What is a Vintage Year?
The term “vintage year” refers to the milestone year in which the first influx of investment capital is delivered to a project or company. This marks the moment when capital is committed by a venture capital fund, a private equity fund, or a combination of sources. Investors may cite the vintage year to gauge a potential return on investment (ROI). The vintage year of a private equity fund effectively launches the clock of the typical 10-year lifespan of most term PE funds.
Understanding Vintage Years
A vintage year that occurs at the peak or bottom of a business cycle can significantly 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 regarding the first moment a small business receives substantial investment capital from one or multiple interests.
Vintage Years for Comparison
By observing the trends among other companies with the same vintage year, an overall pattern may emerge that can be used to potentially identify economic trends at a particular point in time. If certain vintage years perform better than others, these data help investors predict the performance of other companies with identical vintage years, such as those other success stories.
For example, 2014 is considered a strong vintage year with respect to crowdfunding platforms. Businesses launched through this type of infrastructure during that time period have shown strong growth characteristics as a whole. Since then, the regulatory climate regarding crowdfunding efforts has tightened, further legitimizing this activity and suggesting sustained future growth of companies born this way.
Impact of Business Cycles
Most businesses experience economic shifts as a regular part of their operation. These shifts can encompass seasonal fluctuations like increases in retail sales during the holiday season or in lawn care products during warmer months. Other cycles are based on events such as major product releases.
The business cycle typically progresses through the following four phases:
- Upturn
- Peak
- Decline
- Recovery
During the upturn and peak, the value of the company is seen to increase. During the decline and into the start of recovery, the company’s value is generally considered to be falling.
Key Takeaways
- A vintage year is the milestone year when the first significant influx of investment capital is delivered to a project or company.
- During a vintage year, capital may be committed by a venture capital fund, a private equity fund, an individual investor, or a combination of sources.
- The values of companies with common vintage years may grow or decline as a group.
The point in the cycle during the vintage year may affect the apparent value of the company, leaving room for analysis prior to making investment decisions. During market peaks, new companies are more likely to be overvalued based on the current economic outlook. This increases the expectations for an investment’s return due to the larger initial contributions.
Conversely, companies tend to be undervalued during low market points, as they receive less initial capital, thereby facing less pressure to generate substantial returns.
Related Terms: venture capital, private equity, ROI, economic trends, business cycle.
