portion of those business cards to include at the top of this post).  It got me thinking: how many of these VC firms still exist, and given my interactions with them, why did some succeed and some fail? 

As it turns out, about 40% of those firms are still actively deploying capital today, over 20 years later.  Interestingly, there were some clear themes that jumped out to me as I researched which ones still exist, and which ones closed their doors.  For the venture firms that still exist, they nearly unanimously had the following traits: 1. They were led by venture capitalists that had previously been operators.  2. Their venture firms had flexible scopes of investment, which allowed them to be nimble in response to the dot com bubble bursting.  3. They were independent thinkers, and typically not prone to chase in-favor trends off cliffs.  4. They were patient, and long-term focused.  Meanwhile, the venture firms that no longer exist also had clear traits as well: 1. They were more narrowly trend-focused.  2. They tended to speak more in meetings about output metrics (fund IRRs, IPOs, etc.) rather than inputs (their investment model, deal terms, supporting the founders post-investment, etc.).  3. Corporate VC funds closed more than traditional VC firms, partly because they tended to be both less patient and less likely to wait to out the market cycle.  And 4. Financial services VC funds disproportionately closed as well- perhaps because (like me at that time) they had little domain expertise and could not help these businesses when times got tough.

Fast forward to today.  While not nearly as severe, we are coming off a relative peak in 2021, both in terms of venture capital deal sizes as well as venture capital fundraising.  According to CB Insights, Q4 2021 was marked by $180.1 billion in venture investments worldwide, while Q4 2023 saw $51 billion in investments made- in half the number of companies.  Similarly, venture capital fundraising has fallen significantly since 2021, with many existing funds focused on triaging their current investments.  More directly applicable to Ocampo Capital, retail tech funding has fallen 80% since 2021; and in Los Angeles, the funding of deals in Q4 2023 has also fallen 80% from Q4 2021.

What happened in the years after 2001 is also illuminating, when we look ahead to what the next decade could look like after the relative peak in 2021.  While history rhymes rather than repeats, after the dust settled in the several years after the 2001 peak (during which time the number of new funds dropped by about two-thirds), some of the best years for venture investing ensued.  Based on what I am seeing, the next few years could be very positive for consumer venture investing.

Please feel free to reach out to me with any questions at [email protected], and be sure to add yourself to the email circulation of this newsletter at Ocampo Capital Blog.

[1] A partial list of those venture capitalists include Ho Nam (Altos Ventures), Pierre Lamond (then at Sequoia Capital), Irwin Federman (US Venture Partners), Dixon Doll (Doll Capital), Ira Ehrenpreis (now of DBL Partners), Keval Desai (then at Onset Ventures), Gabriel Kra (Prelude Ventures), Alexander Wong (then at Apax Partners), Joseph Marks (then at Smart Technology Ventures) and many others.

As always, these blog posts are not investment advice.  We may have investments in the companies discussed, and these posts are for informational and entertainment purposes only.