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AI bubble could wipe out funds
Not the dot-com pattern
The dot-com version looked different. Companies with no revenue and no traffic went public at crazy valuations, and their stocks climbed 50% or 100%. People talked about them in cabs. Nothing like that is happening today.
Private money's pressure
This time the money is private, and investors are going all in. Fund managers used to need to beat an index like the SPX. Now they have to beat the fund next door to keep money coming in, and many are heavily into Anthropic and celebrating their SpaceX outcomes.
Entry price
Entry price matters. Angels used to get into companies at 5 or 10 million dollars, and then the asks became 40, 50, or 60 million for products that hadn't launched. Over just ten years in venture, plenty of investors who deployed at the wrong time have gone out of business, having invested at the peak.
Why do funds chase the same bets?
Fund managers are judged against their peers, so standing apart carries career risk when the bet goes wrong. Economist John Maynard Keynes observed in The General Theory in 1936 that it is better for a reputation to fail conventionally than to succeed unconventionally. That pressure pushes managers toward the same popular positions at the same time. The pull is strongest when a rival's early gains are visible to everyone.
How did the dot-com crash reach ordinary people?
Dot-com companies were listed on public exchanges, and millions of people held their shares directly or through retirement accounts and mutual funds. The Nasdaq Composite fell about 78 percent from its March 2000 peak to its October 2002 low. Losses in private funds land on a narrower group, such as endowments, pension funds, and the limited partners who supplied the capital. The Nasdaq did not regain its 2000 peak until 2015.
Why do venture funds fail after a peak?
A venture fund typically runs about ten years, and the managers call capital from investors over the first few years. A fund that deploys during a peak pays high prices for its stakes, so later exits have to clear a higher bar. Cambridge Associates data have shown the 1999 and 2000 vintages among the weakest for US venture capital. A fund whose returns disappoint then struggles to raise its next one.
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