Some startup "unicorns" are magical, and others are donkeys in party hats.
Illustration by Aleksandar Savic
By Erin Griffith
August 4, 2016

Betting against the startup market is tricky, since the companies are privately held. (Yesterday I outlined a few ways some investors are attempting to do it anyway.) I could only find one firm that has the sole purpose of betting against the startup market: Snow Ventures.

The firm’s founder, Alexander Campbell, spent the financial crisis on the prop desk at Lehman Brothers. Later, as an entrepreneur-in-residence at Thrive Capital, he learned about venture capital. He saw plenty of parallels between the VC world and the over-leveraged investment banks of the mid-2000s: lots of structure, illiquidity, people protecting themselves with random clauses and documents that are difficult to unravel, “vicious, nasty” debt, and a general lack of transparency in the market.

“I saw a lot of early investors, founders and employees getting subordinated, not really understanding that if your company takes $400 million on a $1.5 billion post-money valuation, it means you just got pushed 100 spots back in the cafeteria line,” Campbell says. What’s worse, he saw lots of founders and startup employees take the tiny amount of liquidity they had and plow it into another illiquid asset—San Francisco real estate.

So Campbell started his own fund aimed at helping the people who own startup shares—founders and employees, mostly—balance their risk. According to Campbell, even sophisticated people in the startup world don’t always realize how much macroeconomic risk they’re taking on. In Silicon Valley, particularly during past few boom years, macro factors like interest rates, oil prices, and the Chinese economy can seem like distant, irrelevant concerns. But the startup economy is absolutely tied to the macro environment, Campbell says. And right now he believes the the startup economy looks like “a country that’s running a current account deficient that’s depending on foreign capital for liquidity.” The front door of Snow Ventures’ website declares: Winter is coming.

It’s tough to play the doomsayer in Silicon Valley, where it’s normal or even encouraged to take irrational risks. (It’s even worse to be the one profiting off of the failures of others. A big theme in the 2015 film The Big Short is the ethical implications of betting against people losing their homes.) Campbell admits that. Responses to his fund vary, he says. Employees and very early stage investors want to hedge. The early stage investors “are doing the hard work of taking the coffee meetings,” he says. “They know the system is subordinating them and they don’t have enough liquidity to hedge.”

Currently, Snow Ventures is managing a small amount of money from friends and family, using the strategy I described in yesterday’s Term Sheet. The firm shorts publicly traded stocks that are exposed to the startup market and overvalued (Campbell counts Facebook (FB) and Chinese tech companies in this group) as well as publicly traded hedge funds that have large stakes in these companies.

The plan is to put together enough capital to ask a bank to “make a market” for Snow Ventures, similar to what Michael Burry of Scion Capital did in The Big Short.

The only problem is that the startup bubble could collapse before Campbell’s fund is up and running. “If the market is down, it’s not the best time to buy protection,” he says.

Campbell isn’t hoping for a downturn in the startup market. But “if it were to happen, this is what you would want to do,” he says.

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