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Markets Retrace Their Steps

• Throughout January 2022, US stock market indices gave up nearly a year of gains.
• The tech-heavy NASDAQ Composite index closed on January 28th at 13,770, down nearly 14% from highs set in November 2021.
• Why?
  • Nearly a decade of expansionist monetary policy is likely coming to an end.
  • Inflation is at its highest level in the past 40 years.
  • US Federal Reserve chair Jerome Powell signaled intent to raise interest rates in an effort to reign in inflation. (Goldman Sachs anticipates 5 rate hikes in 2022, expecting rates to hit between 1.25-1.5% by year's end.)

What could this mean for the VC market?

• Historically, higher interest rates give more conservative investors a path toward a more risk-off strategy, diverting capital from alternative asset classes like venture capital or private equity
  • Higher interest rates lead to a higher discount rate on future cash flows, which could depress equity value today
• That said, it still feels like investor risk appetite is close to all-time highs. (Might not be quite as hot as it was in Q2-Q3 2021, but still...)
• Jason's conjecture: If we're going to see a significant decline in either check size or deal volume, it's probably going to come at late-stage first. So much value is locked into late-stage unicorn companies, and with the IPO market cooling down and a dwindling pool of entities which could afford to buy these companies, we can probably expect investor trepidation to hit late-stage first.

Some Reading

• The Great Deflate (M.G. Siegler, on his blog 500ish)
  • Excerpt: "As such, I might suggest that for the 20th year in a row, we’re not going to see a tech bubble burst. Because it’s not and never was a bubble. Instead, perhaps it’s best to think of it more like a balloon. And while those too can pop, they can also deflate over time. This feels like a more apt analogy for what is happening here. The air which had inflated earnings multiples to the Moon in tech is slowly but surely coming out, returning the balloon closer to Earth."
• Vision Fund CEO Says Private Markets Are ‘Overvalued’ (Sarah McBride, for Bloomberg. January 20, 2022)
  • Key quotes: "According to CB Insights data, venture dollars spent on startups exceeded $600 billion in 2021, more than double the previous year’s highs. Valuations have soared, too. There are currently more than 900 startups with valuations of over $1 billion, CB Insights found."
  • "'That gap is going to tighten over the next six months,' [Mishra] said of the discrepancy between public and private markets."
• The great startup reset: Why founders should prepare for lower valuations (Charles Fitzgerald for Geekwire)
• 3 views: How should founders prepare for a decline in startup valuations and investor interest? (Alex Wilhelm, Natasha Mascarenhas, and Mary Ann Azevedo for TechCrunch)
• Calling the startup valuation peak (Dan Primack for Axios)
• Dear VCs: If you want startup prices to come down, stop paying higher prices (Alex Wilhelm for TechCrunch)

About The Co-Hosts

• Jason D. Rowley is a researcher who has previously worked with Uzabase, Golden.com, Crunchbase News and others. He volunteers with startup outreach for the open-source community and sends occasional newsletters from Rowley.Report.
• Graham C. Peck is a Venture Partner with Cultivation Capital and additionally helps companies build technology development teams as a partner of FYC Labs and other technology development organizations.