ARK Venture Commentary, 10/20/2022

Venture deal-making falls
Third quarter venture deal volume fell 53% year over year to $81 billion[1] according to Crunchbase. Much of the contraction was concentrated in late stage rounds where volumes fell 62% whereas seed and angel investing activity only fell 6%.

ARK’s take
The deal-making slowdown should come as no surprise. Companies with a cash cushion will resist taking money at macro-economically stressed valuations instead opting to cut burn and extend runway. Simultaneously, dealmakers are treading cautiously while they await more macro-economic and market clarity.

The AI explosion continues
In the past month alone breakthrough models have been released that convert text into video,[2] text into 3d objects,[3] and audio into text.[4] Companies are productizing these advances at a similarly rapid clip. With advances in AI, Video editing becomes magical,[5] Workflow automation becomes simple,[6] and custom language models become available at a 1/10th what they cost 2 years ago.[7]

ARK’s take
AI seems to have crossed a tipping point: products are becoming widely accessible; companies are building atop each other’s advances; and companies—large and small—are being forced to either incorporate AI systems into their strategic plan[8] or attempt to concoct defenses against the forthcoming disruption.[9] This is only the beginning. According to our research, we believe the cost to create AI systems will fall 2.5x per year at least through the end of this decade, and innovation will continue to flower.

Mark to market or mark to model?
Though Yale and Harvard, the two largest endowments in the US, reported reasonably stable asset levels through a June 30th fiscal year end, the underlying metrics don’t square with market reality. Yale reported returns of 0.8% while Harvard reported a fall of 1.8%, its results bolstered by a venture portfolio that—on paper—was up “high single digits.”[10] Over the same timeframe the Refinitiv Venture Capital Index was down 56%.[11]

ARK’s take
The lag effect in marking illiquid positions to market is likely to catch up with institutional portfolios by year end as investment managers make fair value adjustments. Indeed, Harvard—at least—seems to be anticipating this. Private equity comprises more than a third of its assets, and the Harvard Management Corporation’s CEO expressed that the end of the calendar year might result in “meaningful adjustments” to those exposures.[12] Remains to be seen how institutional investors react to their least liquid positions being market to reality.

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