E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning

In the 30 to 90 days following this Feb 2023 episode, equity markets will rise significantly (a 'pain trade' move up), resembling the end-2018/early-2019 head-fake rally after a Fed capitulation.

“So I think we're about to replay a little bit of that, at least in the next 30 to 90 days. The pain trade is to go up. So that's probably where we're going.” View on YouTube

For calendar year 2023, the U.S. economy is more likely than it was a month earlier to experience a soft landing (continued growth without a formal recession), given the then-current labor market data.

“I'd say that relative to where we were a month ago, you'd have to say that the odds of us having a soft landing this year are quite a bit better than they were just a few weeks ago.” View on YouTube

As implied by the yield curve in early Feb 2023: (1) the Fed funds rate will peak within ~6 months at about 4.75–5.0% with at most one additional 25 bp hike; (2) over the subsequent two years, the Fed will cut rates by roughly 50 bps; and (3) over the long term, U.S. interest rates will stabilize around 3.5%, with no return to a near‑zero interest rate policy like in the 2010s.

“So basically the market is predicting we get maybe one more quarter point roughly not much. And then if you go to the two year it's at 4.09...what the market is actually predicting is that over the next two years, we're actually going to get a 50 basis point decrease from the fed. And then if you go to say the five year or the ten year, we're at 3.5%. So the market's basically saying that long term rates are going to stabilize at 3.5%. We're not going back to the abnormal zero interest rate policy...” View on YouTube

Over the coming years, public SaaS company valuations will not return to the extreme 2021 bubble levels (e.g., ~100x revenue) but will instead normalize around valuation multiples similar to those seen circa 2017.

“And that's why we're never going back to the bubble of 2021, where SaaS companies were trading at 100 times IRR. We're going to go back to an environment more like a more normal one, where valuations are more likely. The 2017 valuations, something like that.” View on YouTube

Between roughly 2023 and 2026 (the next 12–36 months from this episode), venture funds will need to deploy a record amount of previously raised but uninvested capital (dry powder), exceeding any prior 12–36 month deployment period in VC history, unless fundraising/mandates change materially.

“That means there's a lot more cash that needs to kind of be deployed in the next 12 to 36 months than has ever been deployed in the history of venture. If that holds true.” View on YouTube

During the 3–4 years following early 2023, venture capital firms will deploy their existing funds at a pace roughly 3–4 times slower than in the prior few years, leading to significantly reduced annual investment volume per year compared to the 2020–2021 period.

“Yes. There's a record amount of money. Venture capital was raised over the last couple of years, but it's going to be deployed much more slowly and carefully over the next, say, 3 or 4 years, than it was over the previous few years. So divide that amount of money by 3 or 4, because the pace of deployment is going to go way down.” View on YouTube

Over the next several years after early 2023, it will be significantly harder to launch new VC funds, particularly solo capitalist, seed, and micro‑VC vehicles, and many of these small/hype-driven fund types will disappear from the market ('washed away').

“I think it's going to be much, much harder for new funds to get started. All of the, you know, hype around, you know, solo capitalists and you know, all these, you know, seed funds and micro VCs and all this kind of stuff. I think a lot of that's going to get washed away.” View on YouTube

By the end of calendar year 2025, Apple Inc. will have cumulatively returned more than $1 trillion to shareholders via dividends and share buybacks.

“By 2025, Apple will have exceeded $1 trillion of cash distributions.” View on YouTube

Between roughly 2023 and 2028, Meta Platforms (Facebook) will return on the order of several hundred billion dollars to shareholders through a combination of share repurchases and (if any) dividends.

“Facebook now you can credibly see a path where Facebook could chunk out hundreds of billions of dollars of of total shareholder value returned over the next 4 or 5 years.” View on YouTube

In late 2023 and throughout 2024, early- and mid‑stage startups will experience a "mass extinction event"—a wave of failures and shutdowns that, in severity for startups, will exceed the impact they experienced during the 2008 financial crisis.

“There is a mass extinction event coming for early and mid-stage companies late 23 and 24. Make the 2008 financial crisis look quaint for startups.” View on YouTube

Of the roughly 5,000 seed (raising $2.5–5M) and Series A/B companies funded in the four years prior to this episode (circa 2019–2022), approximately 50% will ultimately go out of business, with most of these failures occurring as the late‑2023 to 2024 funding crunch unfolds.

“We estimate 50% will go out of business. Loss ratios in the last seven years have been artificially low due to excess capital.” View on YouTube

Across the current startup cohort funded during the recent bubble period, the eventual failure (mortality) rate will revert to roughly 50–60%, similar to the post‑dot‑com bust era.

“We have to go through what's called mean reversion right. We have to go back to the historic statistical average, which means that a 50 to 60% mortality rate seems pretty reasonable.” View on YouTube

In the second half of 2023 and throughout 2024, there will be a major funding crunch for startups: many companies that delayed fundraising will hit low cash levels and be forced to raise in a much tougher funding environment than in prior years.

“this tweetstorm is predicting, is that in the second half of 2023 and then 24, you're going to have a huge crunch where all these companies have to go out and raise. They've been waiting, so they're all going to get to the point where their cash is so low they have to go out and raise, and now all of a sudden they're going to be confronted with the new market conditions.” View on YouTube

In the second half of 2023 and throughout 2024, there will be a major funding crunch for startups: many companies that delayed fundraising will run low on cash, be forced back to market simultaneously, and then confront much tougher funding conditions, leading to widespread down rounds, recapitalizations, or shutdowns.

“This tweetstorm is predicting, is that in the second half of 2023 and then 24, you're going to have a huge crunch where all these companies have to go out and raise. They've been waiting, so they're all going to get to the point where their cash is so low they have to go out and raise, and now all of a sudden they're going to be confronted with the new market conditions.” View on YouTube

Startups that have venture debt as an overhang will discover, during the upcoming funding crunch (2023–2024), that their actual runway is shorter than planned because venture lenders will move to collect their debt before the startups fully run out of cash.

“Those ones. Yeah. And they're going to find they have less runway than they thought. Because again those banks you know, they are going to try and collect the debt before they start running out of money. Not, you know, when it runs out of money.” View on YouTube

In the second half of 2023 and in 2024, the startup ecosystem will experience widespread down rounds, restructurings, and recapitalizations as part of a major funding crunch.

“the crunch is going to happen second half of 2023 and 2024. That's where you're going to see the down rounds. That's where you're going to see the restructuring, the recaps and all the rest of it.” View on YouTube

SaaS public-market valuation multiples (enterprise value / next-12-months revenue) will eventually revert upward to roughly their long-term median of about 8x, but will stay well below the ~16x levels seen at the 2021 bubble peak.

“even if we revert all the way to the mean of eight, which I think at some point we will, that's still well below the bubble of 21 where they got to 16.” View on YouTube

SaaS valuation multiples will not return to the elevated 12–16x EV/forward-revenue levels seen during the 2021 bubble, at least for the foreseeable future.

“And if you think it's getting back to 12 or 16, it's not not happening is not happening.” View on YouTube

Outside of a scenario where interest rates return to roughly zero and capital is again forced into risk assets, public tech/ growth-equity valuation multiples of the magnitude seen in 2021 will not reoccur; the lower multiple environment observed in early 2023 is likely the new normal for an extended period.

“I think the reliable way that we can look at this for the future is that we're never going to see these kinds of multiples again, unless rates are zero and all kinds of tourist capital. Need to find a home to escape? 0% returns in every other asset class.” View on YouTube

Over the roughly 18–24 months following early February 2023 (i.e., through mid-2024 to early 2025), operating conditions will be very difficult for many startups, with significant stress such as layoffs, down rounds, or shutdowns.

“Yeah. There's going to be a lot of that I think the next 18 months or let's say the next two years, it's going to be pretty rough for a lot of companies.” View on YouTube

There is a high likelihood that the overall U.S. (or global) economy will enter a recession at some point later in 2023.

“I still think there's a really good chance of recession later this year, but it almost doesn't matter for you.” View on YouTube

For the foreseeable future beyond early 2023, capital availability for startups will remain structurally tighter and more constrained than it was in 2021, and will not revert to 2021-style easy funding conditions.

“What matters is your business and the capital availability for startups, which is fundamentally different and will remain different than it was in 2021.” View on YouTube