This Week in... Venture Capital
Innovation Week Review 22/2022
The buzzwords these days are:
Stagflation
Inflation and
Recession
Sometimes I also hear the word
Depression
The economic outlook isn't good; actually, it is really bad.
First, the reserve banks printed money at scale in the aftermath of the crisis in 2008. The party didn't stop after the crisis was gone. Governments and banks kept it running until early 2020.
Many experts said that the money printing, aka QE, and low-interest rates were responsible for the biggest asset bubble in the history of stock markets. Everything went up, stock, real estate, and novel technology like bitcoin.
Then came the pandemic.
The global shutdowns disrupted the supply chains, and the response to ease the economic burden:
Printing more money
The usual expectation was that inflation might rise due to the behavior of Reserve Banks in combination with the shutdown. But instead, asset classes surged, and until February 2022, the needle didn't move much on the inflation scale.
On February 24, 2022, Russia started attacking Ukraine the situation changed and inflation skyrocketed. At the same time, China issued a new wave of lockdowns. Both scenarios prolonged the disruption of supply chains worldwide.
Since the FED reverted its approach and started quantitatively tightening and increasing interest rates in Q2/2022, the asset bubble started bursting. Jerome Powell said, that the FED will do everything necessary to prevent inflation from rising further.
Tech stocks were the first to go down, including all cryptocurrencies. The first cryptos started even going bust — thinking of Terra. Everything that doesn't have functioning business models and eco-system is in danger during such corrections.
Some might say, in retrospect, it was inevitable, but the big question in the room is:
Where will we go from here?
Y-Combinator issues a warning to their founders
YC is one of the world's best acceleration programs. If you make it there, you make it everywhere.
YC backed companies like Dropbox, Coinbase, Airbnb, and Reddit early during their startup phases. The team has created a huge network over the years, from early-stage founders to investors, to public companies.
What is their advice?
Go into survival mode within the next 30 days, cut expenses, and expect to get no fresh money for the coming 24 months.
Why?
Read this article:
YC advises founders to 'plan for the worst' amid market teardown
For Tech Startups, the Party Is Over
The last 5–10 years reminded me always of the year 2000.
Everybody with an internet strategy in their pitch deck got tons of money — no questions asked.
Before 2000 it was the norm that companies in the internet era didn't need to have proven and functioning business models with cashflows, growing revenues, and good margins.
“We are at the dawn of a new economic era, in which profits don’t play a role anymore. Prosperity for everybody. No work, just leisure, and following your dreams.”, was the attitude in 2000.
The burst of the dot.com bubble changed everything and brought back economic reasoning immediately.
From one day to the other, markets dried up, and nobody wanted to invest in any company with an "internet strategy."
Value investing came back, and companies needed to prove three things to investors:
growing revenues
positive operative cash flows
and good profit margins
During such upwards trends with an adventurous investment base, people often forget the above three principles of companies. Ultimately companies are about providing services with profitable returns if they want to survive.
After an extended period of growth investing with mesmerizing returns, investors always bounce back to value approaches.
Flash forward to 2008 — the collapse of Lehman Brothers — created the next huge crash. Fundraising for startups was particularly hard, back in those days.
Companies that went on the market for the first time with an unproven business model had tremendous difficulties raising capital.
What now? Since many people see the financial doom coming.
Here are some ideas:
For Tech Startups, the Party Is Over
What about Europe?
Some European friends may or may not think:
But, hey all of your doom’s days articles are from the US. So what?
Since the world is global, what happens there creates ripple effects here. On top of that, Europe is closer to the problems in Ukraine and highly dependent on Russian gas.
As a first result of the sanctions, Finland's aspiration to join Nato, and their unwillingness to pay for gas in the Ruble, Russia turned off the gas delivery to Finland.
After reading the pitchbook article, some might say, well, there is enough dry powder in the VC market today.
My own experience with two crises — 2000 and 2008 — is simple:
Investing is emotional. When the markets get into trouble, people are scared to lose their jobs, homes, and families and end up living on the streets.
Whether they have no money before the crisis or 10 million doesn't matter. The personal perceived pain is real after losing huge proportions of their wealth.
Scared people go into survival mode and do nothing like invest in unclear business models.
Those commitments to VC funds that are not called yet? The dry powder?
I believe VCs will have a hard time convincing their LPs that it is a smart move to pour their capital into companies with not-proven business models that are likely to fail.
In 2000 and 2008 it took about two years to restore the appetite for investing adventures.
But read what experts say:
What's going on with European startup valuations?
What will come next?
Nobody knows.
The sentiment in the market is expecting a crisis, and in Austria, we say that announced revolutions won't happen.
For now, I believe many people are scared and extra cautious. Having an eye on the business model, value creation, margins, and survival is always a piece of good advice.
I expect the return of Warren Buffett-like Value Investment approaches in the coming 24 months.
In a youtube video, Harry Dent said that he expects the next longer-term economic upswing to begin in 2024.
Until then, work on getting your business model straight.
June 10, 03:00 pm CET - Jonathan Sporn, Gilgamesh Pharmaceutical - How Psychedelic Drugs Help Ease the Mental Health Burden in Society
June 10, 07:00 pm CET - Ivan Anz - Philantroinvestor - tbd
June 21, 05:30 pm CET - Carol Sanford - Author of Indirect Work
July 5, 04:30 pm CET - Devin Durrant - Author of The Values Delta
2 Podcasts from this week:
#76: Rich Masters - How the Pandemic Changed the Conference Industry - Bio US 2022 in San Diego
E81: All-In Summit: Bill Gurley & Brad Gerstner on markets, downturns & investment cycles
1 Youtube Takeaway from this week
Books I am reading this week
Meaningful change will happen, when you focus on your values.
Your moral compass can direct your next steps in relationships, in your work, and even in how you view your life. But if the arrow isn’t sure where to point, your efforts won’t have the impact you desire.
Former NBA player turned successful real estate investor, Devin Durrant has spent years teaching people how to emphasize their values to make a positive difference in their personal and professional lives! The desired outcome is achievable…if you put forth a focused effort.
Full of motivational and simple secrets to personal growth and professional success, The Values Delta is your self-improvement action guide to help you prioritize your values and connect them to the most treasured people and parts of your life. You will learn ideas to enhance yourself, your organization, and your community.
You’ll discover:
Two questions to determine your Priority Values and what takes precedence in your life.
The Values Delta Report Card is a tool to measure the qualitative and quantitative impact of your values on what matters most.
Four delta-creating steps to elevate your Priority Values into your everyday mindset and shift your actions accordingly—including over 200 value keywords to help you find your focus.
Inspiring stories illustrate how values, such as gratitude and integrity, play a role in fulfillment and satisfaction.
How to build the Values Delta advantage into any brand, business, or organizational goal, from marketing to sales to service, to benefit customers and employees.
Create the connection between who you are and what’s most important to you and watch the path to positive change unfold before you. the Values Delta and enjoy a simple values-based action plan that can uplift any aspect of your life.
— The Values Delta: A Small & Simple Way to Make a Positive Difference in Your Personal & Professional Life by Devin Durrant
Best Quote From This Week
“Start with the right mind, which means starting with the right paradigm or reality base.”
– Carol Sanford - Author of Indirect Work
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