I'm No Economist #14: 🐦 More Opportunities for Twitter Bragging - VCs Get Their Leverage Back in 2023

Take no advice from me. I'm No Economist

Feb 01, 2023

I bet you're sick of inflation and interest rates talks. How the world has changed after the pandemic, and how that bubble finally popped. Well, I hate to break it to you, but there isn't much left to discuss.

But, I made an effort to try and shed some light onto the markets and see what we can expect this year in the private markets.

In this edition, I brought some data about VC dry powder and the rebalancing of Investors’ supply and startups’ investment demand. It's not looking good for startups, but we needed a market correction.

Investors were being pressured a lot by startups for fast due diligence processes and wire transfers. But VCs got their leverage back, as there are way more startups trying to fill the void of their failed profit goals. If they had profit goals, to begin with.

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Why is VC dry powder piling up?

With the rise of interest rates, it's only natural that risky investments start deaccelerating. These high interest rates environments are great for rent-seekers to maintain the status quo with virtually no risk.

In the U.S. we'll see rate hikes go up to 5% this year and Brazil will keep a steady 13-15% double-digit interest rate - ~~maybe Brazil will devaluate its currency to support its nationalist development agenda, but that's another story. Just remember you read it here first~~.

Not only there's VC money around, ready to be deployed, but my bet is that there's more to come. I've written a couple of pieces on the state of family offices - and LPs in general, for that matter - and since the public markets are tanking, there are not many places left to go get that alpha than the private market’s route.

At the same time, startups are increasingly hungry for cash. Especially those that desperately need the money by the end of the quarter to keep their lights on. Many of them raised rounds in the last 18-24 months when VC deployment windows were so tight.

So, the signals I'm getting are that even though supply exists and will probably increase, demand is way higher now than it was in 2021.

Not because there are more startups and there's more innovation. But because the startups that need capital are the ones in later stages, as seen in the chart below. This, added to the slight change in profile risk of VC managers, leads to a slower investment pace and size.

This is the perfect storm for down rounds, an increase in startup death rates, and an increase in layoffs and tech unemployment rates.

Source: Pitchbook's When Dry Powder Stays Dry

I believe in the nature of a healthy market correction. But I can't help but think that however efficient startups strive to be, if they don't fix their revenue growth rates and, only use their runways to extend their zombie-like operations, it will be a terrible couple of years for innovation.

Sadly, my hope lies only in early-stage financing. A pity, since there are great growth-stage startups that started with amazing projects that are suffering from mismanagement and lack of vision.

Source: CB Insights’ 2022 Global State of Venture Report

What I've been reading lately

I'm reading Atlas Shrugged by Ayn Rand for the first time. It's weird. There are so many parallels with what's going on in Brazil right now that I can't help but notice how timeless that novel is.
How Safe Is Nuclear? - Madi Hilly: Madi again shedding light and making the case for nuclear. I wonder when we'll consider nuclear more seriously

I've been reading a lot about the USD/BRL, and fiscal policy in Brazil under the new (old) populist running the executive power - so I needed some positive news to go about my days...