David York, founder and managing director of Top Tier Capital, a venture capital-focused fund-of-funds specialist, has seen several investment downturns throughout his nearly 40-year career.
In the 1990s, he was working at Hambrecht & Quist, one of the leading technology investment banks of the time, known for underwriting Netscape and Amazon IPOs. York began investing in hedge funds in 2000, within a company that later became Top Tier based in San Francisco.
Top Tier currently has relationships with over 100 companies, including some of the most recognized brands in VC, such as Andreessen Horowitz, Accel, Index Ventures and Craft. The firm, which has more than $7 billion in AUM, also invests in secondary direct and limited partners.
We spoke with York about how this downturn compares to the ones he’s experienced earlier in his career and what he thinks the biggest opportunities and most significant risks will be amid the risk market pullback.
PitchBook: Is what’s happening in the markets right now as bad as the dot-com crash?
York: No, because the fundamentals of the underlying companies remain very strong. They are real companies.
We were all too confident in how the pandemic was going to change the consumption of technology. It was expected to go on forever. We all get a little carried away.
Now everyone is trying to determine the proper value of assets. They are reviewing their balance sheets to find out where they should invest. They were all involved in stocks and technology for two and a half years. But now that everything has been so corrected, people are trying to figure out what asset classes to own and how much they should own. We’ll probably find out where stocks settle sometime in the summer.
What about Web3?
York: You can make a lot of comparisons between the dotcom era and what has happened to NFT cryptocurrencies in the last 18 months. While foundational technologies are being built, a lot of companies in that space don’t make any sense to me and won’t survive.
Fortunately, Web3 is its own little echo chamber. These companies only do business with each other. That’s why I don’t see it as a risk compared to any other risk market.
Do you anticipate that many existing hedge funds will not survive this downturn?
York: If your fund is based in Des Moines, Iowa, it can be difficult to raise your next fund no matter how well you’re doing. But if you have a company in Silicon Valley or Boston and have a decent track record, you’ll be able to raise money.
I don’t see risk losing its allocation percentage in institutional portfolios. While VC may not lose its 10% or 15% weighting, overall LP portfolios are likely to be smaller. They will become more selective in their selection of managers and will probably sell some parts of their portfolio.
What type of side bets are a better bet now, straight bets or LP-GP?
York: You definitely bet LP-GP. If it is not yet clear where the valuation will sit, it is much easier to buy a basket of companies rather than a single company where you are more at risk.
We look forward to the latter part of this year when LPs begin to assess their over-allotment to the company.
In a recession, there tends to be more supply than demand, so we can be a bit more price conscious and get funds at a good value. Some of our best secondary results came to us during these times of anguish.
Which areas will do well on a risk-adjusted basis during the downturn?
York: We will see a traditional flight towards quality. Generally, the business will do better than the consumer, and health care will do well. Valuations remain attractive in Europe. Robotics is getting better. We have a bunch of robotics companies in our portfolio, and some of them are doing amazingly well. Most of them are helping out on the production floor and in the warehouse, but you can see it making its way into people’s homes.
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