Key Moments
E73: Late-stage VC markdowns and mistakes, market strategy, Ukraine/Russia update with Brad Gerstner
All-In PodcastKey Moments
Market correction driven by inflation and war; late-stage VC valuations need reset. Russia-Ukraine war escalates with potential for prolonged conflict.
Key Insights
Public market valuations for SaaS and internet companies have undergone a significant repricing, moving from historic highs to normalization or below five-year averages due to rising interest rates and inflation fears.
Late-stage venture capital valuations are severely mispriced, with companies like Instacart seeing massive valuation cuts, signaling a potential wave of down-round IPOs.
Capital allocators are at fault for inflated late-stage valuations, driven by behavioral psychology and a lack of discipline. Crossover funds are reacting cautiously.
The Russia-Ukraine war is a major geopolitical event creating significant uncertainty. The US strategy might be to prolong the conflict to weaken Russia, rather than push for a swift ceasefire.
Economic realities of increased interest rates and persistent inflation necessitate a focus on profitability and sensible growth spend, moving away from the 'growth at all costs' mentality.
The risk of global stagflation is a concern, but the immediate future is marked by volatility. Companies with strong gross margins and a clear path to profitability are best positioned to weather the storm.
MARKET REPRICING AND NORMALIZATION
The conversation begins by discussing the significant repricing of public SaaS and internet company valuations. This shift is characterized not just as a correction but as a normalization back to pre-COVID levels. Historic highs seen during 2020-2021, which were artificially propped up by zero-interest rates and massive fiscal stimulus, were unsustainable. As interest rates normalize towards 2-3% and inflation fears rise, multiples have been compressed, bringing valuations closer to historical averages.
LATE-STAGE VC VALUATION DISCREPANCIES
A key theme is the significant disconnect between late-stage venture capital valuations and current public market realities. Instacart's substantial valuation cut serves as a prime example of this correction. The discussion highlights that many companies funded at peak valuations during the low-interest-rate environment are now facing the prospect of down-round IPOs, where they must go public at a lower valuation than their last private round. This creates significant disappointment for late-stage investors and a challenging environment for founders.
CAPITAL ALLOCATORS AND BEHAVIORAL PSYCHOLOGY
The panelists place blame on capital allocators for the inflated valuations in the late-stage private market. The behavior of crossover funds, which previously invested in private companies before their IPO, has shifted dramatically. Investor and founder psychology, driven by FOMO (fear of missing out) and the pursuit of 'logo-chasing', led to irresponsible investment decisions. The lack of rigorous governance and focus on unit economics, prioritizing top-line growth above all else, has created a market prone to significant corrections.
THE RUSSIA-UKRAINE WAR AND GEOPOLITICAL UNCERTAINTY
The ongoing war in Ukraine is a significant factor contributing to market uncertainty. The discussion explores the US administration's potential strategy, suggesting it may favor prolonging the conflict to weaken Russia and promote instability, rather than seeking a quick ceasefire. This approach carries risks, including potential for escalation, recession, and humanitarian crises like famine. The game theory involves escalating actions from both sides before meaningful negotiations can occur.
SHIFT TOWARDS PROFITABILITY AND CAPITAL EFFICIENCY
In this new economic reality, the emphasis is shifting from rapid growth at any cost to sustainable profitability and capital efficiency. Companies with strong gross margins, healthy contribution margins, and a realistic path to EBITDA profitability are better positioned. Founders are advised to lengthen their runways, manage burn rates effectively, and focus on unit economics. Metrics like the 'burn multiple' (money burned per dollar of incremental ARR) are becoming crucial for assessing a company's financial health and growth strategy.
FLIGHT TO QUALITY AND FUTURE OPPORTUNITIES
In times of uncertainty, investors naturally gravitate towards high-quality businesses with proven business models and strong moats. The market is increasingly distinguishing between companies that are 'default alive' (profitable or with a clear path to it) and those that are not. While the current environment is challenging, opportunities will arise for well-capitalized investors to acquire assets at attractive valuations. The focus will be on identifying companies that can weather the economic downturn and emerge stronger.
CHINA'S ECONOMIC STIMULUS AND GLOBAL SLOWDOWN
China's proactive economic stimulus measures, including tax cuts, signal concerns about its own economic contraction and export-driven growth. This contrasts with the inflationary pressures in the US, highlighting a potential global economic slowdown. The interconnectedness of economies means that a slowdown in China and the US will have significant ripple effects worldwide, impacting inflation and interest rate trajectories.
THE UNCERTAIN PATH TO PEACE AND ECONOMIC STABILIZATION
The path to peace in Ukraine remains complex, with potential for escalation before a resolution. Key negotiation points include Ukraine's neutrality, the status of Crimea, and autonomy for the Donbas region. The role of sanctions and their gradual rollback is a critical element. The broader economic implications, including the risk of recession and potential for further supply chain disruptions, underscore the need for careful economic management and strategic diplomacy.
Mentioned in This Episode
●Software & Apps
●Companies
●Organizations
●Books
●Concepts
●People Referenced
Common Questions
For every 100 basis point increase in interest rates, the valuation of high-growth software and internet companies can decrease by 15-20%. This direct correlation means higher rates lead to significantly lower valuations for growth assets.
Topics
Mentioned in this video
Mentioned as a key platform for customer acquisition for many low-end SaaS companies, where rising input costs can impact business models.
Listed as one of four internet companies that were 'green' (performing well) on an investor's screen, indicating its quality.
Discussed as a rumored IPO candidate whose valuation might be cut in half from $10 billion to $5 billion, illustrating the trend of down rounds.
Cited as an example of a late-stage venture company that experienced a significant valuation markdown, from $40 billion to $24 billion, highlighting the market reset.
Cited as an example of a long-term enterprise SaaS company with significant market moats.
Cited as an example of a long-term enterprise SaaS company that has built enormous moats, indicating strong long-term profitability.
Mentioned as a comparison for Instacart's valuation and as a free cash flow positive company with strong brands.
Highlighted as a poster child for high-priced SaaS businesses that can grow through multiple compressions due to exceptional free cash flow growth.
Mentioned as a strong, emerging behemoth in the enterprise SaaS space, following established leaders like ServiceNow and Salesforce.
Mentioned as an investment firm that is still active in private markets but is re-pricing valuations.
Discussed as one of the better-funded companies in the 15-minute delivery space, but questioning the long-term viability of the unproven business models in this sector.
Named as the lead investor in Reddit's last funding round, highlighting how large institutional investors might become 'price takers' in a declining market.
Mentioned as a high-priced startup whose valuation may not make sense given current market conditions.
Discussed as a company with potential opportunities due to management changes and a shift towards profitability and a marketplace model, but still considered risky by some investors.
Used as an example of a company that raised at a very high valuation ($20 billion) and then went public at a much lower valuation ($2 billion) a year later.
Cited as an example of strong leadership that cut staff massively during the pandemic to reset cost structure and get to profitability quicker.
Mentioned as a comparison for Instacart's valuation, and an example of a company that cut staff during the pandemic to achieve profitability.
Listed as a superior company bought by Warren Buffett and one of four internet companies performing well in the current market.
Mentioned as a critical platform for customer acquisition for many low-end SaaS companies, with rising ad costs impacting their unit economics.
Mentioned as an investment firm that has reportedly pulled back from private market investments due to more attractive public market valuations.
Host who provides insights on market volatility, late-stage venture mispricing, and geopolitical game theory.
Host who discusses venture capital, startup valuations, and critiques US foreign policy regarding the Ukraine war.
A historian and author from the Hoover Institution, whose column suggested the US might want to prolong the Ukraine war to destabilize Russia.
His 'Art of War' argument is referenced regarding Russia potentially constructing a 'golden bridge' to exit Ukraine while claiming victory.
President of France, mentioned in the context of European discussions about embargoing Russian oil.
Announced as a speaker at the All-In Summit, expected to give a Ted-style talk.
Announced as a speaker at the All-In Summit.
Announced as a speaker at the All-In Summit, discussing his DAO for non-profits.
Mentioned as the interviewer of Ukrainian President Zelensky, where Zelensky made a statement about the potential for 'war three.'
US Secretary of State, whose 'doctrine of economic force' is discussed as a new approach in international relations.
Mentioned in reference to his adage 'default alive,' emphasizing the importance of profitability for startups in challenging market conditions.
Guest and investor who provides analysis on market repricing, venture capital valuations, and geopolitical strategies, emphasizing a return to quality and economic factors.
Mentioned as performing incredible software analysis, particularly on dispersion patterns between software companies.
CEO of Snowflake, described as a 'wartime CEO' who prepared Snowflake's culture for challenging times, emphasizing the importance of aggressive hiring and investment during downturns.
A brilliant tech speaker and writer, associated with 'Wait But Why,' announced as a speaker at the All-In Summit.
Mentioned as negotiating to settle a large oil trade in Yuan with China, indicating a shift away from the dollar.
Used as an analogy for a protracted insurgency, with concerns that the US administration might be pursuing an 'Afghan-style' debilitating defeat for Russia in Ukraine.
The country at the center of the ongoing war, discussed in the context of geopolitical conflict, potential peace deals, and the US administration's role.
Discussed in the context of the US sending economic signals, and later for its tax cuts, export-driven economy, and potential for a global economic slowdown.
A region annexed by Russia in 2014, considered a 'fait accompli' by Russia in peace negotiations.
A region in eastern Ukraine discussed as a key point in potential peace negotiations, with Russia seeking some form of independence or autonomy for its Russian-speaking areas.
The current US Presidential administration, whose foreign policy towards the Ukraine war is critiqued for potentially protracting the conflict and seeking regime change in Russia.
A conservative think tank at Stanford University, mentioned as Neil Ferguson's affiliation.
Mentioned as a platform where Brad Gerstner previously discussed market normalization trends.
Mentioned in the context of the United States suggesting Russia should be kicked out of the group.
A think tank that conducted a study on how to destabilize the Russian regime through Ukraine.
Cited as a past example (2007-2008) of a company that raised money with an IPO ratchet, leading to dilution and delaying its public offering.
Mentioned as a high-priced startup whose valuation may not make sense given current market conditions.
Mentioned as a high-priced startup whose valuation may not make sense given current market conditions.
Mentioned as a platform where Antonio made an appearance.
More from All-In Podcast
View all 376 summaries
76 minTwo Legendary Founders: Travis Kalanick & Michael Dell Live from Austin, Texas
81 minIran War, Oil Shock, Off Ramps, AI's Revenue Explosion and PR Nightmare
61 minThey're Opening the Stock Market to Everyone. Here's What That Actually Means
64 min“This is Bibi’s War” - Harvard’s Graham Allison on the Influences and Endgame of the Iran War
Found this useful? Build your knowledge library
Get AI-powered summaries of any YouTube video, podcast, or article in seconds. Save them to your personal pods and access them anytime.
Try Summify free