Key Moments
E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more
All-In PodcastKey Moments
Recession deep dive: VC psychology, macro risks, Tiger Global, and market predictions.
Key Insights
The current economic downturn is characterized by rapid asset deflation, driven by the withdrawal of capital injected during periods of near-zero interest rates.
A significant destruction of global wealth (14% in five months) is approaching the scale of the 2008 crisis, but is more broadly affecting all asset classes.
While the consumer has held up relatively well, rising interest rates, surging consumer debt, and falling real wages are major risks for the coming months.
Mega VC funds face challenges in returning capital due to the difficulty of finding enough 'mega winners' to justify their large fund sizes.
Founders and employees need to understand 'preference stacks' and re-evaluate startup valuations to manage expectations and protect equity value.
The market is shifting towards a greater emphasis on profitability, free cash flow, and sustainable growth, with 'disqualifiers' like low gross margins and high customer acquisition costs becoming fatal for startups seeking funding.
THE WHIPPING WINDS OF ECONOMIC SHIFT
The current market downturn is described as a rapid deflationary spiral, a "whooshing sound" as capital is withdrawn from an economy previously flooded with liquidity. This was largely enabled by near-zero interest rates following the pandemic, which inflated financial assets across the board, from stocks and crypto to startups. The subsequent aggressive interest rate hikes by central banks have reversed this trend, leading to a swift and widespread collapse in asset values, impacting nearly every market segment.
WEALTH DESTRUCTION ON AN UNPRECEDENTED SCALE
The scale of wealth destruction is staggering, with approximately 14% of global wealth lost in just five months, approaching the 19% seen during the 2008 financial crisis. Unlike 2008, which was primarily centered on financial institutions and specific assets like mortgage-backed securities, the current correction is impacting all asset classes-crypto, credit markets, equities, and potentially real estate. This broad-based impact means more individuals are directly affected by the market's decline.
THE CONSUMER: THE NEXT SHOE TO DROP?
While the financial markets have experienced a sharp correction, the consumer has largely held up, supported by low unemployment. However, several factors point to a potential consumer slowdown. Rising interest rates are making mortgages and car loans more expensive, credit card debt is surging to decade-high levels, and real wages have fallen due to inflation. These pressures suggest that consumer spending, a key economic driver, could be significantly impacted in the near future.
VC PSYCHOLOGY AND THE DRY POWDER DILEMMA
Venture capital firms are sitting on an unprecedented amount of "dry powder"—capital raised but not yet deployed. However, the psychology has shifted dramatically. Mega-funds, having deployed capital rapidly at inflated valuations, now face the challenge of deploying new capital at much lower valuations. This creates a dichotomy between experienced VCs who can adapt and newer investors who may struggle with the psychological toll of a down market and potentially poor portfolio performance.
PROTECTING EMPLOYEES AND FOUNDERS IN A DOWN MARKET
Founders and employees in startups face significant uncertainty. Understanding the 'preference stack'—the rights of preferred shareholders to get their money back first in an exit—is crucial for employees evaluating stock options. Valuations are being reset, and it's vital for founders to have realistic conversations about burn rates, runway, and potential down rounds. Repricing options and creating employee carve-outs in acquisition scenarios are potential mechanisms to retain talent and ensure equitable outcomes.
THE NEW DISCIPLINE: FUNDAMENTALS OVER GROWTH AT ALL COSTS
The venture landscape is shifting from a focus on hyper-growth to sustainable fundamentals, profitability, and free cash flow. Startups with moderate growth and high burn rates are becoming unfundable. Key metrics like gross margins, customer acquisition cost (CAC) payback periods, and burn multiples are under intense scrutiny. Companies that demonstrate strong unit economics and a clear path to profitability will be better positioned to navigate the downturn and secure capital, while those that don't risk becoming obsolete.
TIGER GLOBAL'S STRATEGY AND THE MARKET CORRECTION
Tiger Global's aggressive investment strategy, characterized by rapid deployment of capital into late-stage private tech companies based on public market valuations, is highlighted as a case study in the recent downturn. The firm's significant losses and rapid depletion of its latest large fund underscore the risks of chasing growth at inflated prices. This approach, while effective in a bull market, proved vulnerable when public market multiples compressed dramatically, leading to significant markdowns.
THE FED'S DILEMMA: INFLATION VS. RECESSION
The Federal Reserve faces a challenging dilemma: combatting persistent inflation while simultaneously trying to avoid triggering a deep recession. Historically, central banks have had more 'dry powder' in terms of interest rate flexibility during downturns. However, with current rates still relatively low and inflation high, the Fed's options are limited. This precarious situation raises concerns about the efficacy of monetary policy in navigating the current economic landscape.
THE UNCERTAIN PATH TO MARKET BOTTOM
Predicting the market bottom is difficult, with various indicators offering conflicting signals. One perspective suggests that a substantial amount of share turnover is necessary for a true market bottom, indicating that the current correction may not be over. The market's rapid shift from a 'cash game' to a 'tournament' environment signifies a fundamental change in risk appetite and investment strategy, with survival and discipline becoming paramount.
THE LONG-TERM IMPLICATIONS OF FREE MONEY
The era of 'free money' and quantitative easing has had profound effects, contributing to asset bubbles and distorting economic signals. The current austerity measures and the need to deleverage the system present a significant withdrawal period. This reset highlights the unsustainability of excessive money printing and the importance of productive economic activity, such as creating goods and services, rather than solely relying on financial speculation.
RECRUITING AND TALENT IN A CHANGING LANDSCAPE
The dynamics of the job market are shifting. While the 'great resignation' fueled a period of high demand for talent, layoffs are becoming more common in the tech sector. Companies that were previously offering multiple offers for every role may now see a more balanced market. This contraction in hiring and potential for layoffs forces a reassessment of employee value and company stability, impacting the attractiveness of specific industries and roles.
THE RETURN OF FUNDAMENTAL BUSINESS PRACTICES
Startups are now being forced to focus on core business fundamentals like profitability and cash flow, rather than solely chasing growth at any cost. This includes raising prices where feasible, optimizing operational expenses, and extending runway. The ability to adapt to this new reality, making difficult decisions like layoffs or cost-cutting, will be critical for survival and future success in a more disciplined market environment.
Mentioned in This Episode
●Companies
●Organizations
●Concepts
●People Referenced
Startup Survival Guide in a Downturn
Practical takeaways from this episode
Do This
Avoid This
Key Market Comparisons: 2008 Financial Crisis vs. Current Downturn
Data extracted from this episode
| Metric | 2008 Financial Crisis | Current Downturn (as of Q2 2022) |
|---|---|---|
| Global Market Value Destroyed | 19% of global wealth | 35 trillion (14% of global wealth in 5 months) |
| Affected Assets | Mainly mortgage-backed securities, some credit markets, financial stocks | Literally everything: crypto, credit markets, equity markets (NASDAQ in bear market, S&P flirting) |
| Consumer Home Price to Income Ratio (Median) | 5x | 7x |
| New Consumer Credit (Monthly) | Not specified, but lower | $60 billion (highest increase in over a decade) |
| Real Wages Change (Past Year) | Not specified | Fell 2.6% (against 8% inflation) |
| Fed Funds Rate (Start of Crisis) | Around 5% | Around 1% |
Venture Fund Performance (1994-Present): Funds Over $1 Billion
Data extracted from this episode
| Category | Total Funds Existed (> $1B) | Funds Returning > 2.3x |
|---|---|---|
| Private Equity/Growth/Venture Funds | 1276 | 22 (under 2%) |
Startup Funding Criteria in Downturn
Data extracted from this episode
| Metric | Fatal for Funding | Acceptable / Ideal |
|---|---|---|
| Growth | Not growing | Doubling year over year (early stages) |
| Gross Margins | Negative or low | At least 50% |
| CAC Payback | Unknown or long | 1 year or less |
| Burn Multiple | Over 2 (burning >$2 to add $1 growth) | 1 (burning no more than net new ARR) |
Common Questions
The market crash was largely caused by the Federal Reserve making interest rates zero and flooding the market with capital from 2018 up to late 2021. This inflated financial asset values, but when rates were hiked and quantitative tightening began, all that capital rushed out, causing bubbles to deflate rapidly.
Topics
Mentioned in this video
Discussed as the central bank that made interest rates zero and printed money, leading to asset inflation and later causing major market deflation by hiking rates and initiating quantitative tightening.
Cited as the source of an article detailing Tiger Global's significant losses and rapid deployment of its latest venture fund.
Cited as the source of an article on surging consumer debt.
Featured in an anecdote about a startup closing a deal just before Dara Khosrowshahi's cost-cutting memo, and also noted for its CEO stating hiring is a luxury.
Mentioned as a company with significant cash reserves ($2.3 billion) but a much lower market cap ($3.7 billion) and enterprise value ($1.4 billion), highlighting market undervaluation.
Mentioned in the context of Elon Musk's use of convertible debt in 2016 as an 'escape velocity moment' for a career.
Flagged as a 'COVID stock' whose market cap is now trading lower than its last private market valuation, illustrating the problem of inflated public market signals.
Described as an 'incredible company' critical to gaming and 3D but whose stock fell 35% and is trading at 4x revenue, demonstrating market underperformance.
Mentioned as one of the companies whose employee RSUs have plummeted due to the market downturn.
Mentioned as one of the 'COVID stocks' that got heavily hammered in the market downturn, contrasting with B2B stocks which performed better initially.
Praised for consistently raising smaller funds (e.g., $450-500 million) which is seen as the optimal size for venture capital success, in contrast to mega-funds.
Referenced as an example of a difficult early stage to get into for startups, contrasting with later, easier funding rounds.
Mentioned for floating the idea of using convertible debt instead of margin loans for Elon Musk's acquisition of Twitter, highlighting the tightness of the credit market.
Used as an example of a 'perfect company' with a $50 billion valuation which VCs are trying to overfund, despite potentially making suboptimal decisions for the company.
Cited as a company built during the Great Recession, which raised money from Microsoft at a lower valuation after the GFC took hold, enabling it to compete effectively.
Mentioned as an investor in Yammer during the Great Financial Crisis, marking a significant funding event.
Mentioned as having a new 'vibe search' product, which is seen as an example of a trend catering to a lifestyle enabled by 'free money,' which may not be sustainable in a downturn.
A hedge fund and venture capital firm that lost about 45% of its hedge fund value by end of April, and whose venture vehicle deployed two-thirds of its $12.7 billion fund very quickly, indicating exhaustion of dry powder.
Noted for its market cap trading below its last private market valuation and having $6 billion in cash but a $12 billion market cap, indicating significant undervaluation.
Referenced for its stock options given to early employees and later as a company that underwent a 'down round' during the GFC, accepting a lower valuation to strengthen its balance sheet.
Criticized for the Federal Reserve's handling of inflation, particularly his initial 'transitory' comment and late reaction to rising inflation, which contributed to the current economic crisis.
Highlighted as an economist who correctly predicted that the administration's spending would lead to inflation, but whose advice was not heeded.
Cited for his statistical insight on market bottoms, suggesting that a lack of turnover in shares indicates more decline is likely before a true bottom is found.
Highlighted as an investor who consistently advocated for smaller fund sizes (e.g., ~$550 million for Benchmark) over large, multi-billion-dollar funds to optimize returns and avoid the difficulties of generating mega-winners.
Criticized for focusing on Ukraine over domestic economic issues and for policies (like emergency relief spending) that contributed to inflation, alongside Powell, as a 'worst president' in economic terms.
Referenced as 'Zuck,' whose willingness to take a 'down round' for Facebook serves as an example for founders to make difficult decisions during downturns.
Referenced as a benchmark for the stock market, which had a tight correlation with the Fed's money printing from 2018 to late 2021, and is now flirting with a bear market.
Used as an example of speculative assets that people bought with 'free money,' and whose 'flipping for a living' is not considered 'work' in a productive economy.
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