I don’t have a great argument but this doesn’t seem to match what I’ve heard from other sources and my read of the data. Inflation is still above targets but not getting worse, employment is great (even for software engineers), my understanding is that certain startups like fintechs are having trouble with funding their money bonfires but it sounded to me like funding in general is fine. Even your chart shows VC deals well above where they were in 2020 and basically on the trend line excluding last year.
It really seems to me that the economy is basically fine, even though it’s disappointing compared to the bubble last year.
Yeah, I agree. It does seem like the economy is basically fine. But my argument is that the impact of the VC funding bubble has not actually manifested itself yet.
Consider this logic sequence:
The years leading up to 2022 saw interest rates near zero. This drove a massive increase in capital allocations to Private Equities (Specifically VC but all alternative asset classes benefited from it).
This increase in funding led VCs to make lots of bad investments. This is due to the way fund economics incentivize fund managers to deploy capital so as to realize management fees on them. That could be a post in itself, but suffice it to say the fee structure of VC incentivizes them to deploy capital quickly (this is supported by the data as well which shows fund allocation timelines contracted during the bubble).
These VCs, with much larger funds, made bad investment decisions in the years leading up to 2022 and culminating with a massive amount of capital outlay in 2021.
A lot of the startups that raised capital in 2021 should not, under normal economic conditions, have been able to raise the money they did. Many had unsustainable unit economics, etc. But the previously mentioned incentive structure within VC firms led to that available capital being deployed into less credit-worthy businesses.
When a startup raises VC, they typically raise enough for 24-36 months of runway. Meaning that a “bad business” that was able to raise capital in 2021 would not be expected to fail until 2023 or 2024. This is beginning to manifest itself in the VC community as many startups are beginning to find that they are unable to raise capital at any price. We’re literally at the beginning of the runway cliff.
I don’t have a great argument but this doesn’t seem to match what I’ve heard from other sources and my read of the data. Inflation is still above targets but not getting worse, employment is great (even for software engineers), my understanding is that certain startups like fintechs are having trouble with funding their money bonfires but it sounded to me like funding in general is fine. Even your chart shows VC deals well above where they were in 2020 and basically on the trend line excluding last year.
It really seems to me that the economy is basically fine, even though it’s disappointing compared to the bubble last year.
Yeah, I agree. It does seem like the economy is basically fine. But my argument is that the impact of the VC funding bubble has not actually manifested itself yet.
Consider this logic sequence:
The years leading up to 2022 saw interest rates near zero. This drove a massive increase in capital allocations to Private Equities (Specifically VC but all alternative asset classes benefited from it).
This increase in funding led VCs to make lots of bad investments. This is due to the way fund economics incentivize fund managers to deploy capital so as to realize management fees on them. That could be a post in itself, but suffice it to say the fee structure of VC incentivizes them to deploy capital quickly (this is supported by the data as well which shows fund allocation timelines contracted during the bubble).
These VCs, with much larger funds, made bad investment decisions in the years leading up to 2022 and culminating with a massive amount of capital outlay in 2021.
A lot of the startups that raised capital in 2021 should not, under normal economic conditions, have been able to raise the money they did. Many had unsustainable unit economics, etc. But the previously mentioned incentive structure within VC firms led to that available capital being deployed into less credit-worthy businesses.
When a startup raises VC, they typically raise enough for 24-36 months of runway. Meaning that a “bad business” that was able to raise capital in 2021 would not be expected to fail until 2023 or 2024. This is beginning to manifest itself in the VC community as many startups are beginning to find that they are unable to raise capital at any price. We’re literally at the beginning of the runway cliff.