The Yin and Yang of Public and Private Markets

There really is just one capital market, it’s a global market and has been for a long time (the french helped to finance the revolutionary war), but it’s become even more global in the post World War II era. Capital markets are where you go for capital for your business, your investment, your project, your building, your home, etc. And though the word is plural, there really is only one capital market at the end of the day. You can see that by looking at the charts of the dow, the ftse, the hang seng, and the nikkei over the past month.


When capital gets more expensive in one sector, geography, or asset class, it generally gets more expensive in all of them. That’s not always true and there are all sorts of lags and caveats, but it’s generally true and getting more so.

In the past couple weeks we’ve been able to witness that happening in the public markets. Pick any stock, market, or sector and you’ve been able to watch asset values getting re-priced in real time reflecting new rates of return and risk premiums that investors are assigning to them.


And that’s how it happens in the public markets, which is what we’ve all been staring at for the past month. But the capital markets are much bigger than the public equity markets and we have not been able to "stare" at the rest of the capital markets so easily.

The markets that everyone has been talking about lately are the credit markets. They are harder to "stare at" but it can still be done if you’ve got a Bloomberg terminal or some other workstation that you can get credit market data on. The chart I’ve seen a bunch is the "TED spread", the spread between treasury bills and three month LIBOR. Thanks to a reader’s comment, here is a chart of it.


The Ted spread has gone way up in the past month as investors have not wanted to own any paper not guaranteed by the US government. That’s in part what the splurge/bailout/nationalization/socialization movement is all about – making a lot more paper guaranteed by the US government or another government, for a while anyway until things calm down.

But the markets that most readers of this blog care about are the private equity markets and in particular the venture capital markets. There is no chart we can stare at to see how the values of our companies are being impacted. That’s good in some ways because if there were a chart, we’d all be staring at it instead of working hard to build the businesses we have invested in, started, or work for.

But make no mistake, the venture capital and related debt markets have been impacted by what has gone on in the past month. I am seeing it every day in our portfolio and in the investment opportunities we look at. Financings are blowing up, terms are being renegotiated, venture lenders are getting more conservative, and existing investors are stepping up to fill the gaps. The good news is that a lot of companies, and many in our portfolios, have raised money recently and have a good amount of cash on hand. Many of those companies who are flush with cash are cutting burn rates and making sure the cash lasts even longer.

But the venture capital markets don’t move in real-time and they don’t report the prices of every transaction to a market system. So it takes time for all of this to happen and it doesn’t happen uniformly. I guarantee that there are some financings happening right now that are getting done at valuations which would have made sense nine months ago but don’t make sense right now, at least to the uninformed observer. I also guarantee that there are some financings happening right now that are getting done at valuations at half or even less of what they would have commanded nine months ago, even though the public markets have only gone down about 33% year to date.

The public markets and private markets are linked and they all participate in that one mega capital market I talked about at the start of this post. But there are all kinds of lags and disconnects between them that cause things to behave differently between the two markets. So you can look to the public markets for some clues, and everyone I know is doing that, but it will only help so much. We are going to have to make up a lot of this as we go along. But I know one thing for sure. Capital has gotten more expensive in the past month (actually it started getting more expensive late last year) and we all had better reflect that in our plans and strategies.

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Comments (Archived):

  1. stone

    Great post. Here’s another angle on this story. Wall Street barely exists after the government bailout. Never have I seen an entire industry taken over by the government — pretty amazing. The despicable and derelict of Wall Street now need to be flushed down the toilet so the system can be cleansed. This all started with the auction rate security scandal — little reported — and will end with the government owning all the remaining banks.The opaqueness of the credit markets must be fixed because we now know we cannot trust Wall Streeter’s. They have squandered their goodwill — forever in my mind.

  2. tetsuotrees

    Great post, Fred. I know you’ve recently written on the topic (re: Facebook and employee stock sales), but it would be interesting to hear some expanded thoughts on the attractiveness of secondary markets for private shares as a potential longer-term replacement for outright public listings, particularly in light of the current market environment’s volatility. Anyway, good stuff.

    1. fredwilson

      I think a real secondary market is going to be increasingly necessary but Iam not sure now is the best time to start one

      1. Guest

        One would think so, but paradoxically, now may be the best time to start such secondary market.I was at a dinner party a few days ago and had a conversation with this wealthy doctor, whose stock portfolio has taken a massive beating. He was, in fact, envious of me that I owned private shares in a startup and said he wished he had put his money in such, too.You have to understand, Fred, that the Wall Street brand is severely damaged. All of the systems and people that were designed to give investors confidence – analysts, rating agencies, rules on disclosure, SEC filings – are being cynically dismissed as crooked. On that background, investing in bright-eyed entrepreneurs and their ideas has a feel of “real” and “pure”, according to the people I talk to.I’ d say that if some recently laid-off securities pros were to start a secondary market for private shares they would generate a lot of interest from high net-worth individuals that have been burned by Wall Street.I am just telling you what I feel the sentiment is; I personally would be very suspicious of such market. There is a lot of over-hyped, overpriced crap in the venture-backed market (e.g. Skype, GreenFuel Technologies), so I would never touch such shares, however, there may be a favourable sentiment out there…Best wishes,

  3. NYCStartupfiend

    Insightful post. The comment I would add is the obvious one that in the private markets, you live forever with the assessment you make today of what the market for the security will be several/many years down the road. In the public markets, Mr. Market may be totally insane in the short term (a series of factors effect the price on a day to day basis that have little or nothing to do with the macro value for the stock) but that’s largely ok because market participants have the option to change their mind every single day. The consequences are much more limited.Having done a financing in late 2002 that I would never have otherwise done and then lived with the consequences of it years down the road when control provisions in those docs nearly ruined our company by giving the wrong people power, it’s important for even the most desperate entrepreneur to remember that they may be signing up for something they actually cannot live with and that sometimes walking away to fight another day is truly a better option. Sometimes its better to fire nearly everyone and take the company’s burn to nearly zero rather than do a financing that will only make sense in the micro economics of the day but zero sense in the longer term. We in the private market don’t get to cancel those contracts the next day.

  4. Chris Dodge

    Honestly, I don’t like such strong coupling between the various markets. It doesn’t allow for true diversification, across different local markets (e.g. Europe vs. US equities) as well as asset classes, which is so critical for a well-balanced portfolio.Even the energy markets appear to be correlated with the equity markets. Very, very strange and I don’t like it. I particularly don’t like it when equity markets drive commodity prices that impact everyday consumption, like oil/gas. Why should retail gas prices be coupled in such a manner? Is Oil 40% cheaper to produce and bring to market than it was this summer? Of course not. Seems like the tail (speculative markets) are wagging the dog (consumer pricing) here.Of course, correlation does not necessarily mean causality, but things need to get decoupled or at least uncorrelated.But how?!?

  5. Phanio

    You mentioned commercial paper. Most commercial paper is bought by financial organizations that truely understand the credit markets – thus, they understand the risks from these corporations that issue the paper. Question, if they won’t invest in it as it stands, why should the government use our money to guarantee these investments. Wish they would guarantee the companies I own!

  6. todd

    Insightful, simply put and clear.btw, a good infographic [as usual] on the TED spread is at

    1. fredwilson

      thanks todd, i updated my post with that image. it’s great

  7. Mapo

    Fred, thanks for taking time to keep discussions going even during this market tubulenceTying together 2 comments from your post:”…working hard to build the businesses we have invested in, started, or work for.””…existing investors are stepping up to fill the gaps.”The problem for those of us in the “work for” category who see “filling the gaps” funding means the terms of those rounds are highly dilutive.Granted, if as GM I’d delivered double the original forecast we wouldn’t need to fill gaps, but this dilution crushes the upside for top management at our firm who are banking on equity as we have foregone high cash comp in lieu of equity.I’m curious about Fred’s or readers’ thoughts on where things stand now in terms of the need to keep top management, whether investors feel increasing unemployment means replacement management can be found, what choices we have in negotiating with our investors during this round or whether there will be a huge amount of reshuffling of startup management to brand new ventures in this market. Thanks.

    1. fredwilson

      management should not be the ones “crushed” if crushing is indeed happeningit should be the investors in the prior roundsmanagement needs to have a stake in the business and be aligned with the investorsbut we are getting ahead of ourselves here as i have not seen any “crushing” financings yet

  8. Dan Ostermayer

    Fred,The synergy between the private and the public is crucial to investing. You also bring up a hidden and often forgotten point that in the end fundamentals matter most. When you look at the most successful investors in VC and public spaces they are all people who understood good fundamental companies that may or may not have add the technical chart analysis to back up an investment. Fortunately in the private sector there really are no stock charts and only fundamentals. Thanks for the post. Very insightful!

    1. fredwilson

      DanThis is a great point. Private equity and VC investors have to befundamental investors because there are no charts to look at and you have tohold your investments for long periods of time

  9. Ted Murphy

    Thank you for an insightful view of private financing right now.I think it remains to be seen how financial woes impact underlying fundamentals here on the Internet. If the 2000 and 2001 experience acts as a guide, I would expect to see deep cuts in online advertising and partnership revenues. E-commerce revenues, however, may sail through relatively unscathed. I note that Amazon’s revenues in 2001 vs 2000 were up +13%, while Yahoo’s revenues were down -35%.

  10. SK

    The impact of the public markets is more readily felt on the fund accounting side. How many of us are carrying our portfolio at cost and how many are truly marking it down with the market? Dusting off even year old investment memos and running comps again and returns analyses is illuminating – try hitting refresh on those auto updating comp sheets! Then again the fundamentals of these businesses have also changed – most market size and/or growth assumptions are no longer valid.

    1. fredwilson

      So true. Which is why we try so hard to use overly conservative valuation models. We’d rather mark up less than have to mark down later. We always end up arguing about our valuations with our auditors who want them to be higher. Its a strange situation when the auditor is pushing us to be more agressive

  11. Wallen's

    The correlation between public equity markets is usually not that strong. Actually, geographical diversification still works (though less than 20 years ago). However during crisis like this one, correlation tends to go up the roof. It’s been the case in all major stock market crashes.

  12. LivePaola

    I thought it was “yin and yang”?

    1. fredwilson

      OopsThat’s embarrassingFixed itthanks

      1. Ed

        Actually, it was a satirical double entendre I thought was intentional 🙂

  13. atcltd2003

    Great view of the obvious dilema brought about by inscrutable motitvations – yin&yang. Entrepreneurs have recognized that for life to go on they must find ways to live outside the “established” VC & credit markets. This seems to mean a sub-market eminating from still robust emerging economies. Does anyone know more about this new frontier in financing?

  14. John Scholes

    The TEDSpread is readily available on the Bloomberg website (you do not need an account)…

    1. fredwilson

      SweetThanks for the link

  15. alwayslean

    And what the f£$% has that got to do with yin yang. I thought that you would be pointing out the fact that money and debt are the same. All money is created by banks lending. the net worth of earth is £0. Debt and money, yin and yang. But then your an investor not a hippie.