A Few Things....Coronavirus, VC Returns, I Am Nothing

February 1, 2020

"Not everything that can be counted counts, and not everything that counts can be counted."

- Albert Einstein

"The price of anything is the amount of life you exchange for it."

- Henry David Thoreau

"Our fingerprints don't fade from the lives we touch."

- Judy Blume

"Quiet people have the loudest minds."

- Stephen Hawking

"Courage is being scared to death and saddling up anyway"

- John Wayne

A. The Coronavirus

R0 is the number of people a newly infected person tends to spread the virus to. The fatality rate is the chance of dying. The coronavirus is serious, but not that serious.

What this means to me is that the coronavirus isn't going wipe us out. It isn’t going to wipe China out. In fact, it probably won't kill nearly as many people as a normal flu season. Of course viruses do mutate, so that risk remains.

Latest facts (thanks Ateet):

- So far, nearly 10,000 cases have been confirmed, with more than 230 deaths. This is a roughly 2.2% mortality rate – although it's likely to increase.

- The 2002 and 2003 SARS outbreak had a 10% mortality rate, and the MERS outbreak in 2012 had a 35% mortality rate.

- Annually, 28.6 million people get the flu in the U.S. An average of 37,400 flu-related deaths occur... and in 2019, there were 61,000 deaths.

- The coronavirus affects the respiratory system... and more than 50% of Chinese men smoke – this is likely much higher in men age 65 and older.

Ray Dalio shared his and his team’s thoughts on the coronavirus and potential market impacts this past week. The article is titled “Our Early Thinking on the Coronavirus and Pandemics”. They run through a number of past pandemics, going all the way back to the Spanish Flu which occurred during WWI.

Here’s an excerpt:

“As for the spreading of this virus, as with any sort of unknown, there are 1) actual events and 2) the expectations of events that get reflected in market pricing. Generally speaking, these once-in-a-lifetime big bad things initially are under-worried about and continue to progress until they become over-worried about, until the fundamentals for the reversal happen (e.g., the virus switches from accelerating to diminishing). So we want to pay attention to what’s actually happening, what people believe is happening that is reflected in pricing (relative to what’s likely), and what indicators that will indicate the reversal.”

I think the bigger issue is that no modern manufactured product works unless it has all its requisite widgets. The most dynamic portion of the Chinese economy – the Yangtze Basin – is at least for now closed for business. This will remove China out of many manufacturing supply chains.

The now three year old trend of relocating manufacturing out of mainland China to locations with cheaper labor, more skilled labor, better resource access, better consumer access, and/or less political risk will likely accelerate.

It’s possible that the coronavirus has sped everything up that was already happening in the international system – the isolation of the Chinese economy – even more than the Trump administration.

B. Venture Capital Returns

Cambridge Associates released a report this week with some compelling data about the venture capital (VC) market.

For those unfamiliar with Cambridge Associates, the firm advises large pension funds, endowments, and family offices on their allocations to various money managers. Founded in the early 1970’s, Cambridge Associates was the first firm to focus heavily on VC.

The report argues that institutional investors should allocate an even greater portion of their portfolio to venture capital. Here’s a summary of a few of the report’s observations:

First, top decile institutional investors in 2019 have an average allocation to VC of 15%, nearly double their allocation in 2009.

The dispersion in returns is likely driven by superior access for top institutional investors into top VC firms.

Second, while the industry’s top VC firms tend to persist, new and emerging VCs also drive significant returns for each vintage. From 2009-2016, an average of 7 of the top 10 performing US VC funds have been new (Fund I, II) or developing (III, IV). An important caveat is that the TVPI metric tends to favor smaller funds, where higher multiples are more common, and new funds tend to be smaller. Yet, those small funds often get bigger and become new franchises over time. Hence, limited partners have myriad opportunities to get into the next great fund, if they’re willing to take risk on a new manager.

Third, venture capital is far less risky than it used to be. Loss ratios after the dot-com bubble were “only” 20% on average, while impairment ratios were 41% over the same period. These metrics exceeded 52% and 66%, respectively, from 1991-2001. Cambridge Associates posits that VC funds present lower risk due to greater portfolio diversification, as well as shorter times and capital exposed between company development milestones.

Lastly, the private equity markets, including VC, are “eating” public equity. The number of publicly listed companies in the U.S. has fallen by half over the past two decades to 4,336. Over this period, a late stage VC market has risen dramatically. 8,352 unrealized and partially realized companies were funded cumulatively by 2019. In aggregate, the market cap of the latter now more than 10% of the former. Globally, Cambridge Associates counts $340 billion of Net Asset Value (NAV) of VC-backed companies — a paltry 0.5% of the $85 trillion of global public equities.

After 40+ years of broad access to institutional capital, this data suggests that VC as an asset class could grow even larger in the future. As the surface area of technology broadens and builds upon the work of those who came before, don’t be surprised to see VC grow even larger as an asset class in the coming decade.

Thank you Alex Taussig at Lightspeed Ventures.

C. What Will Your Dash Be ?

THE DASH the poem by Linda Ellis

I read of a man who stood to speak at the funeral of a friend. He referred to the dates on the tombstone from the beginning… to the end.

He noted that first came the date of birth and spoke of the following date with tears, but he said what mattered most of all was the dash between those years.

For that dash represents all the time they spent alive on earth and now only those who loved them know what that little line is worth.

For it matters not, how much we own, the cars… the house… the cash. What matters is how we live and love and how we spend our dash.

So think about this long and hard; are there things you’d like to change? For you never know how much time is left that still can be rearranged.

To be less quick to anger and show appreciation more and love the people in our lives like we’ve never loved before.

If we treat each other with respect and more often wear a smile… remembering that this special dash might only last a little while.

So when your eulogy is being read, with your life’s actions to rehash, would you be proud of the things they say about how you lived your dash?

Thank you Anthony

This reminded me of one of my favorite scenes from Dead Poets Society.

D. A Few Things Worth Checking Out:

1. Quick joke on markets:

14:52:34 BLOOMBERG HELP DESK: How can we help?

14:52:01 ME: There is a hyphen in front of all my prices and the numbers are red. I have never seen this before

14:53:34 BLOOMBERG HELP DESK: This is what happens when a price goes negative

14:53:52 ME: What are you talking about?

2. Great short thread by the head of Fixed Income at BlackRock on what’s really impacting capital markets - liquidity….the supply of fixed income is actually going down !

3. Sometimes you read things that totally change your perspective. This report on the future of Food & Agriculture by RethinkX was one of those. Which ties in well with this Walter Isaacson podcast on the Future of Meat.

4. The Edge. This website is a hidden treasure. On it, you'll find all kinds of interviews with great writers and articles about forgotten scientific ideas. Start with this  interview with Rory Sutherland.

And if you love this stuff you will enjoy: This Will Make You Smarter by John Brockman.

5. If you like reading hedge fund letters, there is a good collection of Q4 and year-end letters HERE and HERE.

6. Great essay by Paul Buchheit (inventor of Gmail) on Identity:

I am nothing. It's simple. If I were smart, I might be afraid of looking stupid. If I were successful, I might be afraid of failure. If I were a man, I might be afraid of being weak. If I were a Christian, I might be afraid of losing faith. If I were an atheist, I might be afraid of believing. If I were rational, I might be afraid of my emotions. If I were introverted, I might be afraid of meeting new people. If I were respectable, I might be afraid of looking foolish. If I were an expert, I might be afraid of being wrong.

But I am nothing, and so I am finally free to be myself.

By returning to zero expectations, by accepting that I am nothing, it is easier to see the truth. Fear, jealousy, insecurity, unfairness, embarrassment -- these feelings cloud our ability to see what is. The truth is often threatening, and once our defenses are up, it's difficult to be completely honest with anyone, even ourselves. But when I am nothing, when I have no image or identity or ego to protect, I can begin to see and accept things as they really are.

E. Quotes I’m Thinking About:

"Being powerful is like being a lady. If you have to tell people you are, you aren't."

- Margaret Thatcher

"You will never reach your destination if you stop and throw stones at every dog that barks."

- Winston Churchill

“Let me tell you something you already know. The world ain't all sunshine and rainbows. It's a very mean and nasty place, and I don't care how tough you are, it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't about how hard you hit. It's about how hard you can get hit and keep moving forward; how much you can take and keep moving forward. That's how winning is done! Now, if you know what you're worth, then go out and get what you're worth. But you gotta be willing to take the hits, and not pointing fingers saying you ain't where you wanna be because of him, or her, or anybody. Cowards do that and that ain't you. You're better than that! I'm always gonna love you, no matter what. No matter what happens. You're my son and you're my blood. You're the best thing in my life. But until you start believing in yourself, you ain't gonna have a life.”

- Sylvester Stallone, Rocky Balboa (thanks Frank)