Anyone paying attention in the industry knew in 2019, pre-pandemic, that something wasn't quite right. Companies were hiring way more people than they needed, growing way too fast, building products that didn't make sense, pivoting to increasingly user hostile products, etc. But it kept going because VC and other investor money just kept flowing in.
Then pandemic hit. Everyone who thought things weren't right in 2019 expected the reality check to finally be cashed and for a major industry correction to happen. It should have happened. But it didn't.
Instead the Fed poured incredible amounts of money into the market. We saw stocks instantly u-turn and companies that in 2019 you were suspicious of were all of a sudden getting even more ridiculous valuations.
This happened for what is in retrospect and obvious reason: Big name investors and VCs needed time to cash out. And they got it. We saw two years of record numbers of IPOs. Myself and many others pointed out over a year ago that something wasn't right, that this looked like investors rushing to cash in their chips and get out before everything came crashing down.
Inflation started to rise, and indeed the game came to an end. Now we're going to see a crash that will be much harder than we though we would have seen in 2020 because policy has allowed already unhealthy companies to explode and grow even larger. And they're all interconnected so it's going to be ugly.
How many of your company's customers are other start ups or other tech companies? We have a generation of companies led by people who have never really seen a recession, forget one that impacts tech, completely clueless about what's coming. First we saw consumer spending absolutely wreck big name companies bottom lines. But this is very likely to start spreading as more startups that depend on other startups revenue streams start to miss their targets.
This current generation of founders might be clueless about recession and major downturns, but the people in charge at places like Sequoia sure as hell aren't.
Me thinks you don't know how venture capital works?
No it hasn't. Not even close.
Here:
- https://www.cnbc.com/2022/05/10/amazon-stock-has-lost-nearly...
- https://www.marketwatch.com/investing/index/ndxt?countrycode...
HUGE conspiracy theory here. Also, you are giving VCs too much credit. They're not super smart, with a few exceptions.
When the market is not that optimistic anymore and people are in conservation mode, there's no one to pass the bag to anymore so VCs have to appropriately adjust which businesses they are going to invest in and the valuation.
This is why hype, signaling and FOMO plays such an important role in fundraising. It is about whether the startup can generate enough promise to convince others that they're a high growth investment vehicle and not as much about whether they are profitable in the short term.
Startups with cash on hand and generating cash from operations will have some bumps in the road and probably take a big hit to their valuation, but with make it through. Startups still trying to figure out how they’re going to “make money” and without a ton of cash on hand to give them a long runway likely won’t make it through the next 18 months.
Inflation started to take off about April last year, and was 7.9% at the end of February this year when Russia invaded Ukraine. Since then it rose about a half percent and then started to drop, as sanctions have been implemented.
There were also very few COVID lockdowns in China in 2021, most were in early 2020 and then some major ones occurred in 2022 but those, like Ukraine, were well after inflation started to rise in USA and Europe. Not to say the early 2020 China lockdowns could not have caused later inflation, but is that what you are claiming?
The answer to the why of all of this is super easy: greed.
Corporations are a tool, like a hammer. They're not good or evil. They exist and operate as they are permitted to. And human nature hasn't changed either, everyone is "greedy" to a first order approximation. So what has changed? What conditions have changed between now and then?
I'd be more inclined to believe the disruption from production to supply chains to storage and demand, migration, etc due to covid regulations (not just the Chinese lockdowns) to have had the major impact. But it could also be for example energy costs due to expensive green regulations, or cartel behavior from energy producers because energy prices have been a major leader in price increases and those affect virtually everything else. Just saying "greed" doesn't help understand anything. People are greedy, we already knew that. Aristotle knew that.
This has nothing to do with profit increasing faster than inflation which I'm not saying is false, mind you. Again, if you had a shred of evidence or logic to say prior to 2021 that corporations did not and would choose not to increase profit faster than inflation then that would be interesting.
The evidence is profits increasing faster than inflation and examples of C-suites saying straight up that this environment is letting them raise prices.
The story is that when inflation is low, consumers are more intolerant of price hikes. They'll shop around and try out your competitors. Evidence to support this sentiment analysis is the myriad ways companies sneakily "hike" prices. Shrinkflation for example. When prices seem like they are going up on everything, what's the point of shopping around?
If a company has a profit of $10M and inflation is 10%, then the following year a profit of $11M is a "real profit" of $0.
This is not a joke, or an excuse, or an apology, just a statement of indisputable fact. Inflation hasn't really gotten started yet. And it's not (just) greed. An FPGA that cost us $40 at DigiKey two years ago is now $700 at $SKETCHY_CHINESE_BROKER. Somebody^WEverybody is going to pay for this.
Their portfolio companies can go bankrupt. It is a Darwinian (survival of the fittest) moment for all the companies at this time.
We’re experiencing a (likely) shrinking economy, with fewer customers who are spending more conservatively. VCs want their companies to succeed and preserve wealth.
I believe fed is on a pause.