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‘We are in a tech founder’s market’: 3 Silicon Valley experts explain why investors can expect higher returns in private equity than in capital markets for the next 15 years despite frothy multi-million valuations

  • Venture capitalists say founders are becoming more demanding as they get an unprecedented number of unsolicited offers since the pandemic hit.
  • Equity returns are expected lag behind what investors would gain from high-growth tech businesses, UBS said.
  • Enterprise software, cybersecurity, cloud and fintech are some of the hottest digital properties right now.

If one person in Silicon Valley encapsulates the hilly region’s entrepreneurial zeal, it would be Elizabeth Yin. 

Born and raised in the San Francisco Bay Area, she co-founded and ran adtech company LaunchBit that was acquired in 2014. She then became a partner at 500 startups where she also ran the Mountain View accelerator. Now, she’s co-founder and general partner at Hustle Fund, a pre-seed fund for software entrepreneurs. 

She has lived many lives in the buzzy tech scene but has recently witnessed an unprecedented trend. 

“I have a portfolio of companies whom I would say are seed stage as far as traction goes, and then they’re getting preempted with series A offers left and right, where often the series A investors don’t even know how much revenue these companies are doing when they make the offers,” she told Insider in an interview.

“So it’s that nuts where you have the investors not doing due diligence. You have investors who are being forced to make decisions very quickly. You have a lot of preemptive offers out there,” she said.

As investors aggressively hunt for yield outside of the turbulent equity markets, the trend is only going to continue for sky-high valuations and ultra-aggressive offers, according to market watchers. 

Maximilian Kunkel, chief investment officer for the Global Family Office segment within UBS Global Wealth Management, said a client portfolio that followed the classic 60/40 split between global equities and fixed income stood to make an annual return of around 5.5% after fees these days.

Low global interest rates and lofty stock market valuations don’t leave much room to carve out juicier returns in the traditional markets and, as a result, investors are willing to look at more creative ways to get that.

“One way some investors go about this is to try and look towards alternative investments in particular, private equity. Where you are not only seeing traditionally higher average returns, but where we, for example, also going forward expect a yearly average return after fees to be about 2- 3% higher than in listed equity markets,” Kunkel said. 

In a recent research report, UBS said private equity and venture capitalists are zooming in on the following sectors: enterprise software; those involving digital subscription models; cybersecurity with a focus on cloud software and IoT devices; industrial technology; consumer technology; e-commerce and fintech. 

Silicon Valley is hot property again but it’s not cheap. 

Nobody knows that better than Ravin Gandhi, the chief executive officer and founder of GMM Nonstick Coatings, who is also a part-time venture capital investor.

“I built a business that makes non-stick coatings for pots and pans. That’s where I basically made my name,” he told Insider. “I’m a nuts and bolts guy.”

Despite his proven track record, including selling own his business to SDK, a $9 billion Japanese conglomerate — the largest buyout ever in the non-stick coatings industry — he said getting in on technology deals in Silicon Valley has become even more difficult since the pandemic began. 

“Investing has become so freaking competitive that when you get hot deals, you have to sell yourself as an investor to these companies. They’ve got really, really sophisticated money lining up. So you can always sense it when someone’s kind of hot, they’re like a Y Combinator deal or it’s some sexy-a** thing. And they’ll say, okay, well we understand you’re interested, but what do you bring to the table? So it’s crazy to then have it flipped so quickly,” Gandhi said.

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