Podcast, Fireside Chat
E73: Late-stage VC markdowns and mistakes, market strategy, Ukraine/Russia update with Brad Gerstner
- A post-Ukraine war famine is projected to occur later this year if the conflict continues without a ceasefire, driven by potential Russian missile attacks and a complete European oil embargo.
- Market rates are expected to normalize to approximately 2% by January 2020 levels, requiring a reduction in growth multiples from historic highs and a 50% to 60% haircut on late-stage venture valuations to reflect reality.
- Inflation is anticipated to stabilize between 3% and 4% with forward rates rising, leading to 2% negative real rates and a 4.3% inflation rate by year-end, while Citi and Goldman Sachs forecast exit tenure rates of 2.7% for 2022 and up to 3.5% for 2023.
- Asset valuations face a 30% to 40% haircut if interest rates reach 2.75%, with a discount of 15% to 20% required for every 100 basis point increase in rates, forcing most companies going public in the next 12 months into down rounds.
- The next 6, 12, and 18 months will experience significant volatility and uncertainty regarding inflation and rates, delaying real price discovery in private markets until companies seek funding or aim for a public offering in the fall.
- Late-stage private financing markets are currently effectively closed due to a standoff between buyers and sellers over new multiple regimes, necessitating a 5x growth in Annual Recurring Revenue (ARR) to recover higher valuations after compression.
- Investment quality filtering is expected over the next six months, with healthy companies required to be EBITDA positive within the current year or within two years to survive the flight to quality.
- Business models relying on arbitrage from low interest rates, such as neobanks, and low-end SaaS companies are at risk of collapse as customer acquisition costs via Facebook and Google could rise 20% to 40% by 2030 and outpace price increases.
- Public market distortions from the last two years will unwind through layoffs and valuation resets, potentially causing the psychology of companies that undergo down rounds to shift and making talent recruitment difficult.
- Specific companies like Snowflake are predicted to grow free cash flow by over 100% this year and 80% to 90% next year, while Instacart's $24 billion valuation is viewed as a reset that could be either cheap or overpriced by $10 billion.
- The Chinese economy is forecast to enter a recession or contractionary period in Q1 2019 due to global slowdowns, while the US Fed is expected to acknowledge a balanced risk between growth and inflation by the middle of summer.
- The US administration is predicted to prioritize the destabilization of Russia over a quick resolution to the conflict, with Biden administration popularity expected to plummet if the war and recession persist, possibly leading to tax cuts to encourage workforce return.
- Global stagflation is not currently anticipated despite fears of hyperinflation, though investors selecting partners based on highest valuations are now facing a trap until the market returns to a five-year average valuation level.
- Key figures like Putin and Zelensky are expected to exploit battlefield advantages before negotiations, while the US government may escalate rhetoric regarding chemical and nuclear weapons in response to the ongoing war.
- The Federal Reserve is perceived to be behind the curve on recession risks with massive demand destruction occurring in the US economy, necessitating a future reduction in growth multiples.