Why the price of oil matters to startups


Oil prices are going down.


They are today lower than the bottom of the Great Recession fall. Partly because the US has continued to produce more, and probably the relative growth of some renewable use. Oil use globally growth pretty slowly — it’s been around 100mm barrels per day for years, up from 95mm to 103mm over the last 12 years.

2008, the price of oil fell. What happened in 2009 to venture capital investments?


It went down in 2009. Notice it went down in 2016 too — the year after the oil price crash in 2015.

VC and oil exist in a large market context with many economic factors — stock market, real economy, jobs, currency.

But they are directly linked too, something entrepreneurs and VCs don’t often talk about (if they think about it.)

Oil sales (100mm/day x 365 x $50 = around $2T/year) –> Middle Eastern sovereign wealth funds (Qatar, Kuwait, UAW, Saudi sovereigns are ~ $4 trillion) –> investments in funds –> investments in public and private companies.

The NYSE and Nasdaq combined are around $40 trillion of market cap. So these 4 oil countries matter a lot. They are ~5% of the money in the US stock market I would guess. But not just stocks.

Big primary capital groups have some mix between real estate, public stocks, debt and private equity. Yale has 19% in private equity/venture capital. They have a reputation for being pretty heavy on illiquid assets like this (7% in real estate, 7% in natural resources), so maybe the average of most smart primary capital pools is half, around 10% in venture/private equity.


Those are big US university endowments, but it’s a way to think about how the $4T of oil sovereign wealth might be managed. They have $400bn in venture capital firms + PE (let’s say 30% in VC and 70% in PE). That’s $125bn invested in global venture funds as an LP — invested in funds that invest over say 3 years, and harvest over 7.

Venture Capital is around $250 billion per year recently for the entire world. Let’s say the ‘market cap’ of all VC-backed companies is 3x that in the private markets: $750 billion. Around 1.5% of the public markets. So it’s a lot smaller. We just estimated that oil money is 5% of public markets.

What is oil money as a share of venture capital? Well funds invest over ~3 years and hold for returns over 7 years. So a brand new ABC Ventures Fund 8 raised in 2019 will have spent all the money in 2022, and will need it again. About 2/3 of all funds will be on the market in a given year trying to raise a new fund this year/next year.

Since $250bn is invested per year, or $750bn to be invested by the current cohort of funds — what’s the oil share? $125/750. About 15%. Three times higher than the public market. And it means these groups anchor new venture funds — they don’t round off the venture funds, they are the biggest blocks around which many funds assemble the rest of their smaller LPs. A $300mm fund will have a few $30mm checks (sovereigns, pensions, etc.), and a bunch of $10mm checks.

Which means…when oil falls from $80 to $40 as it has in the last year, the job of raising a venture fund becomes super super hard.

And next year, you the startup founder will notice it. Even if the crisis looks over in the newspaper. Whiplash.

Oil groups are sensitive to the price of oil. A unique variable. But ALL funds — pensions and sovereigns and sovereigns — are sensitive to the price of public equities. Most are ~50% in the stock market. When the stock market falls 20% as it just did, folks have bigger fish to fry than the far smaller positions they have with longer exit timelines.

So the advice this week from Sequoia — RIP Good Times II – that coronavirus is a huge risk to startups — is informed by advice to venture capitals: VCs are going to walk through the Valley of Death the next 18 months.