Interview, Fireside Chat
Fabrice Grinda: The First Person to Predict the Collapse of Credit Suisse? | 20VC #886
- Fabrice outlines three probabilistic macroeconomic outcomes: a 20% chance of an optimistic scenario where inflation returns to 2-3% and rates remain low if restrictions end by summer and geopolitical stability returns in Ukraine and Taiwan; a 60% probability of "the great stagnation" characterized by 5-9% inflation, 3-5% interest rates, and eroding real asset values; and a 20% probability of a catastrophic scenario involving double-digit pain, sovereign debt crises, and potential nuclear escalation.
- The most likely "great stagnation" scenario is expected to result in a Latin American-style economic environment with high nominal inflation and low nominal rates, causing years of purchasing power erosion and feeling "yucky" due to the political inability to raise rates sufficiently due to high public debt.
- A "worst case" scenario involving a massive global recession is gaining probability daily, with risks of sovereign debt defaults in Italy, Greece, or Switzerland (due to banks holding off-balance-sheet loans 9-10x GDP), a potential Eurozone blowup, and asset prices falling 50% if rates reach 8-10%.
- Recession is deemed "more likely than not" due to dropping consumer and business sentiment and historical precedents of oil prices exceeding $100, though Fabrice believes technology's deflationary impact and labor productivity gains will create new job categories countering mass unemployment fears.
- Interest rates are anticipated to rise to 1.5% in the coming months and potentially 2-3% later, with a risk of reaching 8-10% or even 20% if inflation expectations become entrenched, necessitating structural deflationary changes like removing NIMBYism or deregulating harbors to prevent a "Volcker 2" era.
- The investment strategy plans to maintain fund sizes between $300-500 million if startup creation returns to the historical median of 5,000 per year, or expand to $1.5 billion if the current high volume of 15,000-20,000 persists, with a decision expected in the next two years.
- Capital deployment will remain aggressive in Seed and Pre-Seed stages due to fair pricing, while larger checks (Series B and beyond) will be deployed carefully if market repricing occurs, with a focus on acquiring top companies at a 50% discount to previous valuations.
- Large institutional investors like Insight Partners and a16z are expected to shift focus to later-stage investments (Series C+) as their size prevents moving the needle on Series A checks, leaving the market for mid-sized checks to smaller funds.
- Long-term confidence remains in Web3, crypto, and the decentralized internet vision despite current price corrections, driven by anticipated institutional allocation over the next decade or two, while the "everything bubble" created by loose policy since 2021 continues to unwind.
- Fabrice plans to continue writing smaller check sizes ($325k for Series A, $725k for Series B) due to the tripled volume of startups, though a raise to $1.5 billion would allow for checks of $1M-4M to avoid running out of capital.
- The optimistic scenario is currently viewed as unlikely by market sentiment, which resembles the negative feeling of pre-2007 or the dot-com crash, yet this environment is seen by Fabrice as a contrarian opportunity to invest.