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Comment by nanis | Hacker News Reader

Apart from the stock market, you have to take into account the persistent inflationary environment that is being created.

Inflation shortens horizons. The usually impatient early investor becomes more impatient as the uncertainty surrounding the value of a dollar that might be earned years hence becomes greater and greater. Therefore, people's appetites for projects that might pay off in 10 years fall in favor of projects that might pay in five. Their appetites for a five for a five year horizon fall in favor of projects that might pay off in three. And, those fall behind projects that might pay off in a year which fall out of favor in as people seek something that will pay off this quarter.

So, if you are working on something that will pay off immediately, you're good.

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When you're investing in early-stage startups and hoping to fund the next unicorn, the goal is an 100x exit. 7 percent inflation, even over a decade time scale, is so minute compared to those exits that it really doesn't come into anything beyond passing consideration.

I ran a regression of the CPI / inflation rate and its impact on the venture capital ecosystem both in terms of median round size and also total dollars invested and it's very highly correlated at north of 0.7

CPI hasn't been above 7 percent since 1980... How could you even run that regression?

7 percent inflation over a decade is one doubling, so it cuts your 100x return down to 50x. That seems like it might move some needles on valuations.

Meanwhile, the money you invest will also not create quite as much runway for the companies you invest in, so the fraction of successful exits may also decline.

If interest rates appreciate to keep up with inflation, time horizons compress -- future revenue is worth less, and today's revenue is worth more. This drops risk appetite for investors, who move from tech IPO darlings like Rivian to boring stable earners like utilities, so that will also decrease likely valuations your startups get when they IPO, potentially by another order of magnitude, dropping your 50x down to 5x.

2 percent inflation over a decade cuts your 100x return to 80x. That would seem like it would move some needles on valuations and yet it doesn't. You need to compare the 7 percent inflation to previous levels, but also to bond yields, equity yields, etc. I wouldn't be surprised if there was less money flowing into seed funds, but all that means is that your web3 app to see where the closest set of exposed nipples are might not get funded whereas in a lower yield environment, somebody may have taken a flyer. I'd be surprised if it caused a wholesale pivot away from unicorn hunting.

Wouldn't the value of companies track inflation making them an attractive store of value?

Inflation means tomorrow’s money is worth less; it impacts cashflows more when they are further out.

When the cost of money is near-zero, today’s values of near and distant cashflows are similar. When the cost is high, they are very different.

I’m not sure if you mean in your question that a project shown to track inflation will be unaffected. This is somewhat true — we see this in inflation-adjusted bonds etc. But inflation is far from a uniform effect, and I’ve never seen a pitch include inflation in its estimates…

Inflation means prices are increasing. Your company probably gets more revenue when prices go up. Whether you come out ahead will depend on a lot of factors - what kind of inputs you have, how much pricing power, etc. But you can’t just discount your cash flows by the inflation rate unless you also incorporate the increased revenue into your estimate of the cash flows.

Why do you think the stock market indexes are crashing as inflationary expectations are being entrenched?

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