2022 in Tech/VC, First Half Review

One big reason I wrote down my 2022 predictions at the start of the year was to remind myself just how wrong about the future I usually am. Charitably, you could say that 4 of my 10 predictions have already proven completely wrong by July, and at this pace I’d guess that only 2-3 will be left standing by the end of the year. 

Still, it’s good to take a step back and consider how the world has differed from our (my) expectations over the past 6 months, which has certainly been a very busy period for those of us in the tech and startup ecosystem.

Public Markets

The biggest thing I got wrong was believing that the public markets correction (which was well underway in January) would be somewhat muted and would at least partially reverse by mid-year. That of course was totally incorrect. 

What we actually got was an extended drawdown through mid-March, followed by a brief two week rally, drawdowns through mid-May, followed by a one week rally, then (maybe) a bottom in mid-June.

With the market narrative shifting back and forth in between inflation concerns and recession concerns, it will be very interesting to see if June was really the bottom. Some high quality assets seem like they couldn’t possibly get any cheaper, but I’ve been wrong before.

Speaking about being wrong, in my personal account I made major buys of public SaaS companies in January, March, and May — which was obviously way too early (at least the January & March buys… we’ll see about May). I continue to believe that 10-15x NTM revenues is an attractive entry price to buy and hold the very best and fastest-growing public SaaS co’s, but we’ll see how wrong I end up being.

My prediction: Tech stocks are up 15% from current levels by the end of the year.

Venture

The most fascinating thing that happened in the VC ecosystem is that the entire industry seemed to be in complete denial about the correction until one particular week in May when the entire industry seemed to get the memo all at once.

Normally, one would assume that significant corrections in public markets “trickle upstream” as investors hear from their pals who specialize in the subsequent round of investment that things have changed, and perhaps every round should correct a couple of weeks before the preceding one (e.g. crossover investors get defensive 2 weeks after public market investors do, then late stage investors 2 weeks after that, then mid-stage, then early-stage, etc)…

But this isn’t what happened at all — what actually happened is that public markets corrected at the start of the year, crossovers seized up at around the start of the war in Ukraine, and then everyone in early/mid/late stage VC held their breath until May, at which point everyone published a “how to operate in a downturn” blog post and then went on vacation for the summer. Interesting. Why didn’t the Series D guys tell the Series C guys who then told the Series B guys and so forth?

My guess is the answer is tied to the rise of Tiger et al. Once the big crossover funds went full multi-stage and all the way back into early stage (this includes folks like Insight), this breaks up the game of telephone and instead creates a “fog of war”. The Series B folks used to be able to call the Series D folks for a market check without worrying that they were speaking with somebody competitive to them, but when the Series E folks are writing Series A lead checks, everybody is your competitor! This means market checks are harder because everybody is playing poker* with everybody else. So everyone in venture played the “everything is mostly fine” game until early May when it was time to collectively admit that Good Times RIP.

*(Fun anecdote from the ~March time period: When pitching portfolio companies to other VCs, many of us started saying this funny thing about valuation expectations: “Well, we’re not unreasonable people, we all understand that the macro has cooled somewhat, so we’re open minded about adjusting our expectations.” This was code for “Even though public multiples are down 70%, it would be great if our haircut only ends up being 20%.")

Still, there’s a lot of dry powder out there, and kids go back to school in August, so eventually the check-writing will begin again in earnest.

My prediction: Venture rounds start to get done at a decent pace in September/October.

A rant about “uncertainty”

Brad Gerstner from Altimeter, an extremely smart investor who I respect a lot, said something at the All-In Summit two months ago that made my jaw drop. The relevant clip starts here at 14:08, but I’ve reproduced what he said below:

I think one thing - Bill, not to interrupt - the assumption of the question was, “Will they be forced to deploy capital into a very bad vintage?” Right? I actually think the upcoming vintage is going to start getting real, it’s going to be a good vintage, I think that was Bill’s point, I think we both feel that way. I think the vintage of the last 18 months will be lousy. So the capital deployed over the last 18 months won’t have a lot of return.

All of our LPs know that. I was just sitting with an LP, one of my investors, at lunch today — Imagine this, they have 50 investments like Benchmark and Altimeter, all of them are going down, and now you’re going to call them up and say “I want all this money right now to invest in a bunch of stuff that may not have corrected enough?” These are partnerships, partnership means a partnership with me and with my partners, all the people who gave me my money. We’re not going to put our partners into a headlock and drag their money into the market and put them into things that we don’t think accurately reflect the new world order.

If you want a clear indication of why venture capital industry returns almost always lag the S&P 500, this is it. I’m not criticizing Brad — who has 1000x the investing track record I do — at all, but pointing out that he’s identifying a major structural issue in the venture capital industry that makes it hard for us to do as well as we should.

Right now, prices are depressed. This means that VCs and LPs are doing poorly on investments made in the past 18 months. Because this is an uncomfortable place to be, VCs don’t want to call capital to make investments right now, even though valuations have gotten cheaper, perhaps down to a level where we might be able to make some money by investing. Why aren’t they calling capital now? Well, for one thing, these are uncomfortable conversations to have with LPs which might provoke a review of performance; better to just avoid them. But the other issue that Brad brings up is that pricing is “uncertain” (to be fair, not a word he himself used, but I hear this all the time) — we don’t know if pricing is depressed relative to where it will be in 6 months.

This is a funny way to think about uncertainty. Sure, pricing is uncertain right now. What does that mean about pricing 6 months ago? Well, it must have been more “certain”. And indeed it was — deal pricing was certainly terrible. You knew it at the time, when deals were being priced at 100-200x ARR, that it would take a miracle to make any returns on these deals.

Or, another way to put it is, if you were “certain” that investing in startups at 100-200x ARR was a good returns opportunity, then you were both “certain” and “wrong”.

Either way you look at it, clearly the thing that we want as investors is not certainty — if anything, we want uncertainty, because that’s where the alpha is — yet the incentive structure of the GP/LP relationship actually pushes the industry to make bad investing decisions because of a perverse attraction to certainty. Huh.

My prediction: At some point I will write a blog post about why the winners of the 2020s decade in venture will be evergreen/permanent capital vehicles & family offices, because they are able to mostly sidestep this dynamic.

The biggest determinant of whether cash-burning private company CEOs are sleeping well right now

… is whether they raised a ton of money when capital was cheap, or whether they were so dilution-averse that they only raised small nibbles in the hopes of raising at even higher valuations in the future.

It turns out that if you have infinite runway, not only does the fundraising climate not really matter all that much to you, but the valuation “bar to clear” doesn’t really matter either, because you don’t need anybody else’s money to “grow into it”.

A lot of commentariat is saying things lately like “founders who raised at insanely high valuations in 2021 really shot themselves in the foot”. That’s not exactly right. A more accurate statement would be “founders who raised too little at 2021’s insanely high valuations really shot themselves in the foot”. The best thing to have done, in retrospect, was to have raised meaningfully more than you needed at a valuation that was quite high without being so high that you could never grow into it.

My prediction: Most high profile private companies that raised mega-rounds in 2021 will conduct 10-20% layoffs in 2022, but ultimately end up doing fine, provided that they have product-market fit and revenue traction.

Crypto/Web3

I’m not even going to talk about this, because if I were any more clear on how negative my sentiment is about crypto, some investors who I really like are going to stop hanging out with me. 

But I will make one observation. As recently as 3-4 months ago, it was pretty much forbidden for anyone in the tech/VC ecosystem to say anything more critical of web3 than something that sounded like “sure, there’s a lot of scams out there, but at its core the blockchain is really interesting technology”. More recently, however, post-Celsius/Voyager/3AC/Anchor/etc, it’s more common to see tweets expressing the viewpoint that the blockchain has no value whatsoever. Quite the change in the breadth of the Overton Window, and very interesting.

My prediction: Practically every crypto asset besides Bitcoin gets nuked between now and the end of the year. NGMI.