Start-up Tea Leaves
A lot of stuff is simmering, perhaps boiling too rapidly, and the steam is thick. Which means that, when it comes to startups and the investors in them, volatility is at an all-time high. In recent days I’ve been struck by the following:
1. Lots of talk about commodities and crypto, while private capital – including angel and venture – continues to muscle up like it’s on steroids. Private capital topped $10 trillion last year and Goldman Sachs predicts that it could triple in the next five years. Which means that money continues to be shoveled into traditional and new-style venture funds as well as angel investment. So the money is there, and in the last few years, it’s been appearing in the EU, mostly in the form of unicorn investments – a hopeful sign that we’re attracting more attention from stateside investors.
2. And the ‘who’ of venture investing is evolving rapidly (after 40 years of mostly follow-the-leader approaches to a static business model). Along with floods of new money have come a younger, less hidebound generation, many of whom are addressing the lack of inclusion in the knowledge economy (most impressive and gratifying has been the ascension of women entrepreneurs and investors), as well as a willingness to try on new hats, including solo capitalists, operator angels, SPVs, and party rounds, to name a few recent approaches.
3. My talks with stateside venture investors lately have had that ‘whistling past a graveyard’ feel. Yes, there is still too much money chasing too few good deals, and startups are feeling their oats, having given up their begging cups in the last few years. And top deals are still attracting crazy valuations. But there’s a pullback, a sense of caution, a gnawing worry that the market peaked in 2021. The US Fed has gone from printing money to raising interest rates, the war (and Covid in China) have further messed with supply chains, and inflation has returned like Godzilla. Fund managers responsible for the 2017-2020 vintage are sucking their teeth, realizing that the good times may be good and gone. Market corrections will be painful for all concerned; remember that high valuations also shift risk to the company and its shareholders as well.
4. That said, the stalwarts of the industry (from industry founders Kleiner and Sequoia to younger members of the establishment like 16Z and Founders Fund) have sniffed the air and raised huge new funds to address what they think will be the next trillion-dollar market, what is being called ‘Level 3’ internet. Everything crypto is going to be gangbusters, especially the new tools to manage all aspects of the forthcoming financial layer of the internet — tokens, coins, and meme currencies which they predict will translate into another major disruption of everything from credit cards to fiat currencies, the promise being more transactions with less friction and less cost, when digitization finally catches up to transactions, increasing the diversity and the velocity of money (Lightning Labs being an early case-in-point).
5. Which means that it’s happy days if you’re a volatility investor, not so happy if you’ve got a nest egg and inflation has begun to compromise your hard work. Founders have a bunch of new obstacles – logistics, availability of component parts as well as key talent, increased cybercrime and phishing, and access to markets – to go along with all the usual challenges of growing a business. You can’t exactly hunker down, however much you’d like to. Andy Grove, founder of Intel, always advised that being paranoid was a good thing, that it was a hedge against complacency. In that vein, I encourage you to read the following thoughtful tweet thread – what I hope is an especially paranoid reading of the current circumstance:
Michael Karnjanaprakorn may be a Cassandra. He may also be right.
Educator (Associate Professor) / Entrepreneur / Leader of angel
communities /Entrepreneur in residence at PorterShed
and BioExcel / Rarosenberg@gmail.com