E73: Late-stage VC markdowns and mistakes, market strategy, Ukraine/Russia update with Brad Gerstner

From roughly March 2022 through at least the subsequent 6–18 months (i.e., through approximately September 2022–September 2023), financial markets will experience high volatility and uncertainty driven by unclear inflation and interest rate trajectories. Over a 5–10 year horizon from 2022, the global economy will not experience persistent stagflation or a new regime of sustained hyperinflation.

“I think it's going to be this period is going to be marked by a lot of uncertainty around inflation and rates until we have more clarity. And what that means is allocators of capital are going to allocate less to risk assets, and they're going to pay less for risk assets. But you know, listen, if I look out over the 510 year horizon, I don't believe in global stagflation. I don't believe that we're in this new hyperinflation environment, but we're going to have to get through this next six, 12, 18 months, and it's going to be filled with a lot of volatility and a lot of uncertainty.” View on YouTube

Starting from late March 2022, broad equity markets will trend mostly upward in the immediate short term (the next few weeks to a few months), after which market volatility will increase again.

“I, I think the markets are mostly moving upwards for the short term. And then I think volatility is going to come back.” View on YouTube

Given the repricing of public SaaS and questions about long‑term profitability, late‑stage private SaaS companies will face significant valuation and financing troubles during the 2022–2023 reset period.

“And so if that's true, then the late stage private SaaS companies are in trouble.” View on YouTube

A meaningful subset of late‑stage private companies in the 2022 IPO backlog will go public at valuations below their last private round (down‑round IPOs) over the ensuing IPO cycle (roughly 2022–2023).

“Some of them are probably going to have to IPO at down rounds. I think that's sort of the takeaway.” View on YouTube

During the 12 months following late March 2022, more than 50% of companies that IPO will do so at valuations below their last private financing round (i.e., they will be down‑round IPOs).

“I think that Saxe's point about down round IPOs. I don't think this is the exception. David. ... The majority of companies that come public in the next 12 months are going out below their last valuation.” View on YouTube

From March 2022 until at least fall 2022, the late‑stage private venture financing market will remain effectively shut for new rounds at prior peak valuations due to a buyer–seller standoff. Valuations will not revert back to the extreme multiples seen in the preceding 18 months; that prior period’s valuation level will not be revisited in the foreseeable cycle.

“Certainly I would say this broadly speaking, the late stage private financing market in venture is closed because there hasn't been. Right. We're in this this buyer seller standoff. ... I just want to be clear. There is no bouncing back to where we were the last 18 months. That was the outlier. That was the make believe.” View on YouTube

Meaningful price discovery for late‑stage private technology companies—i.e., clear, market‑clearing valuations via financings or IPOs—will begin in fall 2022, when more companies are forced to raise capital or go public.

“That's not going to occur until these companies need money or want to go public. That's right. This fall is when we'll start to see real price discovery.” View on YouTube

For late‑stage private companies like those listed (e.g., Gopuff, Canva, Klarna, Discord, Ripple, Grammarly), if operating performance holds and interest rates rise as expected from March 2022 levels, their fair valuations must be marked down by approximately 15–40% immediately; however, if they subsequently grow revenue at a superior rate, they can recover to their prior peak valuations within roughly 18 months of the markdown.

“Here's what you can say if if everything is held equal just with the rise of rates, you have to reset those valuations between probably 15 and 40%, okay, at a minimum minimum. But what Brad said is also true, which is if they then keep growing at a superior rate, they can get back to even so, meaning 18 months. They could also show up again at 40 and be net net a wash.” View on YouTube

Starting in 2022, markets will undergo a prolonged and complex multi‑year process of unwinding the valuation and capital allocation distortions created during the prior 2–3 years of ultra‑low rates and excess liquidity.

“So we are at the beginning of probably a very complicated process of unwinding the distortion that we've lived through in the last couple of years.” View on YouTube

Around 5–7 years after March 2022 (i.e., approximately 2027–2029), public equity markets will again reach a major top characterized by investors repeating the same highly speculative, complacent behavior seen in 2020–2021, with overbidding for high-risk assets far out on the risk curve.

“we'll know we're at a market top five or 6 or 7 years from now, when we repeat the same asinine behavior that we just went through, when everybody becomes complacent again and overbidding this stuff way out on the risk curve.” View on YouTube

Approximately 5–7 years after the 2022 correction (i.e., around 2027–2029), markets will once again reach a cyclical top characterized by investor complacency and aggressive overbidding for the riskiest growth assets, repeating patterns seen in the 2020–2021 bubble.

“we'll know we're at a market top five or 6 or 7 years from now, when we repeat the same asinine behavior that we just went through, when everybody becomes complacent again and overbidding this stuff way out on the risk curve.” View on YouTube

Within 1–2 weeks after March 26, 2022, Russia will increase missile attacks in Ukraine and European countries will implement a complete embargo on Russian oil exports of roughly 3 million barrels per day, with these escalations occurring shortly before formal Russia–Ukraine peace negotiations commence.

“watch the next week or two, like in any good negotiation, unfortunately, I think both sides are going to amp up their current strategies. We may see missiles coming out of Russia, and we may see European, uh, complete European embargo of Russian oil, 3 million barrels a day. Those will be the final straws right before we enter negotiations” View on YouTube

Before Russia and Ukraine enter substantive peace negotiations (post‑March 2022), there will be a significant military and economic escalation by both sides, including a European embargo on Russian oil that collapses the Russian economy and drives global oil prices up to approximately $180–$200 per barrel.

“if I had to guess, we are going to have a period of significant escalation on both sides before they both get to the table. Macron said this week that we still have the Europeans have not made a decision about the embargo of Russian oil that will collapse the Russian economy, and oil will go to 180 or $200 a barrel. I think that's a real likelihood.” View on YouTube

Throughout the Russia–Ukraine war period following March 2022, the Chinese government will refrain from supplying Russia with weapons, prioritizing its economic interests and its 5.5% 2022 GDP growth target.

“China sees this coming and says we're going to get ahead of this. We've got a people's Congress in November. We've promised them 5.5% GDP growth. 3 trillion of that is export driven. That means if Europe and the United States catches a cold, they catch the flu. Okay. So they have to do everything in their power. This is why they're not going to supply the Russians with weapons, right.” View on YouTube

By mid‑summer 2022 (around June–July 2022), the U.S. Federal Reserve will publicly characterize its outlook as seeing a more balanced risk between economic growth and inflation, rather than prioritizing inflation risk alone.

“that's why I think there's also a probability. By the middle of the summer, the fed in the United States is saying we now see a balanced risk between growth and inflation.” View on YouTube