What is the Vintage Year
The vintage year is the year in which the first influx of investment capital is delivered to a project or company. This marks when capital is contributed by venture capital, a private equity fund or a partnership drawing down from its investors. Investors can use the vintage year of an investment to further explain its returns.
BREAKING DOWN Vintage Year
A vintage year at the peak or bottom of a business cycle can affect the later returns on the initial investment as the company may have been overvalued or undervalued at the time. The vintage year provides information in regards to when a small business initially received its first investment capital. This can include capital from a variety of sources, so is not restricted in regards to the origin of the funds. The vintage year helps determine the nature of the business cycle in which the company entered.
Vintage Years for Comparison
By observing the trends among other companies with the same vintage year, an overall pattern can be potentially identified to gain an overview of economic sentiment at a particular time. If particular vintage years perform better than other vintage years, this information may be extrapolated to predict the performance of other companies within the higher performance vintage year.
For example, 2014 may be considered a strong vintage year in regards to crowdfunding platforms, such as GoFundMe, as they were marked by high growth. Regulations on the industry are generally considered appropriate, suggesting the future growth of these companies will not be hindered for the time being.
Impact of Business Cycles
Most businesses experience economic shifts as a regular part of doing business. This can include seasonal fluctuations experienced by certain business, such as the increase in retail sales during the holiday season or an increase in lawn care product sales in warmer months, as well as other cycles based on the occurrence of certain events such as major product releases.
The business cycle is said to progress systematically through four phases: the upturn, the peak, the decline and the recovery. During the upturn and up to the peak, the value of the company is seen to increase. During the decline until the start of recovery, the value is seen as falling.
The point in the cycle the business resided in during the vintage year may skew the appearance of the company’s true value, leaving room for analysis prior to making investment decisions. During peaks in the market, new companies are more likely to be overvalued based on the current economic outlook. This increases the expectations on an investment's return because more money is initially contributed. Inversely, companies are typically undervalued during low points in the market; because less capital is initially contributed, these companies or projects have less pressure to generate big returns.