Interview, Fireside Chat, Conference Presentation
E65: VC markup dynamics, Russia/US tensions over Ukraine, Altos Labs raises $3B, Stripe mafia & more
- Launches: Palmer Lucky is launching a syndicate soon, with an unknown timeline.
- Investment Strategy Shifts: The speaker plans to distinguish permanently between long-term investments and short-term trades, avoid taking market losses out on loved ones via spousal check-ins, and acts as a price taker in deal negotiations regardless of market conditions.
- Market Timing and Activity: The bulk of the speaker's firm activity will focus on making new investments over the next 4-5 years, while venture deals are expected to price at more reasonable levels soon as public market corrections trickle down; fortunes are expected to be made in the current down market and collected in the up market.
- Fundraising Constraints: There is a significant disincentive for venture firms to take markdowns for the rest of the year due to pressure to raise the next fund, and crossover investors like Tiger and KOTU have slowed down, placing a pause on the money flooding into venture.
- Valuation Realities: The speaker expects private book valuations to correct, noting previous break-even or loss scenarios, and rejects the notion of perpetual value increases in startups; entrepreneurs are expected to be more thoughtful about achieving right valuations rather than artificial up-rounds.
- Liquidity Timeline: It is expected to take 10-12 years to drive liquidity from startup funding to an exit.
- Shadow Portfolio Risks: If forced to raise incremental funds, the speaker would be unable to run a shadow portfolio at cost basis and would instead focus on ensuring other VCs marked up their deals.
- Geopolitical Outlook: The US is likely not to send military troops to a border conflict with Russia due to lack of historical precedent, though a long-term strategy to keep Russia contained via support for Ukrainian sovereignty is expected; a US-Russia war could cause stock markets to go to zero or become negative, while China is expected to benefit from such conflict.
- Economic Sanctions: De-escalation is expected to occur through economic sanctions and monetary impact, specifically by turning off Nord Stream 2 to impinge on Russia's economy, or by explicitly stating no intention to add Ukraine or Georgia to NATO.
- War Risks: The economic seed is planted for potential conflict this year due to the need to manufacture growth amidst trade issues and supply chain problems, with the risk of conflict already materialized.
- Fed Policy and Recession: The Fed is expected to be more hawkish than anticipated, potentially causing an overcorrection that leads to recession; removing $9 trillion from the system via asset sales will have an enormous impact, and engineering a soft landing is expected to be difficult.
- Recession Indicators: The risk of recession is much higher than a month ago due to the wealth effect of destroyed portfolios slowing the real economy, while rate hikes may act as a leading indicator for post-hike market rallies.
- Supply Chain and Labor: Supply chain issues are expected to cause 20-30% revenue drops in coming quarters but should be worked out by the end of 2023 or early 2024; labor participation rates are expected to remain low as pandemic-era exits from the workforce have not reversed.
- Inventory Trends: Inventory levels rose in Q4 with ameliorating supply chain conditions, specifically in the car and housing sectors.
- Altos Labs Expectations: Altos Labs' technology is expected to reach the "front cover of magazines" this year as science becomes real and commercialized, though the Monte Carlo simulation approach with $3 billion in parallel research is expected to historically struggle with product-market fit.
- Bolt and VC Dynamics: The Bolt company executed a PR strategy to gain awareness by targeting Stripe, creating a "punching up" dynamic; VC responses created a "punching down" dynamic that drew attention, and the decision not to invest in Bolt at a lower valuation is viewed as a mistake.