The Week That Matters (12th June-16th June, 2023)
"Most venture capital funds can't deal with the highly uncertain and lengthy innovation process." Professor Marianna Mazzucato
2022-2023: A great vintage for venture?
Animal spirits aren’t consistent through cycles. When times are perceived to be good, investment managers and entrepreneurs often roar like lions. When things turn, however, they often meow like domesticated cats. That was how John Maynard Keynes convinced Franklin D. Roosevelt to stay the course with the New Deal, in a letter he wrote to him in 1938. Sometimes government, Keynes argued, is needed to even things out.
The author was reminded of those words this week at a conference focused on tech start ups. The venture capital firms sounded like domesticated cats; they were not the majestic lions they had once been. To be fair, it’s the same story in every major city around the world. Venture capital firms are having to admit that many of the metrics they used to justify the bloated valuations they paid were nonsense. Some are even admitting that many of the tech companies that received funding didn’t actually have product market fit (most neo-banks?). They just worked for some half baked narrative developed by Andreesen Horowitz.
The venture capital industry, despite getting a lot of attention in the press, is still relatively small but the recent domesticated cat-like behavior is a real problem for the author. There are some amazing companies that need funding but the venture capital industry is still sitting on its hands.
The terms available for some deals have been outrageously good especially towards the end of 2022. But most fund managers seemed too stunned to even turn up to work. The author had to raise from private sources of capital, the sort of people who run businesses and have a real understanding of price and cycles. They don’t tend to sit on beanbags.
Such opportunities would not last long in other professional investment circles. The author has spent, for his sins, most of his life pitching to whip-smart hedge fund managers. At some point, the valuation for a company is just too cheap to ignore even in the worst of bear markets. There is always a price maker who can see through the noise. It’s the same with PE and credit. That kind of know-how seems to be lacking in venture. It’s all so consensus. It’s all so kumbaya. It’s always, without fail, clubby.
The author has concluded the industry is just an inverse beta play on interest rates. For such products, you don’t need people who think about risk. You just need people who can push a narrative well when interest rates drop. It’s a marketer’s dream.
A repeat of 2016?
The press love historical analogies from the distant past. The current economy is nothing like the economy we experienced in the 1970s but it hasn’t stopped pundits talking about stagflation and the like, ad nauseum. Some have even compared the US to Weimar. Does no one read history anymore?
Fortunately, we don’t need to go far back to see a similar period of indecision from the venture capital industry. It’s easy to forget but the start of 2016 was a shocking time for risk. Many major markets (EUR, CRB commodity index, European banks etc.) were lower in February 2016 than they had been in March 2009.
Unsurprisingly, Sequoia released one of its macro reports. They warned founders to batten down the hatches. It was going to be a long winter. Of course, it wasn’t. 2016 ended up being one of the best years to invest in venture in recent memory. The economy improved and venture capital firms got back to pushing up valuations for silly concepts like neo banks.
Sequoia wouldn’t have commented on the broader economy in the 1980s and 1990s. They were secular growth specialists. Why would they? They were too busy funding great growth opportunities like Google, Apple and Nvidia.
The advent of the cloud changed the venture capital industry for the worse. It was possible to take a spray and pray approach to investing, not the extreme risk approach advocated by the likes of Tom Perkins. Rather than picking well, it became important to establish a narrative, preferably one that required heaps of capital (think of the fees!), and get the whole ecosystem obsessed with it so that the venture capital firms could cherry pick the best ones that came out of the funnel.
This has meant the industry has become beholden to the sways of the economy (read interest rate policy) more than at any other time in its history since the 1950s. The reality though is Sequoia is as bad at timing the economy as Ray Dalio is at timing the market (is cash ever trash?). If US interest rates drop fast as the author believes they will, the great minds of Sequoia will be paying up like the rest of the industry by the Autumn. Luckily, they have the surprisingly capital intensive vertical of AI to get behind now.
Andreesen Horowitz: London bound
In the style of PT Barnum, the great circus promoter of the 19th Century, Marc Andreesen announced with great fan fair that they were setting up in London. He argued that it was because the regulatory environment was more stable for crypto and web 3 technology. It had nothing to do with the fact that Zone 1 of London is where you go when you have a ton of dough (money) and want to speak to other rich upwardly mobile people about “innovation” (most actual Brits can’t afford it). Of course, being in London, Andreesen Horowitz will also be closer to the Arab money. Don’t believe the hype. They all hated Masayoshi Son of Softbank for getting to the Saudis first.
Andreesen has a problem. They needed a new narrative in 2018 following the very successful “software will eat the world” call to arms and so they settled on “crypto will drive the next wave of computing innovation.” Unfortunately, it hasn’t really. And Gary Gensler, the Head of the SEC, is just getting started with his crypto crack down.
London will not be immune to these changes. There is no way it will have a separate policy towards crypto over the long run. It will follow suit. Andreesen Horowitz would have been better to go to an emerging market like El Salvador if they wanted a better environment longer term but El Salvador doesn’t have, of course, the same restaurants and clubs as Mayfair.
Government Policy Matters
Australia, the author’s adopted homeland, has wonderful schools that compete easily with top schools like St Paul’s in West London and its universities pump out great young people with excellent STEM backgrounds. Despite that, we had eight listed BNPL providers and very few world class agriculture or renewable energy companies. That is in a country that’s literally on fire every summer.
Something is very wrong. Private capital helps an ecosystem thrive but government policy plays a very important role. Look at Israel. We need to start appreciating the role government plays in taking extreme risk to push us forward. The current set up only works for Marc Andreesen and his ilk (think of all those fees). It is not working for the world.
As always, thanks for reading. Wishing you the best with family, trading and business. Happy Father’s Day to the British Dads. Until next week….
Best regards
Mateen
DISCLAIMER: None of this is financial advice. The opinions expressed are purely my own opinions and it is imperative for you to do your own research. They do not represent the views of any company I am associated with.