VC Meltdown
bogleheads.org
bogleheads.org
There are nuggets of great information and wisdom here and there, but the people that dish that out aren't commenting that often. However; you have no way of knowing if a given poster- most of the posters you are reading from- have any fucking idea what they are talking about. I'm reminded of being told not to believe anything you read on the internet by my elders in the early 2000s...
Instead what I find is that I'm participating in a massive maw of negativity and panic, almost a desired state of entropy and failure. I think it May Be Time To Stop Posting. I think I'll keep my head down and do my best to keep food on the table instead.
These are investors who are diligently adding to their $VTI position not dabbling in high-risk venture capital backed companies.
Easy to predict doom, though. If you do it enough, you'll eventually be right.
These are strange times. Interest rates rising, inflation crazy but economy and job market is pretty hot.
As a Bogleheader myself, I'll keep plunking money into my ETF's at discounted prices and believe it'll pay off long term. :)
In an economic downturn, VCs are going to have more power and preach more financial prudence. But VCs are awash in capital right now.[1] Their money needs to flow somewhere in order to provide a return to their LPs. How does that factor into this analysis?
My hypothesis is that the negative unit-economic businesses that the article refers to will falter, but there are plenty of early-stage startups (the ones that didn't need a multi-billion dollar round from Softbank to win their category) that will be fine.
[1] https://pitchbook.com/news/articles/vc-fundraising-venture-c...
None of the computers were wiped, so we had a look around. My friend’s prediction was spot-on: “I bet you’ll find more porn than business plans on them…”
If the market is really bad, you could see LPs start to default on these capital calls. There are consequences to doing this, so this isn't a likely scenario, but it could happen in a worst-case scenario.
Why does a D2C brand like Casper, for instance, not make a profit? Their physical counterparts are able to turn profits despite the cost of running physical stores.
Or why does a crypto exchange like Coinbase need 5,000 employees?
Because in many tech software companies there are also 5,000 employees, who are bored and over-engineered current tooling and best practices. It’s self perpetuating.
VC land always seems to contain so much absurdity that I don’t know why it suddenly matters, or when it will.
Now, the problem is that if you took the pessimist view at any of these times - you’d have missed the big “wins”. But now we have 100 Billion dollar companies which may not be viable businesses. Few to none of the unicorns ever went down.
Well thankfully there is lots of work that isn’t VC.
On the one hand, I've seen the YC memo which writes as though a big crash is obviously on the horizon, but in daily life, it seems like the economy is still going strong, wages are higher across the board (from tech internships to my parent's retail job). I'm not hearing anyone outside of HN/tech talking about any recession.
Is this downturn in CS/tech jobs a likely outcome or just speculation? Is there anything I should do/expect different to prepare?
Literally a huge swathe of the tech community could just choose to ignore it and they'd go about their business. Sure you could get laid off but that happens in good times too, it's just not as talked about. If your chances of getting laid off go from 3% to 6%, you don't really live your life any differently. Good to be aware it can happen, but mostly just go about your day.
I graduated college in 2008. By 2010 the job market was fine.
I'm assuming that you mean in programming. I don't remember the job market being "fine" for many other industries.
I guess what I'm saying is, you're going to be OK, the bits still need to flow, servers will still need to scale and software won't write itself.
Your first job might not have as large of a salary as you'd like. You should be prepared to job hop a bit and not get too attached. Stay flexible for a bit and don't make life plans that require stability.
Looks like an opportunity to allow the time series to be adjustable at this point; I suspect "Transportation", "Food", and "Travel" will top that "Startup layoffs by industry since COVID-19" for quite some time.
If the S&P falls another 10%, if RE crashes 35%, and tech valuations go to a third of what they were getting in the last two years....so what? That's what things were in ~2019? I bought a house 18 months ago and if it lost 35% of what it's valued now, I'd still be up from when I bought it.
Sky high valuations will definitely kill some companies that were funded in the last two years, but will it affect most of them much?
If Databricks and Discord and Stripe lose a few billion from their valuations, other than some grumpy employees does that kill the company? I don't see how it's cause for a crash...
Its current “Zestimate” is $286k.
My sister bought a McMansion in ‘02, before things got crazy, and it took years for it to regain enough value post- recession to be able to sell it at a profit. At the peak houses in the neighborhood were going for over half a million and they got theirs for ~200k.
A lot of of the problem was the government didn’t let house prices fall and bought up tons of mortgages to keep them off the market for years for political reasons. Really depends on how the government decides to prop up the housing market this time, probably not as much since the whole bubble isn’t based upon it.
Looking back two recessions you have tech stocks going to the moon and basically no bailouts for the people playing the stock market slot machine. IIRC only really Chrysler got bailed out and that was on shaky political ground.
So you have a crash and the government’s response to speculators was “meh” or a crash where the majority of people were bound to lose a whole bunch of money out of their biggest asset and they turned on the money spout to save their jobs. You have to decide on your own which one the current environment more closely resembles to have an idea what the government’s response might be.
Paying rent (because they moved out of the state for school/job) and a mortgage for a house you can’t sell had to suck pretty bad methinks.
[0] perhaps according to Alanis Morissette‘s definition of irony.
You don't have to take my word for it. From 2007 to 2008 inflation crashed from nearly 5% to 0.1%.
I’m not saying they will crash more, they will crash the same amount, back to the price before the boom began.
We live in an era where regulators are toothless and guys like Elon flaunt criminal behaviors. If they get away with that in the open, lord knows what’s happening out of sight.
So you’re just gonna throw that in there just like that, where do you get that from?
https://www.theguardian.com/technology/2022/may/27/elon-musk...
https://www.sec.gov/Archives/edgar/data/1418091/000000000022...
(this ignores the legal yet malicious actions of Musk attempting to have the Cooley LLP law firm employing an ex-SEC attorney previously engaged in matters with Musk fire the attorney through coercion: https://www.cnbc.com/2022/01/15/tesla-asked-cooley-to-fire-l...)
Please look up the context in which the phrase "criminal behavior" is typically applied.
Can we keep HN spirit the same? The same spirit that values geeks, rewards going against the grain and celebrates individuals not based on how society judges them, but on how intrinsically interesting and beneficial their work is to humanity.
If you take a look at this chart you’ll see that corrections bring housing prices back to before the boom. Housing prices will fall way more than 35% in the coming recession and your house will be worth much less than it was 18 months ago.
https://www.researchgate.net/figure/A-HISTORY-OF-HOME-VALUES...
You could end up being underwater on your mortgage, which could be a bad thing if other aspects of your financial situation deteriorate.
So if your financial situation deteriorates to the point where you are forced to foreclose, you lose the equity in the home, but your other assets are protected.
Been through essentially that (it was actually a short-sale in a non-recourse state, not a foreclosure, but in most effects the two are pretty similar.)
So, yeah, because we didn’t rent the new place immediately when we realized that there was a problem but after some period of nonpayment (but before the short sale was finalized), we had to find an individual landlord who managed property directly rather than one managed through a management firm that ran applicants through a hands of screening process before even looking at them (who we found, before the apartment was publicly listed, through an real estate agent who we first contacted because they had listed their house for rent and it was at the high end of what we were looking at, and who we also ended up working with on the short sale.)
Once financial circumstances turned and we were in the market to buy again – within the 3 year period of ineligiblity after a short sale for an FHA loan – we had relatively little problem finding acceptable financing, though we paid slightly higher (but still tolerable) rates, and were able to refinance into better rates a couple years later.
Being underwater on your mortgage is, in and of itself, not too bad. If you also can’t pay the mortgage, that’s bad, because being underwater means you can’t sell the house to get out of it.
OTOH, in a non-recourse state, especailly in a bad economy where you are very far from being alone in that situation (which, statistically, is when it is most likely to happen), there’s a sense in which that is more of a bank problem than a you problem.
Besides that, some people purchase homes to fixup/sell as a way of personal/business income. Others may have purchased just barely in their means and now inflation going up on necessities has pushed them out of their means ... and they need to sell but also can't afford the loss in a declining market. Others may be relying on the value of their home for retirement related expenses.
My point: there are a lot of situations that a declining market makes worse. Depending on how far down it goes, you can see a lot of people hit hard times which can lead to real economic pain for everyone.
In addition, there is a big wave of onshoring coming into the US due to supply chain issues.
Housing price will not fall due to 25% inventory levels from 2008. Also High mortgage locks sellers into their current homes. I predict another 20% rise in house prices (At least nominal rise).
https://www.bloomberg.com/news/articles/2022-05-10/williams-...
Unemployment is almost always lowest prior to a recession. It's exactly an overheated labor market that drives the Fed to tighten and induce a recession to cool off inflation.
Inflation cannot be defeated without driving unemployment up, when labor market is this tight. Wages rising at 6%+ is not conducive to 2% inflation
Given the vast supply-demand mismatch, housing today is generationally underpriced. The simple fact of the matter is that new home construction plummeted after the GFC to levels not seems since the 1930s and it has never recovered. We’ve spent a decade drastically underbuilding housing, while enshrining NIMBY policies making it near impossible to ever pick even get back to pace let alone make up for lost time. Against that we have the largest generation in history aging into prime home buying age.
The people panicking are the ones who bought the house 3 months ago.
In other countries, they are risky if you don’t watch out:
1. RSU vest at $10
2. You have to pay additional income tax eventually of let’s say $2 because of that valuation. (the US and Europe would only hand out shares worth of $8 and withhold the $2 taxes for you. Other countries make this your responsibility and give you the full $10).
3. Stock crashes, your shares are only worth $1 if you would sell them now.
How do you pay the $2 tax from 2., once tax is due, if your shares are only worth $1? Multiply that by 1,000 to 100,000 RSU that vested and you get into difficult decision territory quickly.
Obviously, you can hedge against that by selling the appropriate amount of RSU on vesting day.
I believe the withholding is 22% by default. If you're living in CA and have a large RSU vest, then your actual tax liability is much higher. Friends at Coinbase had an initial $75k (yearly) grant vest at $750k. They didn't sell, and that grant is currently worth $150k. Their 2021 W-2 claims they made much more money though.
In this particular example, I would have expected the employer to withhold the appropriate amount when vested. (The subsequent loss is, ofc., unfortunate, but it's no different than any other investment.)
Now, if their employer didn't withhold the appropriate amount, and they didn't know about it / didn't account for it, and combined with the rather exceptional circumstance of that stock (although… you're in crypto, and you're not accounting for volatility?) … yes, that is going to be a large tax bill. But the type of person here getting this level of a grant ($75k) can most likely cover it[1]. (Though, I do grant that this is exceptional — but that's also part of the point, too.)
AIUI, when this situation applied to me, the idea was that the employer knows that they're in CA, and should thus account for that & withhold appropriately.
[1]: assuming a 30% tax on the vest, that's a $225k bill. The un-withheld portion from your assumptions is $60k; there's still $150k in stock that could be liquidated to cover that bill, or, I presume the type of individual getting a $75k grant is more than likely going to have $60k in savings. If it's 0% withheld, that's $225k - $150k = $60k in savings one would need. We can, ofc., contrive a situation here where that person has $0 in the bank.
And, after vesting, I've always considered any RSU then just … a normal stock. You have to decide whether you believe enough in the company to continue holding it, or if it'd be better off turned into cash &, if you want investments, then just mixing the cash into whatever you normally put your money into.
> Multiply that by 1,000 to [$1M of RSU awards] and you get into difficult decision territory quickly.
I am still on Duck Tales, Larry.
If a company can't adjust equity comp for new employees because they came on at the wrong time, then there's no reason to stay and vest at a bubble valuation. It's like being underwater and being told to just deal with it.
Going anywhere else will get you new RSU grants priced appropriately.
Talk to your manager. If they can't pull the right levers for your retention, you don't owe it to them to stay.
If you take S&P 500, you'll see a period of sustained growth from the late 1940s until the mid-1960s, followed by a period of poor returns until the early 1980s. At least according to one interpretation. Then there is a period of growth until 2000, followed by poor returns in the 2000s. We are currently in another period of growth that started in 2009.
The risk people are afraid of is not a simple crash (like in 2008 or 2020) but a lost decade or 15 years. It's a plausible scenario, as such things do happen. On the other hand, the current period of growth is the shortest of the three, so maybe the growth is still sustainable and there are many good years ahead of us.
And for an even wider context: The US has been stable and prosperous for over 150 years. That's a long time by the standards of historical empires. Maybe Pax Americana is over, and we are now starting the decline towards our version of the Crisis of the Third Century. If you are working age, there is a nontrivial chance of that happening in your lifetime.
If by the end of the year things are 'reset' to ~2019... that sucks for some investors, it sucks for people who got options grants in the last couple years, it might negatively affect the job market some, but it's not doom and gloom. Four years ago was a perfectly workable amount of capital, reasonable valuations, decent salaries, etc.
- Technological progress has increased worldwide interdependence, to the point of destroying resilience. The world is one vulnerable system now to a much larger extent than any time in the past. Think Ukrainian grain exports to the North Africa. Hundreds of millions have grown to rely on that. Hardly even technologically possible 100 years ago.
- Physical limitations to economic growth. Technological progress has made humans increasingly expert at exploiting natural resources on an ever larger scale. The same cannot be said of management of negative externalities. In other words, we can probably manage peak oil. Peak water? Less so. Global warming? Do you see a way out of that?
Even the regions that are most affected by it and could do things to better prepare, are carrying on as business as usual. Yes, heatwaves kill a few hundred people, but apparently that's "fine".
Ambitionless short-term local-maximum thinking rules the world.
People who aren’t familiar with the underlying fundamentals of the housing market assume the Covid boom was a RE bubble. In reality it was just demand getting pulled forward. A generation of new entrants played musical chairs to grab a house before the supply ran out. 28-year olds who were waiting until they were 35, moved out of city apartments to grab suburban SFHs because they were afraid of being priced out of the market forever.
Those same people, sitting on cheap mortgages, aren’t going to sell their house to move back to the city, just to buy a house again at a much higher price in a few years. Covid compressed 7 years of price appreciation into 2, but these prices are the new normal.
[1] https://www.freddiemac.com/perspectives/sam-khater/20210415-...
Massively annoying to hop on Zillow and see how many homes sold for $N in '20/21 get re-listed for $2*N a year later. But you're likely right though. It'd take a depression to reset anything back to '19/20 pricing now that everyone got addicted to listing their homes for 2x the $/sqft and being rewarded with people throwing cash offers in their face with no inspections.
And it really isn't going to get better. You've also got cash flush boomers making their economic exit to retirement-land who will continue this problem.
I’ve had similar thoughts, but then I realized there’s substantial inflation that seems to be sticking around for the foreseeable future. So even though certain assets I have are where they used to be 2-3 years ago, that’s in nominal dollars, not real dollars.
Directionally I agree with the post. Relative to a few months ago, there's more fear, and a much bigger emphasis now on cash efficiency, lower burn rates, etc. That said, I'm less pessimistic than the author and have different takes on a few of their points:
Point 2: "VC funds have new investment periods of 5-6 years" -- it's more like 1.5-3 years these days. Which means that LPs can back an existing VC's new fund in 9 or 18 months, and that new fund will have lower entry prices and higher ownership. A lot of established LPs I've talked to appreciate that downturns can be the best time to deploy a new VC fund. I do agree with the author's conclusion that funds might shrink in size, and many funds -- especially less established ones -- will shut down. But I believe there will continue to be lots of capital available, especially at earlier stages.
Point 3: "The compensation for software and business people will drop commensurately" -- this is the point I'm least certain about. Startup salaries have risen quickly in response to FAANG salaries. Once Google and FB started offering $400k and $600k total comp to sr engineers, startups raised their offers significantly as well. This is part of what's contributed to much bigger seed rounds in recent years: you now have to raise $4m to pay for your team of 6 in SF, instead of $2m. And if Google stops paying $400k and starts paying $250k then I do think startup salaries will drop as well. But if Google et al keep paying high comp, then I don't think startups will have much of a choice, and I think overall software comp will remain high.
Point 4: "VCs will invest more in convertible debt" -- maybe. There are benefits to debt, which the author outlined, but also drawbacks. I think most investors who write big checks will still prefer equity rounds. I do think employee equity and options will start being rebased, which we're already seeing: https://pitchbook.com/news/articles/instacart-valuation-groc...
Point 5: "Some sectors will really suffer" -- I agree with this. Here's a good take: https://twitter.com/lessin/status/1531713953293668352. Basically if a business model depended on the availability of cheap, abundant capital, then that business model will be hard to raise for in the near future. I think pure software companies will continue to attract capital at healthy (but lower) valuations.
One big difference between today and 20 years ago is that you can build a real internet business with a small team. While valuations exploded in the last 2-3 years, it was not uncommon before then to see a startup raise $2m-$3m and get to $60k or $100k MRR. And that's a great run rate for a company with half a dozen people. Your burn with 6 people and $100k MRR is probably minimal, and your dependency on future funding is low.
...as opposed to the rank and file who are now worrying about paying their bills?
how come high inflation did not happen earlier?
Lots of handwringing, but sell-off of last 3-4 months has been extremely localized to growth tech. All the rest pretty OK. It's just that wall street whales no longer have an appetite for speculation, and they pulled out fast and hard.
This speculative money is going to return at some point (6 months, 2 years (?)), ironically likely to the same companies that saw 50% valuation cuts this year.
Since 2009, US interest rates have been rock bottom and QE largely stopped recently before COVID ended. That's because the economy was largely back on track . The Fed's plan was to start pulling the fictitious money out of the system by selling off those corporate bonds and around 2019 markets started to wobble. COVID forced everybody to print money again, but this time too much money was printed and people threw money at anything. Now that COVID isn't affecting the economy as significantly, travel, etc.. There is now out of control inflation somewhat related to supply shocks but also greatly exacerbated by cash in hand buyers looking to spend regardless of the cost.
Now the fed has the opposite problem from 2009/2020 so they have to start making money more expensive again and start to extract money from the market once again. This is scaring the hell out of equity markets because there's less cheap money to help juice speculation and cheap expansion (think all the Ubers of the world who don't make enough money). Their business models start to go down south when there's no new bank to cover their largesse.
- Low interest rates for years made money cheap (drives debt and stock market)
- Stimulus during 2020 & 2021 has thrown an immense amount of cash into the economy
Housing will take a 30% haircut, and we'll probably see some of the over-extended corporate debt come to roost as well. But tech is going to be fine, and crypto will bounce back by EOY.
sometimes the crowd is right
we'll see
Even if that's the case, it will only change the ROI of big VCs from like 4,000x to "just" 1,000x. Boo hoo. (Edit #1: Ok, this is hyperbolic but you get the idea).
Similar to BTC, if you bought at 0.01USD you're still making a killing, even with the recent dip.
If you bought at the top though ...
Edit #2: Turns out I was spot on w/ the 4,000x figure, https://brandondonnelly.com/2019/05/10/5599/
BTW, YC's ROI is on the order of 50x-100x by my guesstimate (0.5B invested in ~3,000 companies, ~10% stake on a market valued at 400B before the dip); open to discuss it.
They might make that on a single investment, sometimes. But that covers the ones they lose money on.
If houses lose 30% of their value, a substantial amount of people would be underwater and would likely be better off walking away. Could be very bad.
Most people will not go underwater (not that many people, proportionally speaking, bought in the last 2 years), but either way, there's zero chance anyone's walking away if it's their primary residence. What are they going to do, live in a van down by the river?
Rent?
All the folks that are pretty much capped out on their debt with their new mortgages should be a great position going forward because they're locked in with their 2-3% mortgages and interest rates (and/or market returns) should surpass that.
When the choice is pay for gas to get to work or feed the kids nobody cares they are benefiting on their 30 year mortgage because of inflation.
What if you just want to... you know... live in a house? In that case you just live in it, service the mortgage, and wait.
You could go bankrupt, but then you'd have a hard time finding a rental place for the same amount that'll accept people with very low credits scores.
That would only be true for people who did cash out refis, not for someone who just wanted a lower interest rate. All they did was re-amortize their current existing loan (on a house that they already had equity in) and get a lower rate.
I don't have the raw numbers, they're almost all paywalled off, but you can see the recent volume of refi has been a multiple of each quarter from 2013 through 2019.
https://www.attomdata.com/news/market-trends/mortgage-origin...
The total outstanding residential mortgages today are roughly $12T. Since 2020 onward, over $5T in volume has been refinanced. That's a large portion of the population with a mortgage that is very early in its lifespan.
https://www.statista.com/statistics/205946/us-refinance-mort...
How do you figure? Refinancing does not, in most cases, mean taking additional equity out, thus LTV should not change for the majority of refis.
https://www.housingwire.com/articles/cash-out-refis-reach-1-...
Cash out refis accounted for ~25% of all refinances in 2021 (roughly similar numbers in 2020). Remember at the start of the pandemic many people tapped their equity because of uncertainty and extremely low rates.
Also the Fed has already said that they are going to raise rates much higher than 75bp. And in fact they have to to control inflation. Interest rates should be above eight or 9% right now and it’s not.
Sell to get some cash after the April tax bill and then take a vacation in June/July after the kids are out of school.
Where do people get ideas like this from?
It just seems so completely disconnected from any kind of conventional economic policy that it is hard to understand why someone would say it.
https://en.m.wikipedia.org/wiki/Taylor_rule#The_Taylor_princ...
I believe my parents had a 17% interest rate on their mortgage back then.
Long-term, high levels of unemployment are a nightmare.
I wonder if you actually think there’s a way out of the mess that’s been created over the last 14 years?
Depends on which side of the life begins at conception/birth debate you're on ;)
I took your suggestion as suggesting the fed should bump the rate up to nearly 10% in one go, with no warning, which isn't what they did back then.
I also think the artificially induced recession wasn't even necessary. It's more likely that Regulation Q reform is what actually ended that inflationary period.
> Housing will take a 30% haircut, and we'll probably see some of the over-extended corporate debt come to roost as well
What, then, is a correction?
Valuations are too high so a "30% hair cut" is warranted, but something like "ninja" loans or IPO'ed tech companies with 0 revenue isn't a thing right now.
There were market wide fundamental issues that cause huge shifts. This simply missing this time. The VC space isn't wallstreet and it definitely isn't mainstreet. Even if a crypto+vc crash happened, we'd only be in "haircut" not full on crash as a general populous.
By the end of 2023 things should have gotten very exciting.
Does it rhyme with sockchain?
Oh no, downvotes. Shocking.
But even though I do see value in BTC, it is hardly going well, and I don't mean the price.