Third Eye Capital
Tel: (416) 601-2270
Fax: (416) 981-3393
Email Third Eye Capital

Brookfield Place
Bay Wellington Tower
181 Bay Street, Suite 2830
Toronto, Ontario, M5J 2T3

Vulture Capitalism (Q1-22)

Vulture Capitalism (Q1-22)

Investor excitement for innovation companies is justified by recent technological advances and the widespread adoption of trends in ecommerce, cloud computing, web 3.0, and AI. ARK Investment Management (ARK), which claims to focus solely on offering investment solutions to capture disruptive innovation in public equity markets, believes that innovation companies could represent US$210 trillion in equity market capitalization by 2030 (up from approximately US$14 trillion in 2020). As we have flagged in previous letters, both public and private valuations in technology are priced to perfection and disruptive innovators can themselves be disrupted (think Netscape, Myspace, Nokia, Palm, RIM/BlackBerry). Considering that growth is slowing, inflation is surging, monetary policy is tightening, market volatility is increasing, and geopolitical tensions are intensifying, the upside for innovation companies should be capped in the near term. The ARK Innovation Fund was the worse performing fund in Q1-22 according to financial analytics firm Morningstar, falling 30%. Yet, investors continue to pile into venture capital (VC) in record numbers and VC firms seem oblivious to the tech valuation corrections happening in public markets.

Although the start of 2022 has witnessed a healthy recalibration of public technology company valuations, median U.S. VC pre-money valuations continued to climb in Q1-22. Early-stage valuations surged to US$67 Million from US$45 Million in Q4-21 as non-traditional venture capital investors, including hedge funds, increased their focus on earlier deals. The rapid pace of dealmaking has created an environment where the due diligence process has significantly shortened, according to the VC coverage group at J.P. Morgan. Heated competition for deals sometimes leaves only a weekend for VC partners to get to know founders and their businesses before having to commit capital, which has driven early-stage valuations to sky-high levels. Pitchbook estimates that the venture market had amassed more than US$230 Billion in dry powder at the end of 2021, a record high.

Momentum in VC deals might be robust but exit counts and values have collapsed. Q1-22 posted only US$33.6 Billion in total capital exits for venture capital-backed companies in the U.S., a precipitous drop from the previous three quarters of over US$190 Billion each. Traditional IPOs have neared a complete halt so far in 2022, representing the weakest start to the year since 2016. Some companies are forced to revisit SPACs and are exploring other dual track M&A options. As mentioned above, technology continues to be the most targeted sector for M&A. With corporate balance sheets flush with cash, approximately US$2 trillion in the S&P 500 alone, and financial sponsors holding another US$2 trillion of dry powder, corporate buyers will be keen to plug their innovation deficits.

The lofty valuations of VC backed companies depend on longer duration cash flows and terminal values, which get quickly revised downward when discount rates increase. VC market adjustments will trickle down from the public markets and affect later stage companies first. The ten largest VC backed listings in 2021, which including Rivian, Coinbase, and Roblox, now combine for a US$121 Billion market capitalization, less than half their total post-money exit valuations. Exit valuations for VC backed companies are also resetting lower. J.P. Morgan recently observed that investors are requiring more structural and downside protection in deals, such as payment-in-kind dividends and liquidation preferences. Many of these companies will be confronted with the immensity of investor expectations that will not be met and be forced to either “down round”, restructure, or divest. The opportunity for distressed lenders experienced in the technology sector will be significant. After all, it is the technologies of failed companies that become the scaffolding upon which future innovations are built.

Article excerpted from the Q1-22 investor letter



Domestic (Canadian) Advisor registration form:

If you are an advisor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

    Personal Information

    I consent to receive information from Third Eye Capital.

    Domestic (Canadian) Investor registration form:

    If you are an existing or prospective accredited investor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

      Personal Information

      YesNo
      I consent to receive information from Third Eye Capital.

      International Investor registration form:

      For US persons
      If you are an existing or prospective accredited investor or an advisor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

        Personal Information

        I consent to receive information from Third Eye Capital.

        Address Information

        Investor Information

        An IndividualA Company
        U.S.Other (specify)
        Fund of FundsFamily OfficeBankOther (specify)
        $

        Instructions for the following sections: Individuals please answer Part A of Sections I and II; Institutions please have an authorized person answer Part B of Sections I and II.

        Section I - Accredited Investor Threshold Questions:

        Part A - For Individuals:

        1. I certify that I have an individual net worth, or my spouse and I have a combined net worth in excess of $1,000,000.

        2. I certify that I am highly a sophisticated investor who routinely invests sums of $250,000 or more.

        Part B - For Institutions:

        1. The submitter certifies that it is a bank, insurance company, registered investment company, business development company, or small business investment company.

        2. The submitter certifies that it is a charitable organization, corporation or partnership with assets exceeding $5 million, and that was not formed to invest the Fund.

        3. The submitter certifies that it is a corporation, partnership or trust with assets of at least $5 million, that was not formed to invest in the Fund, and whose purchases are directed by a sophisticated person.

        4. The undersigned certifies that all of its equity owners are “accredited investors” as defined in United States Securities and Exchange Commission Rule 501(a) and who can satisfy the higher criteria for the same set forth in Section I, Part A above.

        Section II - Qualified Purchaser Questions:

        Part A - For Individuals:

        1. I certify that I own not less than $1,000,000 in securities investments.

        Part B - For Institutions:

        1. The undersigned certifies that it is a bank, insurance company, registered investment company, business development company, or small business investment company

        2. The undersigned certifies that it is a "family owned company" (as defined below) that owns not less than $5,000,000 in securities investments. A "family owned company" is defined as a company that is owned directly or indirectly by or for two or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendents by birth or adoption, spouses of such persons, the estate of such persons, or foundations, charitable organizations, or trust established by or for the benefit of such persons

        3. The undersigned certifies that it is a trust that was not formed to invest in the Fund, the trustee or decision-making authority of which, and every person contributing assets to the same, is a “Qualified Purchaser” under one of the other definitions of this Section

        4. The undersigned certifies that it is a person acting for its own account or for the accounts of other Qualified Purchasers who in the aggregate own and invest on a discretionary basis at least $5,000,000 in securities investments.

        Questionnaire Submission:

        Thank you for your patience in completing this questionnaire.

        If you have any questions, please contact Chris Vokes, VP of Investor Relations at Third Eye Capital:

        T 416-601-2270 ext 242 E chris@thirdeyecapital.com