The Big Chill
To our Valued Investors:
2022 has thus far been quite unkind to the public markets. In January, we at Iron Edge VC made an effort to demonstrate that bearishness on the exchanges has no significant impact upon our Second Market of private companies: “Apart from corporate headlines, geopolitical concerns surrounding Ukraine and Russia, as well as China and Taiwan, have rightfully created some skittishness among investors… Panic selling hits the public markets hard when spooked investors run for the hills, cash in hand. For the significantly less liquid names in the private markets, the sky rarely seems to be falling, because valuations usually are already right where they should be. After all, with the prospect of hypergrowth visible on the near horizon, there’s no reason to get hysterical.” (The Beneficial Disconnect, January 26, 2022). In that newsletter, we essentially aimed to underscore that the notably illiquid nature of our private marketplace — often a source of discontent among our clients — turns out to be a blessing during otherwise turbulent economic times. The “beneficial disconnect” between public and private markets plays heavily in our favor during a broad selloff.
This commentary was written, and emailed to you, almost an entire month before Russia’s invasion of Ukraine. Apart from citing concerns about tensions in that part of the world as well as in China and Taiwan, the newsletter also focused on more domestic economic considerations like anticipated interest rate hikes. Despite the characteristically lighthearted tone, we hopefully assume that few, if any, mistakenly detected a celebratory tone in our assessment of the public markets. We can certainly relate to the displeasure that comes with shrinking valuations of investment portfolios. Almost two weeks after Vladimir Putin’s threatening words became murderous actions, it seems appropriate to clearly acknowledge the seriousness of the markets’ decline and, more importantly, what is driving it. Today, the world is horrified to witness what happens when a powerful and remorseless extremist abandons all sense of restraint. Next to the gratuitous destruction of human life, financial matters are secondary, and it is important to remember that as we pray for a speedy resolution.
The newsletter was meant to show a lack of correlation between severely distressed publicly traded equities and the comparatively stable shares of private companies. To be clear, though, it would be inaccurate to assert that broader market woes have had “no impact” on Iron Edge VC’s business flow. 2022, frankly, has been off to a less energized start than we had anticipated. The absence of an uplifting bull market has not only slowed overall private funding and introduced a new level of conservatism among the most influential venture capital outfits, but it has also caused some smaller individual players to pump the brakes a little. While the knee-jerk reaction is quite simple to understand, it can be argued that waiting too long to survey the landscape may be inadvisable. Again, bear in mind the disconnect. The Russell 3000 index, a benchmark of the entire U.S stock market, has sunk more than 13% in two months. During the same period, Iron Edge VC’s investments have been the beneficiaries of some very encouraging developments. NextRoll reported healthy revenue numbers and 130% year-over-rear SaaS growth. Introhive’s Annually Recurring Revenue (ARR) numbers improved by a staggering 70% in 2021. Triller filed its Form S-4 with the SEC last month, signaling that it will go public within weeks, accompanied by a strategic investment at more than double the valuation of our stake. Figure Technologies is proving to be the best-kept secret in fintech. Among our other active investments, Orbital Insight, Attentive Mobile, Kraken, Embodied, and others continue to show signs of robust growth. This is because these companies are free to innovate and to solicit funding at will, unfettered by the treacherous whims of a massive investor base. In this case, it’s good to be a part of a smaller crowd.
Still, in the interest of transparency, we can admit that the slow but steady expansion of our roster of “active” investments reveals another indirect consequence of broader market uncertainty. In truth, our preference would be to keep the names moving along, bidding farewell to some of the older ones by way of profitable liquidity events. When Pinterest, Palantir, SoFi, AirBnB, and Amplitude went public and our shares became tradeable, many of our clients converted their returns into new Iron Edge investments. This kind of activity keeps things fresh, and it delivers happy outcomes for the Limited Partners who put their faith in us. As things currently stand, though, the all-important liquidity events — the Initial Public Offerings (IPOs) and other means of going public — are experiencing a slowdown due to geopolitical precariousness. Only seventeen companies have priced IPOs so far this year, according to IPOScoop. Even before Russia’s attack on Ukraine, New York stock offerings had been off to their slowest start since the Great Recession of 2008. The invasion has essentially shut down the IPO market in Europe and the U.S., dashing the hopes of many who had been looking for a bump in activity by quarter’s end. As it stands now, first-quarter proceeds from IPOs in Europe are on course for a nearly 90% reduction from the same time last year. The invasion has also driven the CBOE Volatility Index as high as 39. The Volatility Index is also called the “VIX”, or more ominously, the “fear gauge”. It depicts levels of uncertainty in the markets. Conventionally, a VIX higher than 20 suggests that an IPO would be considered too risky. At nearly twice that level, early investors looking for a public exit will likely need to exercise patience for the time being.
This shouldn’t be taken as a gloomy outlook for our future. Most accredited investors have lived long enough, and have been plugged into the markets long enough, to have seen a few market cycles. The present downturn is exacerbated by several factors, most notably a massively destructive act of aggression overseas with no easy solution in evidence. It is a grim and detestable circumstance but, we expect, not a permanent one. The only way out is “through”, and things could very well get a lot worse before they get better, but one day decency and diplomacy will prevail. The markets will regain strength when the uncertainty dissipates. As this happens, the pipeline of private companies will be very well-positioned for their debuts, as so many of them will have been enjoying unimpeded and uninterrupted fiscal growth all along. Think of how the flow from a garden hose slows to a trickle when you bend it into a crimp, and then how the water bursts out with great, renewed force when you let it go. In these, the first months of 2022, it may be difficult to envision unbridled prosperity, but Iron Edge will be ready when it’s time to put on the seat belts. As our favorite and oft-quoted Warren Buffett saying goes, “Be fearful when others are greedy, and greedy when others are fearful”.
We at Iron Edge VC are proud to have access to the shares of today’s most exciting private companies that have proven and emerging track records of impressive growth, but still have tremendous potential and are not yet available on the public markets. When you buy shares in our Funds that house these exclusive investments, you will be along for the ride right with us. If you would like to learn more, or if you know of anybody else who would, do not hesitate to contact us by clicking “Get in Touch” below.
If you have enjoyed this article, visit the Iron Edge Blog for past updates on our pre-IPO opportunities and for general commentary on investment in the private marketplace.
As always, shares of Iron Edge investment funds are available on a first come, first served basis.
All the Best,
Founder & Managing Partner
Founder And Managing Partner