A Thought Experiment
Here is a simple thought experiment:
In 2021, US venture capital backed companies raised $330B, roughly $180B above the average of 2018-2020 (source)
VC backed companies spend roughly 50% of funds raised on marketing (source, source)
This implies an “excess marketing spend” (compared to average) of around $90B in 2021.
Assume most of this spend was on online / digital marketing (source)
Assume that 50% of spend was on Facebook and Google (their combined share of the digital ad market)
This implies around $45B of excess digital ad spend on Google and Facebook in 2021.
Here are the combined digital ad revenues of Google and Facebook for the past few years:
2019 - $205B
2020 - $233B (+13.6% YoY)
2021 - $324B (+39% YoY)
Here is what it would look like without the “excess” and likely unsustainable ad spend:
2019 - $205B
2020 - $233B (+13.6% YoY)
2021 - $279B (+19.7% YoY)
Still pretty good, but more inline with historical growth rates and the growth rate of the digital ad industry as a whole.
These are obviously super rough estimates, but even if they are in the right ballpark, the implications are material. Venture funding is already starting to dry up. This is also just one small example from one industry.
It feels like the end of a distortive era of stimulative monetary policy that culminated in a speculative, lockdown-induced frenzy. The ripple effects could be interesting.
Disclosure: Long GOOGL