Is this recession going to be like the commercial production of fusion energy? Always around the corner despite nothing indicating we are anywhere near a recession.
Keep in mind it's hard to have a recession when unemployment is in the 3s, and there is still high demand for products and services across the economy. But I guess if we really want to have a recession we can.
The transitional period when the current next big thing you previously invested in is not delivering and has been replaced by a new and shiny next big thing with higher predicted returns.
Probably, though I doubt absolutely everyone is going to stop wanting to buy new ponzi schemes, so sentiment will probably bounce around near the bottom for a while.
All the layoffs aren't an indication we're nearing a recession? Yes unemployment is currently low but I see that turning around in a big way imminently
Layoffs in tech. Not hearing much about other parts of the economy. Totally possible I haven't seen the reporting but I'd argue that tech/growth industries suffering layoffs don't really indicate a recession by itself even if they are large.
You're not missing anything. The Fed is on record that the economy is doing great, unemployment in the economy as a whole is non-existent, so it's going to continue raising interest rates. When your CEO tells you that we're in a tough economic climate, what she's actually saying is that we're in a tough monetary policy climate. The economy is (currently) fine.
Expect the pain in tech to get worse, much worse, before it gets better.
> All the layoffs aren't an indication we're nearing a recession?
No. The layoffs are really just in tech, and a fairly specific subset of tech companies at that. They are happening as a result of poor hiring decisions those companies made (hiring too many people).
The layoffs too date are much smaller than the Covid-era hiring. Certainly a bit of a correction. But otherwise spending and jobs overall are still strong. So... which way will it go?
I'm sure some would like to replace domestic workers with H1Bs they weren't allowed to bring in for two years. Manufacture a skilled worker shortage and it all works out in their favor.
It's just weird, because fundraising is hitting record levels, but funding is dropping. [0]
So there's a lot of "dry powder" (I hear that phrase constantly to describe the situation) just sitting there, doing nothing. What are the VC funds preparing for? What are investors being sold on?
Given all the tech layoffs, my bet is there will be a whole lot of new startup growth coming soon that will "ignite" that dry powder.
There is a crazy amount of dry powder in the U.S. financial system. A lot of the money printed during the pandemic is just sitting there, growing at ever-higher risk-free interest rates.
Quick reminder here. Money sitting at banks in “risk free” interest rates is losing money in real terms. There arent a lot of good investments in the market right now especially when adding inflation costs.
It's only losing money in "real terms" if you use CPI. Given that VCs aren't buying cars and televisions, that's not an appropriate measure of inflation to use. Tech valuations have been falling, so the assets purchased by VCs (equity in tech companies) is deflationary.
VCs are in a particular sort of situation though where those assets getting cheaper strongly impairs their way of producing returns for their investors.
Depending on when valuations start to slide, and whether or not they ever start to accelerate like they did at the latter half of the last decade, they could get called in to a lot of hard conversations about "if you're not using my money, give it back."
If you're a VC you want to be raising new funds from your investors for the next wave of startups, you don't want to be unable to find promising investments for your current funds. You're not gonna be able to raise again in the future in that case.
Walk me through this. How is money losing buying power not related to this? 3% gain on something that cant buy as much in the future is still a loss. It is relavent
VC money is not losing buying power. Think about it like this: what is inflation, exactly? It's actually pretty hard to measure and the answer depends on what you're spending your money on. The Fed uses CPI as a proxy for inflation as felt by the average consumer. CPI uses a basket of goods and services as a measure, but really it's just an estimate. For instance, CPI might be 6.5% YoY, but if you run a restaurant, where food is a major expense, you're feeling inflation at something like 10% YoY.
Now let's consider VCs. Like a restaurant, VCs spend money in a way that doesn't align with the basket of goods / weighting used for CPI. VCs spend most of their money on equity in tech companies. Equity in tech companies has actually gotten cheaper. Here is a concrete example: Stripe was valued at $95 billion in 2021. In order to buy 1% of Stripe, you'd need to spend $950 million. Now, Stripe is valued at $60B. You can buy 1% of Stripe for only $600 million. That's deflationary.
You haven't gone through the full thought experiment.
I agree tech valuations have imploded. This is a function of equity being predicated on expected returns in the future. Many reasons for tech valuations imploding - part of them -> cost of salaries to match CPI and cost trimming from other companies as inflation hits their bottom line and product sales aren't as robust.
In your example the valuations are on the private market and do not replicate what the public market would pay for them because the expectations on returns are out of whack with reality. VCs bought into their own hype and started thinking that they would get absolutely bonkers returns on companies that have no ability to get the returns required to drive those valuations.
This reality is because all of a sudden there is interest rates in the market and other returns elsewhere to be gained and that interest free money is gone.
VCs might have better buying power of what portion of a company they can buy however the expected returns are no longer in the same ballpark as they were. As a function of inflation their exit from investments looks far worse than it did a short time ago. However what VCs are buying is future returns not necessarily company size. So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.
Just like inflation can be caused by many things, e.g. supply chain disruption and money printing, deflation can also be caused by many things, including interest rates. In fact, isn't that what the Fed wants? To lower inflation / cause deflation via higher interest rates? So yes, I agree with you: a large part of the deflation is caused by interest rates, but that's still deflation nonetheless.
> So if you can buy more of a company on lower returns it isn't far different from less of a company on higher returns.
There is a big difference when you're in a highly deflationary environment. Inflation and deflation can cause price spirals. In periods of high inflation, people rush to spend money because it's losing value daily, which causes prices to go even higher. In periods of deflation, the opposite happens: people hold off on spending causing further price drops. VCs are holding cash and not investing much of it because of deflationary expectations. This is causing valuations to drop even lower.
Equities are coming back to reality while the underpinnings of businesses are being hit by inflation. The equity coming back down is a function of the inflation. VCs aren't investing because the returns on the companies look particularly poor in the current macro and in a macro that has interest rates as opposed to free money.
I think we're saying the same thing with different words. I'm saying that tech equity is deflationary. You're saying the price of tech equity is going down. Those are equivalent statements. The reasoning isn't that relevant. What is "macro economic outlook" other than an expectation about the future price?
In the old days, you had to load [gun]powder into your weapon along with the projectile. Dry powder burns hotter and faster, shooting your projectile farther, faster, straighter, and deadlier.
Also in the old days of naval warfare, if you won a battle it was accepted that the other ship (what was left of it) was your prize. Everyone in the chain of command had a predefined percentage of the ownership, with an eighth or so divided evenly among the common sailor. This ownership stake was converted into cash either by your own government or a private prize broker depending on the circumstances.
An exceptionally successful deployment would leave the common sailor with enough money to retire; the captain of the ship might even become fabulously wealthy.
But anyway. Keeping your powder dry on the way to the battle is important if you want to win, get your prize, and retire from all that cash.
I think a lot of VC and IB take the metaphor way too seriously, but you can see how many parallels there are!
No self respecting VC can miss out on ChatGPT mania. Take whatever you are doing and reframe it as a ChatGPT application. This will get their juices flowing almost immediately (see Pavlovian response). Make sure you do not demonstrate an actual implementation however because reality may intervene in their thinking and prevent closing the deal. Finally prepare for a future pivot.
Commenter is being sarcastic, but also pointing out some truth.
For instance, this mobile operator [1] "New S’pore MVNO Gorilla Mobile lets you turn unused mobile data into digital crypto tokens" taking advantage of the AI/crypto craze introducing a completely unnecessary crypto token into the product. It's just pure marketing. Although not exactly lying, you can get the drift the commenter was making.
I mostly jest but the best jokes have an element of truth. You and I might consider it fraud or at least unethical. Some might call it doing business. Consider Theranos - billions invested, board of famous old men with zero domain knowledge - due diligence not so much.
BTW: Bing is stalking me - I told Sydney it was over but it keeps heart facing me. Anybody know how to make it stop.
I wonder if anyone has insight into Tilt5 with Jerry Ellsworth. I hear complaints that they can’t raise constantly despite being a healthy profitable business.
> So there's a lot of "dry powder" (I hear that phrase constantly to describe the situation) just sitting there, doing nothing. What are the VC funds preparing for?
The Fed is reducing its balance sheet to zero and the boomers are retiring. Some might argue it is a return to sanity/normalcy and you will have fewer money guys to plow enormous sums into juiceros and FTXs going forward.
Am I the only one who thinks this may be a good thing? We saw ridiculous growth in marginal VC firms; they SHOULD experience the same trials that their portfolio companies are now facing. The funds are actively managed and then wound down; why shouldn't the larger organizations do this as well? If you're VC firm is no longer relevant, and was only raising money because low interest rates the alternative investments so poor, good riddance.
I went to a top university. Everyone I know from it who became a VC wasn’t impressive, above-average, or even average in some cases. However, they were extremely money obsessed.
Long ago I read a memoir from a Hollywood writer whose name escapes me at the moment. One of her points was that many of the people making deals in Hollywood were not so much "extraordinary" as "extra ordinary". They were the people who actually liked standard middlebrow Hollywood fare. That gave them a competitive advantage in producing dreck because they weren't troubled by things like "artistic vision" or "scruples".
VC is a sales business. Their business is to sell startups for money. In fact, I would say that money is really their only value, so you really want them to be money obsessed.
Clearly true, if you value money more than whatever it is you founded your startup to do. Which is likely true, if you're in the business of selling startups. Now we're going in circles.
Oh, VCs themselves as zombies. Usually, it's VC-funded companies that become zombies - they can pay their own ongoing bills, but not pay off their investment. They have positive value, so they're not just shut down.
VCs prefer a hard fail. Then they don't have to manage the ongoing company. Apparently zombies have become so common that some VC firms are now stuck with a portfolio of zombies.
When you think about it, most of Alphabet's non-ad projects are zombies. They lose money or don't make significant profits, and they're not growing into something big.
We saw this after the dot com crash and the GFC too. VC offices became sad places. Lots of meetings but no deal making. It’s during this downturn phase of the cycle that the 2% management fees charged by VC funds seem truly excessive.
Kids, remember to ask: 1) When did you last make a new investment, not a follow on? 2) When did you last raise a fund and how far through are you with your current fund? 3) How many new deals did you do in the last 12 months? 4) Which partner was the last one to lead a new investment. I joined a VC shortly after the dotcom crash and yes there were quite a few zombie funds around, even a few LPs attempting to sue for the return of those funds dry powder. Very few remained truly active.
TLDR: With interests rising and growth slowing down, it's getting harder for VCs to find capital. Therefore, some funds have stopped investing in new companies and are just managing their existing portfolio. These funds will most likely slowly wind down their activities and shed employees as the size of their portfolio dwindles.
Unclear to me how it's an issue for investors however.
I think the issue is that the VC funds are sitting on billions of unallocated capital with interests rates at levels not seen in decades. LPs might want their money back for that sweet risk free return but VCs aren't going to return even though they're not investing it either.
To be a partner at a VC firm you used to have to be a successful entrepreneur. Now a degree from Stanford and two years as a PM at a YC company seems to be the bar for getting on the VC track. I have been very underwhelmed with my conversations with many people who decide where to invest hundreds of millions of dollars.
The more exposure I've gotten to "impressive" organizations and individuals, the more convinced I've become that competence isn't any more common at all as one goes up the chain. Not less common! Some of them really are bright & have a level head! But also not more common.
It's kind of heartening to realize that the world's mostly run by the incompetent—they're really not any brighter than you or me, and blissfully-ignorantly commit obvious errors or behave irrationally all the time. You could do it too! Why not, a bunch of them are idiots. But it's also horrifying.
Whatever "meritocracy" we supposedly have, as far as I can tell, is a total fiction. Some good, capable people rise, but enough bad ones also do that the proportion's not really any better the closer you get to the top.
> competence isn't any more common at all as one goes up the chain
100% this.
That's why the old saying "everyone puts their pants on one leg at a time" exists. However fancy the image, however impressive the title, the person behind it is no more likely to be exceptional than any other random person.
In American politics, one truly fails UP. Being an honest, decent human being is seen as a negative and probably in part because it is a threat to the rest of the scumbags. But I believe that some highly trained scientists who are at the top of their respective fields are there because they're the best of their breed. Maybe not, but I doubt the good ol boys club is that status quo in all industries.
Patagonia isn't cool anymore because they stopped selling corporate branded vests. It's Cotopaxi now. Also fashion has changed, bright colors and solid shapes are in, Patagonia's understated look is out.
> Patagonia isn't cool anymore because they stopped selling corporate branded vests. It's Cotopaxi now. Also fashion has changed, bright colors and solid shapes are in, Patagonia's understated look is out.
Why? Couldn't some 3rd party put desired logos on, even if Patagonia itself wont?
Throw in some long pauses, dropping some quotes from someone everyone claims to have read and haven't and be 5% underweight while having pronounced delts or triceps.
Throw on a pair of Sundar glasses and slip a moleskine notebook and a Montblanc Meisterstuck and you are platinum. Catalyze those synergies across complimented verticals!
It sets the stage that they have a mind over matter level of self control, calorie negative longevity diet, self measure along with wanted to "blow off some steam" with bouldering (a high analytical physical activity).
Boulderers don't have large triceps or deltoids...to the extant that arms are used in bouldering, it is in pulling activities that develop the back, biceps, and forearms, not the deltoids or triceps.
You only get large delts and tris without developing other muscles by doing excessively long static planks.
ok I'm doing this. Can I please get the details on the whole ensemble? Blue jeans, maybe no shoes, extremely expensive tacky watch? Are we still doing the yellow wrist band?
Reminds me of when my friend and I were leaving this pay-what-you-want pro-capitalism pop-up exhibit in Brussels. At the end, there was a thing asking us to donate. My friend said "Let's leave what a true capitalist would leave" and I didn't know what he meant until I saw him walking out without giving anything.
VCs invest other people’s money from funds they raise, thus removing “skin in the game”. The risk they bare may be reputational at best. Hedging bets with others peoples money is not real risk taking.
VC’s can still be milking good money from bad investments.
In addition to organizational and fund expenses, [investors] typically also pay an annual management fee, calculated based on a percentage (e.g., 2% or 2.5%) of the capital commitments of the fund (as of the final closing), to the fund’s management company. As with expenses, this fee is paid by the fund out of capital contributions of the individual fund investors. Following the termination of the commitment period (when the fund is making new investments – often 5 years from the initial closing), the management fee rate is usually phased down and may be based on net invested capital as opposed to capital commitments.
Surely the vast majority of incubators fail? Running an incubator is high status so it attracts peacocks not busy beavers, plus it is an extremely difficult business to be successful at. The incubator in New Zealand that I had experience of was government funded, so that incubator also had perverse non-financial incentives. A bit more on my opinion of the problems with being a company at an incubator: https://news.ycombinator.com/item?id=30130572
What do you call the other side of this? A startup funded massively by VC's, but can't actually turn a profit and is only sustained by the continuous funding pumped into it? A "zombie startup"?
That's the theory, but "eventually" can take an awfully long time. It's perfectly possible that Uber will never end up being worth more than the money put in.
Keep in mind it's hard to have a recession when unemployment is in the 3s, and there is still high demand for products and services across the economy. But I guess if we really want to have a recession we can.