What Does the Post Crash VC Market Look Like?
bothsidesofthetable.com
bothsidesofthetable.com
Reminds me of the saying: "Venture Capital starts with too many good ideas chasing too little money, and ends with too much money chasing too few good ideas."
Not all LP commitments have the same durability.
It’s like leasing a building to a first time restaurant owner or a big public company doing restaurants and getting identical rent. One is more durable (and valuable) than the other. But it gets left out of cash flow.
Same with counts of dry powder.
if a legitimate large corporation is having trouble raising money, its a huge red flag.
Wow, debt looks super attractive.
When I first saw this @azlyrics comment was dead and I'm wondering what the fuzz is.
[0] https://www.thebalancemoney.com/list-of-junk-bond-etfs-12147...
theres a very real chance that 10% yield will spike further and downgraded
it's also relevant that you can't just ask for capital back as an LP. it's committed to a fund. you can not commit to another one but the price of much greater returns in alt assets is much lower liquidity.
Also the fed finally stopped propping up valuations with QE, money is leaving the economy (about damn time).
FWIW VC/PE/some other private stuff isn't actually down yet at least not on paper. But this is bc they are not marked to market very often at all. The reason activity is still good is bc valuations are way down, like half in a lot of cases.
- savings and loan
- junk bond
- dot com / financial engineering (Enron)
- mortgage backed securities
- VC
Basically, money chases outsized returns, some new thing emerges to satisfy the demand, it becomes effectively a ponzi / house of cards, it falls apart, we shift to the next thing. It's impossible to predict when and what will happen of course, it will be interesting to read retrospectively about what's happening with VC as we have with the rest:
Barbarians at the gate / Den of Thieves
Smartest Guys in the Room
The Big Short
(Bad Blood is partway there but Theranos wasnt a turning point like the others)
Side note: Regardless of the borderline sociopathic ruthlessbes of Jeremy Irons character, I'd propably work for him as well. At least for a while. Heck, he was flown to a crisis meeting, listened to the people on the ground, understood the problem, met a decision and implemented a plan. All that in one night! Most senior managers I know would have needed a month to understand the why the underlying mathematical model had any significance.
Having been CEO through similar crisis situations, I really related to his character and situation in that movie.
People who criticize his actions don't understand that hard decisions are always between two shitty options. There wasn't a warm-n--fuzzy way to get out of there.
You can criticize their risk management strategy, and honestly we should more criticize the USG / SEC for allowing such risk to build up.
The major component of crypto being distributed consensus it has absolutely no way to work with external world, therefore it can only work with blockchain-borne stuff. The only thing dreamed up yet are cryptotokens.
Since blockchains have no way to interact with external world it can only be used to exchange cryptotokens between wallets - there is no way to ensure that other side of the transaction involving anything else but cryptotokens is upheld. So it CANNOT be used as money by probably any sane definition of money.
Crypto scams are natural consequence of this inherent property.
So valuations need to come down dramatically is the argument, but the amount of capital trying to get spent is going up astronomically. How does that mismatch resolve in an actual marketplace? Do we assume there are suddenly 4x as many good investments to make from 10 years?
The difference in risk is orders of magnitude.
These investments can not have terms that are as one-sided as some have specialized in, plus it becomes less realistic for an entrepreneur who can properly leverage $10 million to be served by capitalists who have to borrow $10 million to do it.
The truly success-bound entrepreneur will have a much less limited upside by leveraging the $10 million from someone who is actually worth lots more than $10 million instead.
I expect the herd will be thinned considerably.
Kind of like the difference between somebody visiting Miami, renting a Lamborghini which is almost out-of-their reach, then being seen having their car parked at South Beach by a valet. As compared to a well-retired resident owning half-a-dozen European performance cars in their garage. They only drive one at at time anyway, just like everybody else.
Wasn't it Buffet that said when the tide goes out real quick you see who wasn't wearing anything covering their bottom?
This is both because there is more opportunity for a company to scale, but also because when you have several trillion dollar tech companies out there happy to acquire innovative tech companies then multi billion dollar exits become much more feasible. Companies like Microsoft are making close to $100b a year today and they have to put that money to work somewhere. Google's digital ad business was big relative to the size of the internet in 2010, but it was absolutely tiny in comparison to today. And it's not just the size of the digital ads market, but everything - digital audio/video content, ecommerce, hosting, social, productivity tools, etc. All companies operating in tech sectors today have far more potential than they did in 2010 if they execute well.
So no, in my opinion 20x EV/sales isn't that crazy for a good SaaS company. Profitable tech companies at scale with high gross margins typically trade at 5-10x sales because if you can achieve operating margins of say 30-40% (which isn't uncommon for SaaS companies) then you're basically trading at a 20-30x projected earnings multiple. Which yes is high compared to the historical market average (15-20), but if you're also growing at 50% YoY and have steady recurring revenue streams then that's not a hard multiple to grow into at all.
Perhaps what was stupid about 2020-2021 valuations was that a lot of investors assumed that the extremely low interest rates and accommodative monetary policy was going to persist. Some companies did trade at valuations very hard to justify without the low interest rates and pandemic-era tech growth rates (Zoom, Shopify, Peloton, etc).
I'm sharing because I seem to have a fairly controversial take on this and I don't know why. It seems to me everyone has just forgotten that companies like FB traded at sales multiples in the mid-teens for years after they went public and they haven't been bad investment at all. It depends on the company obviously, but a company growing at 50% YoY with 80% gross margins would be ridiculously cheap at a valuation any less than 10x sales based conservative earning projections.
In my opinion most of the reason for this crash is just macro headwinds. Tech companies saw a huge growth boom in 2020-2021 which has now reversed. Interest rate risks have also been dragging on public valuations and this caused a drop in sentiment for tech investments generally. My guess is that in a couple of years once we're through this period tech valuations will trend back to 2018-2019 levels. But I guess we'll see.
Finally this current crash is hardly isolated to tech. Companies like Fedex, Starbucks and Nike have all seen ~50% valuation declines from their peaks this year.
I agree but with the specification that the only way to get that "good SaaS company" multiple now from an acquisition is with the stick rather than the carrot.
What I mean by "stick" that is the target (e.g. Figma) needs to be a active threat to the acquirer's (e.g. Adobe's) business -- as opposed to the "carrot" wherein the target (e.g. any AI-first company making interesting pictures) has a valuation driven by narrative ("humans will prefer AI-generated content over celebrity-generated content).
Acquirers have more leverage on price now.
"Companies like Microsoft are making close to $100b a year today and they have to put that money to work somewhere"
They'll make stock buybacks, and they'll pay out dividends, far less risky to their stock price and long-term management incentive schemes than most value destructive large acquisitions.
That's not to say companies won't do buybacks though, just that they have a duty to shareholders not to blindly buyback their own stock if they believe they could allocate that capital better with an acquisitions, etc. At a time like this when unprofitable, yet very innovative companies have lost a lot of value relative to big tech companies like Microsoft and Google I'd argue that they might be better off allocating that capital more towards acquisitions than buybacks.
This is also why I don't really understand why shareholders of Apple support their current buyback program. Given their stock trades at a near record-high valuation both absolutely and relative to the market large buy backs makes very little sense from a capital allocation perspective. Although I guess they would argue there is literally no where else to put those billions of dollars. Still, that doesn't mean it's a good thing for shareholders, just that they're now forced to allocate capital poorly given their size.
I can easily name a dozen companies and technologies that massively changed the world from 2000-2010 (not saying for better, but undeniable), what have we really developed that didn’t exist in 2010-2020 in this era of Free Money and “Unlimited Potential”?
Hypothetical question.
From my view, I’ve seen VCs come in and use capitol to build up people with good intentions or ideas, and immediately get them absorbed into the giants who are also throwing away endless free money even if their business model is awful.
I’m not looking forward to hyper inflation. But I am looking forward to a slower tech market that actually has to provide something useful in order to stand out.
VC just means venture capital. It's a generic thing. Any capitalist - in our society, anyone - can supply venture capital; they just have to have enough.
If anything is unnatural, it's thinking of VC as something gatekept and for the elite, as opposed to a generic function which can be fulfilled by millions.
Currently Nikola motors is worth a few billion. In a crash they'd be dead.
I wouldn't call it a crash if there is positive irrationality.
I can see it now: "Life sucks because of the crash? Move to the Metaverse!"
You propose that's not what a crash is. What is it then? And when can we say it's as severe as the early 2000s crash?
Look: right now the S&P500 and the Dow are still twice where they were in 2016, and the Nasdaq is almost 3 times. Even after the recent drop. Do we have double the population we did in 2016? Double the resources? Double the technology? If not then why is the stock market twice as high?
My guess is, (and it's only a guess): the nasdaq will bottom out around 5000, the S&P somewhere around 2000. The Dow in the neighborhood of 15k. That's assuming there are no financial collapses like in 2008.
But it will take years to get there.
One easy answer is that the "value" of a dollar is half what it recently was. And that seems to hold fairly true whether you want to use that dollar to buy groceries, a house, a hotel room or a share of a company.
If I measure my investments not in dollars but in say, days of vacation (so hotel, food, gas/airfare, tickets to things, etc) then my S&P500 investment is about where it was in 2016.
Taken literally, it is true :) None of us know what is going to happen.
Personally, I think it won't be the crash that will hurt more, but the time it will take for recovery. Anyone who has invested money in something, gets impatient with no growth for a long time following a crash that resulted in a loss for them.
Dotcom crash the Nasdaq dropped 78%. No one really knows what'll happen now though.
The put options that I closed out based on my correct prediction that the market would drop literally the day after I posted this would disagree.
Additionally since the Fed meeting and the subsequent market drop that general consensus has shifted pretty rapidly towards agreeing more with me than not.
I still think the market is even more optimistic than it realizes.
It's not doomerism, its reality: we're still in an insane asset bubble that has been propped up by a decade of insanely low interest rates and cheap money. Various conditions around the world are causing rapid inflation which is forcing central banks to raise interest rates ending the era of cheap money. The market sentiment remains convinced that this will a temporary hike, not going much about 4-5% and decreasing rapidly, however there is plenty of economic analysis that indicates this does not make sense.
I guess all of those billionaire investors are total idiots thinking about the future without crystal balls.
Yes, please give me your misunderstanding of EMH to prove to me I'm wrong. I'll wait.
Ray Dalio got famous and rich specifically designing investment strategies because he didn’t believe in a crystal ball.
I’m genuinely curious which investors you are talking about where choosing where market indexes will be is their investment thesis.
None of the strategies I saw at my time there had anything to do with accurately predicting specific market levels. Quite the opposite they were largely off market positions for the main component with the occasional hedge on the market.
It's some variation on
1) "there's no alpha over time, only someone with a crystal ball can make money on any directional play besides line go up" to which I'd say
a) While most people can't generate alpha over time a, the idea that no one can is empirically wrong.
b)if you worked at some bizarro world macro hedge fund where no one has any interest in making educated guesses about market direction and is running some kind of medallion / bridgewater strict beta/correlation strategy (how is that macro? doing that in FX, EM equity or international debt? I wouldn't call a medallion type strategy on EM stocks a global macro strategy ) (also bridgewater clearly incorporates directional opinions based on nuanced understanding of history, geopolitics, cycle timing on top of their core strategies, so I'd say you're wrong in the case of Dalio)
Anyway, that's all to say, I find the "you have no right/validity to talk about where you think markets are heading without a crystal ball" (ie no one should waste time discussing it ever) is not only condescending but as I said, just not correct or clever.
I will finally say that of course there are huge numbers of people having very unintelligent conversations where they throw shit at the wall in terms of market predictions, but you can't judge any activity on people doing it badly, even if that's a large percentage of people in this case
Is fairly specifically indicating a dramatic change in market level. More specifically it’s calling out that the person expressing an opposite opinion is definitively wrong about the magnitude of a future market move.
I think it’s fair to ask at that point how the person can be so definitive “without a crystal ball”.
Macro hedge funds wouldn’t invest that way (at least not in my experience). They’d risk weight their positions based on a variety of outcomes, even if all of them are directionally the same, and then hedge their downside risk if they are directionally wrong.
Not happening. The current rate raises are done to control inflation, and not to reverse it. Some prices will stay that high because of inflation. Some prices have already went down but you can't see it: also because of inflation.
Sorry, but the Fed had already robbed you, and you are unlikely to get your money back.
It looks like battery tech, energy tech, commercial space, housing 2.0, water tech
SV is done, but had an awesome run