How will the correction in the stock market impact startup fundraising?(tomtunguz.com)
tomtunguz.com
How will the correction in the stock market impact startup fundraising?
https://tomtunguz.com/multiples-2022-01-19/
122 comments
It's a fair point. I didn't go back that far in the data set. I think the one major difference between the last 10 years and the.com era was the lack of viable business models in that time. I think the crypto ecosystem looks more like 2000 than the current software market because most of the software companies today worth billions generate hundreds of millions of revenue. Also, the interest rates within the last 10 years are going to be most similar to the ones that the FED is contemplating implementing over the next couple of years. The rates in the early 2000s were significantly higher in the 3-6% range. https://www.macrotrends.net/2015/fed-funds-rate-historical-c.... Last, the third trend that's important is just the volume of dollars going into venture Capital which is 20 times what it was during that period of time
> "the crypto ecosystem looks more like 2000 than the current software market because most of the software companies today worth billions generate hundreds of millions of revenue"
The big difference between the dot-com bubble and the current cryptocurrency bubble is that there were lots of useful dot-coms which didn't make a profit while there are lots of profitable cryptocurrencies which aren't useful. That's because dot-coms put the use case first while cryptocurrency puts the monetisation first, leading to the monetisation of nothing and removing the incentive to actually build anything (whether useful or not). It remains to be seen whether any useful legitimate practical uses will come out of the cryptocurrency space, but it isn't looking promising after 13 years, while after that length of time the dot-com bubble had been and gone and recovered and led to mass adoption of lots of useful things we all use on a daily basis.
The big difference between the dot-com bubble and the current cryptocurrency bubble is that there were lots of useful dot-coms which didn't make a profit while there are lots of profitable cryptocurrencies which aren't useful. That's because dot-coms put the use case first while cryptocurrency puts the monetisation first, leading to the monetisation of nothing and removing the incentive to actually build anything (whether useful or not). It remains to be seen whether any useful legitimate practical uses will come out of the cryptocurrency space, but it isn't looking promising after 13 years, while after that length of time the dot-com bubble had been and gone and recovered and led to mass adoption of lots of useful things we all use on a daily basis.
On the point of "useful legitimate practical use", I can send or receive money cheaply and easily anywhere in the world without any type of account or identity verification.
That's pretty cool.
Agree on the rest. It's overinvested.
That's pretty cool.
Agree on the rest. It's overinvested.
In all seriousness: I looked into moving money from Canada to the US. It seemed like between gas fees and exchange buy/sell spreads that I was looking at an effective cost of 5-10% at a minimum, higher if I wanted to avoid KYC rules by transacting off the exchanges. And that is ignoring any volatility. That’s about double or triple what I would pay using a traditional bank.
Can anyone point to a practical way of moving money?
Can anyone point to a practical way of moving money?
Have you heard of Transferwise? Would solve your issue.
Separately, if I send you some Bitcoin right now, the fees will be tiny, not sure how you're getting to 5-10%. Volatility is a real concern and you can easily move 5-10% because of that.
ETH is a different story.
Separately, if I send you some Bitcoin right now, the fees will be tiny, not sure how you're getting to 5-10%. Volatility is a real concern and you can easily move 5-10% because of that.
ETH is a different story.
PayPal? It’s free and instant and has been for decades.
Haha.
I meant in the context of international transfers between countries with different currencies which is one of the cited "success stories" for crypto. My research is that it is actually a pretty bad way for me to spend my money across boarders. I haven't seen a practical, affordable, way to transfer money via crypto that is better in any way than retail banking. I suspect that outside of Iran and Venezuela, crypto is pretty useless as an international commerce device.
I meant in the context of international transfers between countries with different currencies which is one of the cited "success stories" for crypto. My research is that it is actually a pretty bad way for me to spend my money across boarders. I haven't seen a practical, affordable, way to transfer money via crypto that is better in any way than retail banking. I suspect that outside of Iran and Venezuela, crypto is pretty useless as an international commerce device.
Thanks!
> I think the one major difference between the last 10 years and the.com era was the lack of viable business models in that time
In quite a few cases, yes -- I agree. In many other cases, though, I think it was the sudden unavailability of capital that did in some companies that otherwise could have been viable. Given enough time and money, poster-child dot-com failures like Pets.com, WebVan, and Kozmo.com might have well become a Chewy, Instacart, and Doordash.
> Also, the interest rates within the last 10 years are going to be most similar to the ones that the FED is contemplating implementing over the next couple of years. The rates in the early 2000s were significantly higher in the 3-6% range.
Maybe. I for one wouldn't dare make any predictions as to what will happen to rates. I mean, in 1972, when the 10-year treasury was ~5%, no one -- no one -- even imagined that it would increase persistently for a decade until it ~16% in 1982. In 2000, when the 10-year rate was ~6%, no one -- no one -- even imagined it would decline persistently over the next two decades, hitting ~0% in 2020. Today, no one -- including me -- can imagine how or why rates would go all the way up to 6%, let alone 16%... but I'm sure the future will find a way to surprise us.
> Last, the third trend that's important is just the volume of dollars going into venture Capital which is 20 times what it was during that period of time
It depends on whether that large flow would be impacted in the face a persistent bear market -- e.g., could a large proportion of LPs default on capital calls due to losses in other markets? Keep in mind, VC funding declined by a factor of ~10x in 2000-2002. Could it decline by a factor of 10x this time around? I think that's unlikely, but we can't rule it out simply because the amounts are larger.
> I think the one major difference between the last 10 years and the.com era was the lack of viable business models in that time
In quite a few cases, yes -- I agree. In many other cases, though, I think it was the sudden unavailability of capital that did in some companies that otherwise could have been viable. Given enough time and money, poster-child dot-com failures like Pets.com, WebVan, and Kozmo.com might have well become a Chewy, Instacart, and Doordash.
> Also, the interest rates within the last 10 years are going to be most similar to the ones that the FED is contemplating implementing over the next couple of years. The rates in the early 2000s were significantly higher in the 3-6% range.
Maybe. I for one wouldn't dare make any predictions as to what will happen to rates. I mean, in 1972, when the 10-year treasury was ~5%, no one -- no one -- even imagined that it would increase persistently for a decade until it ~16% in 1982. In 2000, when the 10-year rate was ~6%, no one -- no one -- even imagined it would decline persistently over the next two decades, hitting ~0% in 2020. Today, no one -- including me -- can imagine how or why rates would go all the way up to 6%, let alone 16%... but I'm sure the future will find a way to surprise us.
> Last, the third trend that's important is just the volume of dollars going into venture Capital which is 20 times what it was during that period of time
It depends on whether that large flow would be impacted in the face a persistent bear market -- e.g., could a large proportion of LPs default on capital calls due to losses in other markets? Keep in mind, VC funding declined by a factor of ~10x in 2000-2002. Could it decline by a factor of 10x this time around? I think that's unlikely, but we can't rule it out simply because the amounts are larger.
> lack of viable business models
To be fair this still remains to be seen for most? public tech companies. It’s easy to be unprofitable and just say you’re following the Amazon model. But can Uber or AirBnb actually run a business that increases their net profit YoY sustainably? I think that remains to be seen. The super easy money in both private and public markets for over a decade has kicked up this fog so that it’s hard to make out what is going on. It could be that many are just as sustainable in a tight market as they would’ve been in 1999
To be fair this still remains to be seen for most? public tech companies. It’s easy to be unprofitable and just say you’re following the Amazon model. But can Uber or AirBnb actually run a business that increases their net profit YoY sustainably? I think that remains to be seen. The super easy money in both private and public markets for over a decade has kicked up this fog so that it’s hard to make out what is going on. It could be that many are just as sustainable in a tight market as they would’ve been in 1999
Of course no company can increase their net profit YoY sustainably, unless you mean increasing it at the rate of overall economic growth, because otherwise after a few decades the economy consists of only that company and its growth must then fall to the rate of overall economic growth.
So let's consider the more reasonable interpretation of "viable business models" as whether Uber or AirBnB can be sustainably profitable at a level that justifies their current market cap (and thus stock price.) Uber Cab is US$73B, AirBnB is US$100B, and justifying those at a P/E of 20 would require respectively US$3.5B and US$5.0B per year of profits, which are US$0.50 and US$0.75 per person per year, at the current population.
They're both effectively marketplaces making a living by skimming a commission off the earnings of actual service providers, who are providing respectively transportation and lodging. Such commissions are usually in the 0.5%-50% range depending on the market power of the marketplace and the kinds of risks involved. (Consulting agencies commonly suck off 50%, for example, in part because they don't get paid at all if the client is sufficiently unhappy.) Suppose they're 0.5%. Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150.
These seem like very plausible numbers to me, even a bit low. For example, right now Uber's commission is 20%, 40 times higher than the 0.5% I'm using above, and pre-covid the US hotel/motel industry was about US$220 billion for a country of only 330 million people, which is US$666 per person, a beastly number that is four times higher than the US$150 I computed above. So I think the market is pricing in a fairly large risk that Uber or AirBnB will just blow up and be worth $0 in a few years.
But I guess you see it very differently. What's your analysis? What am I missing?
So let's consider the more reasonable interpretation of "viable business models" as whether Uber or AirBnB can be sustainably profitable at a level that justifies their current market cap (and thus stock price.) Uber Cab is US$73B, AirBnB is US$100B, and justifying those at a P/E of 20 would require respectively US$3.5B and US$5.0B per year of profits, which are US$0.50 and US$0.75 per person per year, at the current population.
They're both effectively marketplaces making a living by skimming a commission off the earnings of actual service providers, who are providing respectively transportation and lodging. Such commissions are usually in the 0.5%-50% range depending on the market power of the marketplace and the kinds of risks involved. (Consulting agencies commonly suck off 50%, for example, in part because they don't get paid at all if the client is sufficiently unhappy.) Suppose they're 0.5%. Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150.
These seem like very plausible numbers to me, even a bit low. For example, right now Uber's commission is 20%, 40 times higher than the 0.5% I'm using above, and pre-covid the US hotel/motel industry was about US$220 billion for a country of only 330 million people, which is US$666 per person, a beastly number that is four times higher than the US$150 I computed above. So I think the market is pricing in a fairly large risk that Uber or AirBnB will just blow up and be worth $0 in a few years.
But I guess you see it very differently. What's your analysis? What am I missing?
Commissions are revenue, but it's earnings (profit) that you should really care about. The mentality of "Revenue Growth At Any Cost" (spend $1.2 in CaC to buy $1 of revenue) is coming into an end, and my view is that only profitable businesses will survive.
Airbnb only reported positive earnings in the last quarter (which is great, hope they continue the trend), but I reckon a lot of "never made money" tech companies are going to continue to see their valuations sinking.
Airbnb only reported positive earnings in the last quarter (which is great, hope they continue the trend), but I reckon a lot of "never made money" tech companies are going to continue to see their valuations sinking.
Absolutely true, and I should not have conflated revenue with profits in my comment. Plausibly AirBnB and Uber won't have a significant cost of sales in the long run, but plausibly they will. I doubt they'll have retail-like 5% profit margins though, so the difference might be a factor of 2 or 3.
Isn’t this line of reasoning assuming Uber / AirBnB capture 100% of the market? I don’t think that’s a realistic assumption.
Yes, more or less. AirBnB does have pretty close to 100% of some overnight lodging markets and are likely to take more, but they're a long way from having 100% of the market now; their revenues are only about US$5 billion a year.
But I think the major threat to their business is not competition from the old guard with their trillion-dollar yearly revenues; they'll eat those guys' lunch, no problem. The real risk is that they'll be banned, like they are in New York, or soft-banned to favor local startups, like they are in China.
But I think the major threat to their business is not competition from the old guard with their trillion-dollar yearly revenues; they'll eat those guys' lunch, no problem. The real risk is that they'll be banned, like they are in New York, or soft-banned to favor local startups, like they are in China.
This market repricing can only be temporary (at least in nominal terms), because where else would money go? For decades interest rates have been shrinking, making fixed income a safe investment. That’s not the case anymore, interest rates are on the up, where should money flowing out of the stock market go? You are going to see more sector rotation within the stock market, rather than money flowing out of it.
Today’s world depends on tech to an incredibly high (and increasing) extent. Eventually that will be reflected in market valuations.
The venture capital industry today has a much more mature and robust structure than even 5 years ago: the structure of the funds, the fund commitments, the size of the funds and the management companies. They are much more resilient to market moves than in 2000.
Today’s world depends on tech to an incredibly high (and increasing) extent. Eventually that will be reflected in market valuations.
The venture capital industry today has a much more mature and robust structure than even 5 years ago: the structure of the funds, the fund commitments, the size of the funds and the management companies. They are much more resilient to market moves than in 2000.
> Then to justify Uber's market cap, the annual transportation budget per person needs to be at least US$100, and the annual lodging budget per person needs to be at least US$150.
This is also ignoring potential for expansion into other markets. For example, Uber's model might be useful for trucking services. You bought some used furniture, you want a truck to come and bring it to your house. You're a plumber, you need a water heater transported from the warehouse right away for an emergency job. Open the app.
Uber has a large number of drivers connected to them, why not go into competition with UPS and FedEx?
Maybe things like that succeed, maybe they don't. But if they do they make a lot more money, and the possibility that they do makes the company more valuable.
This is also ignoring potential for expansion into other markets. For example, Uber's model might be useful for trucking services. You bought some used furniture, you want a truck to come and bring it to your house. You're a plumber, you need a water heater transported from the warehouse right away for an emergency job. Open the app.
Uber has a large number of drivers connected to them, why not go into competition with UPS and FedEx?
Maybe things like that succeed, maybe they don't. But if they do they make a lot more money, and the possibility that they do makes the company more valuable.
They've already launched Uber Eats here, going into competition with PedidosYa, Glovo, and pizza delivery boys. And they have a package courier service which was actually their only service for a while at the beginning of the 9-month lockdown almost two years ago. So, sure, they could expand into other markets. But I don't think that's what investors are betting on.
You’ve got to include market corrections or some model of “down” as well as “up” in your data or your model will only be optimistic. Your model can’t see past what data it has.
Launched my career late 1999. I was working a lot of short gigs to build experience.
Multiple calls from recruiters daily. Then summer of 2020 the calls stopped. Six months later I gave up started at RadioShack. Where I met engineers with10-20 years of experience that couldn’t find work.
Multiple calls from recruiters daily. Then summer of 2020 the calls stopped. Six months later I gave up started at RadioShack. Where I met engineers with10-20 years of experience that couldn’t find work.
Something that doesn't really work or make money today, like all the crypto thing, might probably follow the same path. But tech is now, unlike in 2000 or 1973, is holding society by the throat, it is hated as much as oil companies were hated in 1973. So i don't think they are going to collapse nearly as badly.
Agree with you, but a semantic point of correction is that, while the nifty fifty did include many emerging tech stocks AND were mostly focused on growth industries, the index included lots of non-tech, like JCPenny, McDonalds, Sears, Walmart, Gillette, and many others.
It would also be a lot more compelling to show number of deals. I get the impression it's deal quantity that slows. Size is held as more of a standard.
Or the window around the 1987 Black Monday/Tuesday event that turned the semiconductor industry into liquid turd and forced the creation of new trading "circuit breakers" to prevent it happening so glibly again.
Apart from the stock market, you have to take into account the persistent inflationary environment that is being created.
Inflation shortens horizons. The usually impatient early investor becomes more impatient as the uncertainty surrounding the value of a dollar that might be earned years hence becomes greater and greater. Therefore, people's appetites for projects that might pay off in 10 years fall in favor of projects that might pay in five. Their appetites for a five for a five year horizon fall in favor of projects that might pay off in three. And, those fall behind projects that might pay off in a year which fall out of favor in as people seek something that will pay off this quarter.
So, if you are working on something that will pay off immediately, you're good.
Inflation shortens horizons. The usually impatient early investor becomes more impatient as the uncertainty surrounding the value of a dollar that might be earned years hence becomes greater and greater. Therefore, people's appetites for projects that might pay off in 10 years fall in favor of projects that might pay in five. Their appetites for a five for a five year horizon fall in favor of projects that might pay off in three. And, those fall behind projects that might pay off in a year which fall out of favor in as people seek something that will pay off this quarter.
So, if you are working on something that will pay off immediately, you're good.
When you're investing in early-stage startups and hoping to fund the next unicorn, the goal is an 100x exit. 7 percent inflation, even over a decade time scale, is so minute compared to those exits that it really doesn't come into anything beyond passing consideration.
7 percent inflation over a decade is one doubling, so it cuts your 100x return down to 50x. That seems like it might move some needles on valuations.
Meanwhile, the money you invest will also not create quite as much runway for the companies you invest in, so the fraction of successful exits may also decline.
If interest rates appreciate to keep up with inflation, time horizons compress -- future revenue is worth less, and today's revenue is worth more. This drops risk appetite for investors, who move from tech IPO darlings like Rivian to boring stable earners like utilities, so that will also decrease likely valuations your startups get when they IPO, potentially by another order of magnitude, dropping your 50x down to 5x.
Meanwhile, the money you invest will also not create quite as much runway for the companies you invest in, so the fraction of successful exits may also decline.
If interest rates appreciate to keep up with inflation, time horizons compress -- future revenue is worth less, and today's revenue is worth more. This drops risk appetite for investors, who move from tech IPO darlings like Rivian to boring stable earners like utilities, so that will also decrease likely valuations your startups get when they IPO, potentially by another order of magnitude, dropping your 50x down to 5x.
2 percent inflation over a decade cuts your 100x return to 80x. That would seem like it would move some needles on valuations and yet it doesn't. You need to compare the 7 percent inflation to previous levels, but also to bond yields, equity yields, etc. I wouldn't be surprised if there was less money flowing into seed funds, but all that means is that your web3 app to see where the closest set of exposed nipples are might not get funded whereas in a lower yield environment, somebody may have taken a flyer. I'd be surprised if it caused a wholesale pivot away from unicorn hunting.
I ran a regression of the CPI / inflation rate and its impact on the venture capital ecosystem both in terms of median round size and also total dollars invested and it's very highly correlated at north of 0.7
CPI hasn't been above 7 percent since 1980... How could you even run that regression?
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Wouldn't the value of companies track inflation making them an attractive store of value?
Inflation means tomorrow’s money is worth less; it impacts cashflows more when they are further out.
When the cost of money is near-zero, today’s values of near and distant cashflows are similar. When the cost is high, they are very different.
I’m not sure if you mean in your question that a project shown to track inflation will be unaffected. This is somewhat true — we see this in inflation-adjusted bonds etc. But inflation is far from a uniform effect, and I’ve never seen a pitch include inflation in its estimates…
When the cost of money is near-zero, today’s values of near and distant cashflows are similar. When the cost is high, they are very different.
I’m not sure if you mean in your question that a project shown to track inflation will be unaffected. This is somewhat true — we see this in inflation-adjusted bonds etc. But inflation is far from a uniform effect, and I’ve never seen a pitch include inflation in its estimates…
Inflation means prices are increasing. Your company probably gets more revenue when prices go up. Whether you come out ahead will depend on a lot of factors - what kind of inputs you have, how much pricing power, etc. But you can’t just discount your cash flows by the inflation rate unless you also incorporate the increased revenue into your estimate of the cash flows.
Why do you think the stock market indexes are crashing as inflationary expectations are being entrenched?
There was an article about all the unicorn IPOs from last year being under their IPO price, I think that's a good indicator of what's going to happen: valuations falling back to earth, you need to be building a business that doesn't rely on VC money. Time to stop handwaving unsustainable companies as "growth plays"
We are going on over two decades of almost continuous quantitative easing, starting with Greenspan after the dot-com burst, going nuclear under Paulson/Bernanke in 2008/9, and then continuing to increase over the past decade and a half.
I don't know what this market is but I have no confidence that the past 50 years of growth can be sustained in this environment. We're already seeing the impact of cheap money everywhere, with an economy built on continuously increasing asset valuations. It's come to such a point that even the slightest economic contraction must be avoided or it risks triggering the same collapse that was avoided by the narrowest of margins in 2008.
I don't want to be pessimistic. I want to be optimistic. I'm just running out of ideas for which rabbit can be pulled out of a hat to keep this charade going for another 20 years.
I don't know what this market is but I have no confidence that the past 50 years of growth can be sustained in this environment. We're already seeing the impact of cheap money everywhere, with an economy built on continuously increasing asset valuations. It's come to such a point that even the slightest economic contraction must be avoided or it risks triggering the same collapse that was avoided by the narrowest of margins in 2008.
I don't want to be pessimistic. I want to be optimistic. I'm just running out of ideas for which rabbit can be pulled out of a hat to keep this charade going for another 20 years.
The US stock market represents something like 60% of all stock market value, but the US GDP is only 25% of all global GDP. If you are long to stock market, you have to believe that this kind of disproportionate behavior continues because there's a lot of confidence in the US markets and the dollar.
How much of that is represented by tech giants? I personally think the US economy is starting to revolve around them too much, to the point where the economy serves their interests, not ours. They're "too much of an inconvenience to fail", they've tied every one of us to their success either through the free/cheap services they offer or their outsized influence on our retirement.
I could see that. There's been a transformation in top 10 companies in the last 20 years. They used to be consumer packaged goods and energy companies, and now they are technology companies.
Speaking of somebody who's very much pro technology, I think technology has improved the lives of billions of people, reduced information asymmetries, reduce the cost of goods and services, and provided more democratic access to lots of things, but there are some negatives.
Fwiw, all of information technology comprises about 10% of the US economy
Speaking of somebody who's very much pro technology, I think technology has improved the lives of billions of people, reduced information asymmetries, reduce the cost of goods and services, and provided more democratic access to lots of things, but there are some negatives.
Fwiw, all of information technology comprises about 10% of the US economy
The rise and success of many of today's tech giants has simply created a fertile environment of mature technologies that a future class of deep tech companies replacing them will use. Value is cyclical, the worth of FAANG and their ilk will pass.
I remember that song from 2008. I'm still very bitter about it.
Fine, be too big to fail. But why do they get treated any differently than a small bank in Kansas that gets upside-down and needs the FDIC to roll in and take it over?
As far as I'm concerned, too big to fail means nationalized and broken up until they are small enough to not pose a threat to the entire economy. When nationalized because they are on the brink of failure, investors get shoved to the back of the line after all other claimants and wiped out.
I mean, this model has served capitalism well for eons. Why are the self-proclaimed captains of capitalism, Wall Street, the ones who get a free pass to stay in business?
Now I'm all angry again.
Fine, be too big to fail. But why do they get treated any differently than a small bank in Kansas that gets upside-down and needs the FDIC to roll in and take it over?
As far as I'm concerned, too big to fail means nationalized and broken up until they are small enough to not pose a threat to the entire economy. When nationalized because they are on the brink of failure, investors get shoved to the back of the line after all other claimants and wiped out.
I mean, this model has served capitalism well for eons. Why are the self-proclaimed captains of capitalism, Wall Street, the ones who get a free pass to stay in business?
Now I'm all angry again.
> If you are long to stock market, you have to believe that this kind of disproportionate behavior continues because there's a lot of confidence in the US markets and the dollar.
Or, the structure of international capitalism means firms in the core extract value from the peripheries.
The US stock market isn't “stocks of firms tied only to their operations in the US”.
Or, the structure of international capitalism means firms in the core extract value from the peripheries.
The US stock market isn't “stocks of firms tied only to their operations in the US”.
There's a really good article on this from Lynn Alden that I will paste here that talks about how this dynamic actually implies that the US is selling its long-term capital assets in favor of short-term capital goods that depreciate, so it's actually a negative for the US. https://www.lynalden.com/january-2022-newsletter/
I agree, but I'm not optimistic at all. Mostly because we're seeing these issues without even trying to tackle the real elephant in the room: climate change. Carbon taxes, real costs of energy... So many negative externalities that don't show up on a companies quarterly report but will eventually (hopefully).
> Without even trying to tackle the real elephant in the room: climate change.
I've never been a climate change denier but I had secretly hoped it would occur slow enough that our economy could possibly adjust for it, over time. Judging by the weather chaos we've already started to see over the past few years it seems like an impossible dream now.
Our economy is predicated on a certain amount of climatic stability over time. a sort of "bounded expected risk". The more investment you have to make into risk mitigation the less you have to invest in productive pursuits. We will be stuck treading water, if we're even lucky, instead of swimming forward.
I've never been a climate change denier but I had secretly hoped it would occur slow enough that our economy could possibly adjust for it, over time. Judging by the weather chaos we've already started to see over the past few years it seems like an impossible dream now.
Our economy is predicated on a certain amount of climatic stability over time. a sort of "bounded expected risk". The more investment you have to make into risk mitigation the less you have to invest in productive pursuits. We will be stuck treading water, if we're even lucky, instead of swimming forward.
There's still room for innovation in rapid-fire, affordable mitigations for extreme weather. Like levee-in-a-box, bridge-in-a-box, deployable temporary sea walls, etc. Also room to innovate in techniques for detecting and mitigating vulnerable conditions, e.g. land slide risks.
Those are still new costs, though.
I'm hopeful that the capital markets will incentivize entrepreneurs to fix this problem much more quickly than most people anticipate
The issue is, honestly, the free-rider effect. It's too difficult for an entrepreneur to get paid unless they resolve a specific problem in such a way that they can demonstrate value to a customer. The only thing that will generally make money is impact mitigation, because they can sell it to an affected buyer. At least, as a general rule.
With government-driven carbon reduction requirements feeding into a trading market it might get to the point that there's enough money to warrant huge investments in sequestration. But I'm not optimistic that capitalism-driven countries will want to impose a high enough cost to spur that kind of investment. At least, they haven't up until this point.
With government-driven carbon reduction requirements feeding into a trading market it might get to the point that there's enough money to warrant huge investments in sequestration. But I'm not optimistic that capitalism-driven countries will want to impose a high enough cost to spur that kind of investment. At least, they haven't up until this point.
Switching to a usury free economic system is a start.
Free money! Yay
That's a straw man. Because money would only be lent for charity, people will actually engage in proper non parasitic financial transactions for business.
Not relevant to this discussion. But has anyone noticed that we only ever say "correction" to mean "going down".
Has their been a period or an asset class in recent history where informed individuals said something to the effect of, "You want to be exposed to X for when there's a correction" referring to an unreasonable low valued asset reaching a more reasonable valuation?
Has their been a period or an asset class in recent history where informed individuals said something to the effect of, "You want to be exposed to X for when there's a correction" referring to an unreasonable low valued asset reaching a more reasonable valuation?
Reminds me of my last job when an unexpected 1% drop in our team's primary goal metric would trigger VPs and directors to have us launch a full investigation into potential causes. But a similar unexpected increase, no one would bat an eye.
Similarly in the stock market, when things are going poorly, people are eager to understand what happened, so a "correction" is a comforting explanation that the underlying asset is still solid and it's just market dynamics at play. But when the stock markets go up unexpectedly, people are generally happy to accept their good fortune without thinking too much about it.
Similarly in the stock market, when things are going poorly, people are eager to understand what happened, so a "correction" is a comforting explanation that the underlying asset is still solid and it's just market dynamics at play. But when the stock markets go up unexpectedly, people are generally happy to accept their good fortune without thinking too much about it.
I think you and u/rreo8 have it. It's away to suggest control even in a loss
You're right correction is a euphemism to sound better than loss. It implies stocks will continue to go up in the medium/long term, which isn't always the case esp for tech stocks. Another recent euphemism is volatility. You didn't just lose 25k you just experienced some "volatility".
The finance sector has a long history of deprecating loss terms.
The US no longer has "depressions". Those used to be commonplace.
Actually, the first term was "panic", That was gradually replaced with "depression". After the Great Depression (1929--1941), the term "recession" came into use.
The Wikipedia list itself is titled "recessions":
https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
The US no longer has "depressions". Those used to be commonplace.
Actually, the first term was "panic", That was gradually replaced with "depression". After the Great Depression (1929--1941), the term "recession" came into use.
The Wikipedia list itself is titled "recessions":
https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
This isn’t true.
That which is asserted without evidence can be dismissed without evidence
The canonical definition of a "correction" is a rapid 10% decline in market capitalization. I have some thoughts as to why.
Equity markets tend to drift slowly higher when there is no new event or story taking place. This can be rationalized in many ways, but my personal explanation is that companies and industries tend to make money over time rather than overnight, and no news is good news in that environment. Valuations tend to pop higher on news about acquisitions or other big deals, as well as information injections about revenue and profit. But the concept of a "correction" implies that the prior price action did not align with the information in the market place. Due to the asymmetrical nature of human social behavior as well as the long bias in the equity market, that tends to be a downward force.
I refer to asymmetry because humans react differently to a one-in-a-million disaster than to a one-in-a-million windfall. They communicate and feel differently about failures than successes. They more readily share their greatest joys than their mortal fears. Everyone likes a champion and everyone likes an underdog, but they are liked in different ways. Information travels and influences differently in good circumstances versus bad, so negative returns tend to be less frequent and more substantial in the equity space.
Commodities don't work the same way. Shortages cause price spikes rather than crashes, and panic works to the upside rather than the downside. Yet commodity prices are often cyclical due to the dynamics of physical production, so the concept of a "correction" makes less sense due to an uneven natural trajectory in the uncorrected valuation.
Equity markets tend to drift slowly higher when there is no new event or story taking place. This can be rationalized in many ways, but my personal explanation is that companies and industries tend to make money over time rather than overnight, and no news is good news in that environment. Valuations tend to pop higher on news about acquisitions or other big deals, as well as information injections about revenue and profit. But the concept of a "correction" implies that the prior price action did not align with the information in the market place. Due to the asymmetrical nature of human social behavior as well as the long bias in the equity market, that tends to be a downward force.
I refer to asymmetry because humans react differently to a one-in-a-million disaster than to a one-in-a-million windfall. They communicate and feel differently about failures than successes. They more readily share their greatest joys than their mortal fears. Everyone likes a champion and everyone likes an underdog, but they are liked in different ways. Information travels and influences differently in good circumstances versus bad, so negative returns tend to be less frequent and more substantial in the equity space.
Commodities don't work the same way. Shortages cause price spikes rather than crashes, and panic works to the upside rather than the downside. Yet commodity prices are often cyclical due to the dynamics of physical production, so the concept of a "correction" makes less sense due to an uneven natural trajectory in the uncorrected valuation.
It happens all the time when you get into certain verticals, it's just that humans are generally more likely overvalue assets than undervalue them and the broader "stock market" is the grandest of all overvalued assets
I'd guess that precious metals investors would say that they're awaiting a correction (to the upside) in gold prices, if it weren't for the confusion that that would cause.
The correction calculation here is based on a price-to-revenue* multiple, not on an outright price reduction.
My read is “revenues are finally coming in to support the previously very frothy valuations”. That doesn’t seem like a terrible state of affairs overall.
* - edited: previously said price-to-earnings
My read is “revenues are finally coming in to support the previously very frothy valuations”. That doesn’t seem like a terrible state of affairs overall.
* - edited: previously said price-to-earnings
I'm the author. Most public investors look at these companies on a forward revenue multiple because the vast majority of these companies don't generate positive earnings.
> don't generate positive earnings.
Or more appropriately, DCF:
“What matters always is dollar margins: the actual dollar amount. Companies are valued not on their percentage margins, but on how many dollars they actually make, and a multiple of that.”
https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-fr...
What other business model do you know that can produce this type of FCF trajectory?
https://www.macrotrends.net/stocks/charts/AMZN/amazon/free-c...
https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/fre...
https://www.macrotrends.net/stocks/charts/FB/meta-platforms/...
Or more appropriately, DCF:
“What matters always is dollar margins: the actual dollar amount. Companies are valued not on their percentage margins, but on how many dollars they actually make, and a multiple of that.”
https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-fr...
What other business model do you know that can produce this type of FCF trajectory?
https://www.macrotrends.net/stocks/charts/AMZN/amazon/free-c...
https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/fre...
https://www.macrotrends.net/stocks/charts/FB/meta-platforms/...
No doubt he built a sensational business focused on cash flows. A lot of the software companies generate significant cash flows because they start to collect multi-year upfront payments for their software. Some of them call them remaining purchases obligations which you can find in the 10ks and annual reports. But the market broadly doesn't look at this today. Maybe at some point in the future though
> No doubt he built a sensational business focused on cash flows.
Look at the largest companies across all of the holdings in $VGT - the story is all the same - DCF rules everything.
> A lot of the software companies generate significant cash flows because they start to collect multi-year upfront payments for their software.
Sure, SaaS B2B software may do this (like many of the companies you invest in), but this doesn't explain GOOGL/FB though? AFAIK, most of their ad payments (which are their cash cows) are monthly payments (i.e. even for a $1M annual google ad spend which I managed years ago followed a monthly payment schedule).
> Maybe at some point in the future though
I'd argue this is already happening. VC revenue multiples and revenue trajectories are just a proxy for DCF. As long as the company's unit economics can support ~80% GM and growth rates are high the company has a strong DCF potential.
Look at the largest companies across all of the holdings in $VGT - the story is all the same - DCF rules everything.
> A lot of the software companies generate significant cash flows because they start to collect multi-year upfront payments for their software.
Sure, SaaS B2B software may do this (like many of the companies you invest in), but this doesn't explain GOOGL/FB though? AFAIK, most of their ad payments (which are their cash cows) are monthly payments (i.e. even for a $1M annual google ad spend which I managed years ago followed a monthly payment schedule).
> Maybe at some point in the future though
I'd argue this is already happening. VC revenue multiples and revenue trajectories are just a proxy for DCF. As long as the company's unit economics can support ~80% GM and growth rates are high the company has a strong DCF potential.
Thanks. Edited to correct earnings to revenue.
That's not the right read. Public software companies prices are way off outside FAANG.
Why is that? What does not being FAANG have to do with it?
Are we talking about older public software companies like Oracle, Adobe, Microsoft, etc, or are we talking about newer ones or even ancillary (not-directly "software" companies) like Docusign?
Are we talking about older public software companies like Oracle, Adobe, Microsoft, etc, or are we talking about newer ones or even ancillary (not-directly "software" companies) like Docusign?
Because people are selling...To me it seems that the FAANG stocks weren't actually overpriced. Many of the other software companies seemed overpriced to me. But any strong sounding narrative as to why is going to be.. incomplete. Someone else will say inflation and interest rates. Someone else will say something else. All you know is people are selling.
It's pretty much across the board... Salesforce, Veeva, Datadog, Blend, New Relic, Okta, Zoom, ServiceNow, Twilio, Atlassian, Docusign and on and on and on. Most of them off 40% from the highs.
It's pretty much across the board... Salesforce, Veeva, Datadog, Blend, New Relic, Okta, Zoom, ServiceNow, Twilio, Atlassian, Docusign and on and on and on. Most of them off 40% from the highs.
there's been a rotation out of technology because of the prospect of interest rates going up. because most technology companies don't generate earnings (profits) for many years, and because many investors use DCF (discounted cash flow calculations) to value a company. the greater the interest rate, the lower the value for these business. that's why it's a broad sell-off.
It's a nice, coherent narrative. It sits so nicely in a human brain. It's incomplete. Several companies had big earnings misses. Docusign is the obvious example. Twilio missed. Zoom. Big drops.
Anytime you have a really coherent narrative in the stock market, you are missing something.
Anytime you have a really coherent narrative in the stock market, you are missing something.
A 52% correction in price would be a dire situation indeed. A 52% correction in multiple feels like a semblance of sanity is returning.
Many of them are off 40% or more. This index:
https://www.spglobal.com/spdji/en/indices/equity/sp-software...
is off nearly 30%.
https://www.spglobal.com/spdji/en/indices/equity/sp-software...
is off nearly 30%.
Said differently, the price has crashed all the way back to a level not seen since just 13 months ago.
That sounds “not dire” to me.
That sounds “not dire” to me.
It's dire for companies and their staff who have been raising big rounds.
Their next round risks being a flat/down round, and especially as many big ones are disconnected from revenue and efficiency. Each round assumes a following bigger round, and as soon as that stops, historically unlikely to recover the FOMO. Investors can go to another co without that proven risk, and the company spirals. Doing layoffs now can work for self-efficiency, or not hiring to plan, but that still means not hitting revenue & growth numbers, so either way, poof goes the valuation.
Ex: It was ugly watching colleagues get major lost $ from Uber over-valuing itself, and at least Uber had significant revenue. Now go to the many sales/marketing/sloppy cloud-driven co's, which is where over half those fund raise $s go and at much lower net revenue: that's a lot of people 12mo +/- 6mo from now.
This is also why I advise folks to price in the next 2 years of growth (~10x) for offers from these kinds of companies as already eaten by VCs, and thus only evaluate for 100-1000x growth. For bigger/later rounds, do another 2-10x. Brutal.
Their next round risks being a flat/down round, and especially as many big ones are disconnected from revenue and efficiency. Each round assumes a following bigger round, and as soon as that stops, historically unlikely to recover the FOMO. Investors can go to another co without that proven risk, and the company spirals. Doing layoffs now can work for self-efficiency, or not hiring to plan, but that still means not hitting revenue & growth numbers, so either way, poof goes the valuation.
Ex: It was ugly watching colleagues get major lost $ from Uber over-valuing itself, and at least Uber had significant revenue. Now go to the many sales/marketing/sloppy cloud-driven co's, which is where over half those fund raise $s go and at much lower net revenue: that's a lot of people 12mo +/- 6mo from now.
This is also why I advise folks to price in the next 2 years of growth (~10x) for offers from these kinds of companies as already eaten by VCs, and thus only evaluate for 100-1000x growth. For bigger/later rounds, do another 2-10x. Brutal.
I agree. It's not there. In fact, we've seen something like five of these corrections in the last 10 years. https://www.tomtunguz.com/five-corrections-saas/
It's probably not dire.
It doesn't change the fact that the price has dropped meaningfully, it's not just multiples contracting while revenues go up.
It doesn't change the fact that the price has dropped meaningfully, it's not just multiples contracting while revenues go up.
They always will be though. It is unreasonable to expect that software companies are always going to be fairly priced at maybe 1x or 5x multiples. Shares will get bought up fast and the price will rise.
They will always be what? Going down? I was just saying they've come way down.
15 years ago they were priced at 5x and it's gone up to 15x then up to 55x then to 80x and now back down!
I don't know what the "75th Percentile Forward Multiple" is, but if it's down %52, it's down more than "the stock market"; the S&P is down about %6.5, NASDAQ is down a bit less than %12.
Perhaps this article is not meant to be understood by a mere programmer like myself. Could someone kindly explain what I should be worried about?
Perhaps this article is not meant to be understood by a mere programmer like myself. Could someone kindly explain what I should be worried about?
Yes, it's a portion of the stock market that's going down a lot. The money is going from technology companies into other companies like healthcare and energy companies. So while the overall market may not be down that much, the technology market is going down a bit. In relative terms, it's gone down to the same levels is about 2 years ago. So there's no disaster scenario here, but there is a pretty significant drop in price from a high level.
The “forward multiple” is the ratio dividing the stock’s current price by its predicted earnings over the next 12 months. You can think of it as a measure of credibility and optimism - do investors believe company predictions to make more money in the next year? And will they grow even more in the future? Tech company stocks dropped some while their predicted earnings kept increasing. Both the numerator and denominator contributed to the decrease in that particular metric.
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The current administration is asleep at a wheel with regards to the economy (inflation and government spending) and their sad grasp at voting rights (i.e. we aren’t gonna win unless we “reform” voting in our favor) only shows their desperation and lack of understand of what’s important. As James Carville famously said, “it’s the economy stupid.” As everyday items and gas prices continue to rise and the stock market continues to plummet (destroying wealth and retirement) I fear they are not equipped to addresses the economy and make tough (anti progressive) decisions.
The huge increase in the money supply and in government spending were well before the new administration took over:
https://fred.stlouisfed.org/series/M1SL
https://tradingeconomics.com/united-states/government-spendi...
https://fred.stlouisfed.org/series/M1SL
https://tradingeconomics.com/united-states/government-spendi...
I'm not saying you're wrong, only that finger pointing and figuring out who started it isn't helping anyone. Let's say for example Trump and Trump alone caused this. Fine, but now it's up to Biden to fix it. So far, doing nothing at all hasn't been particularly effective.
It doesn't work when you started your argument by finger pointing.
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The current administration is the one at the wheel right now.
I'm just sad my stock portfolio took a dive. I started to invest into the market for the first time during the pandemic (thanks to RH). Not sure what I learned so far.
Have a read about the world’s worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market...
In short: there’s never been a 20 year period where the broad-based US large-cap equities index have lost money. The future isn’t guaranteed, but I’m betting on that record to continue.
In short: there’s never been a 20 year period where the broad-based US large-cap equities index have lost money. The future isn’t guaranteed, but I’m betting on that record to continue.
The linked article only looks at the time period of the last 50 years. If you believe in big cycles (like covered in Ray Dalio’s “The Changing World Order”), expand that perspective to several hundred years and market returns don’t look quite as guaranteed over a given 20 year period. I’m still formulating my own thesis but it’s a good read if you are into such things.
I mean if there's a big change like that, then we are all kinds of screwed anyway.
> there’s never been a 20 year period where the broad-based US large-cap equities index have lost money.
Definitely happened in Japan and Europe. France and UK are only just exceeding the large cap index price from 1999 - and likely to drop back down again.
Definitely happened in Japan and Europe. France and UK are only just exceeding the large cap index price from 1999 - and likely to drop back down again.
I see this linked all the time.
Y’know, time in the market beats timing the market
Does any have a rebuttal?
Y’know, time in the market beats timing the market
Does any have a rebuttal?
There's a 15% off sale on stocks. If you are buying stocks in order to invest for the long term, that should make you very happy. You should be learning that stock market corrections or bear markets are normal and nothing to worry about.
If you invested money in stocks that you need in the short term, you are beginning to learn why you don't do that.
If you invested money in stocks that you need in the short term, you are beginning to learn why you don't do that.
> There's a 15% off sale on stocks
15% off from what? 15% off the maximum value achieved during a period of unprecedented monetary and fiscal stimulus?
Given the fed reversal, it's looking pretty clear that stocks will fall quite a bit further. Buying equities now is tantamount to fighting the fed.
Timing the market never works, so if you sit out you won't know when to get back in, but the entity with the power to dramatically influence asset prices has broadcast their intentions and is about to undertake actions which will significantly devalue equities over the next 6-12 months.
15% off from what? 15% off the maximum value achieved during a period of unprecedented monetary and fiscal stimulus?
Given the fed reversal, it's looking pretty clear that stocks will fall quite a bit further. Buying equities now is tantamount to fighting the fed.
Timing the market never works, so if you sit out you won't know when to get back in, but the entity with the power to dramatically influence asset prices has broadcast their intentions and is about to undertake actions which will significantly devalue equities over the next 6-12 months.
>> Given the fed reversal, it's looking pretty clear that stocks will fall quite a bit further
It sounds like you have information that isn't already priced into the market. That's awesome. You can get rich.
It sounds like you have information that isn't already priced into the market. That's awesome. You can get rich.
Yes I appreciate the snark and understand what I'm saying is going to be like water off a duck's back to the average boglehead.
It's being priced in over time. The market doesn't immediately price in future events. We've only rolled back the last 2-4 months of gains so far.
I've already reacted accordingly. There's a lucky Boglehead or stonks investor who was happy to catch the falling knife when I sold. I feel sorry for them but what can you do? People want to believe simple market themes and not look at the driving forces. I'll go back to buy and hold in 6-12 months depending on the fed.
It's being priced in over time. The market doesn't immediately price in future events. We've only rolled back the last 2-4 months of gains so far.
I've already reacted accordingly. There's a lucky Boglehead or stonks investor who was happy to catch the falling knife when I sold. I feel sorry for them but what can you do? People want to believe simple market themes and not look at the driving forces. I'll go back to buy and hold in 6-12 months depending on the fed.
What percentage of your portfolio did you sell?
About half, although that was mostly RSUs from my high growth tech job which was sure to get hammered by the rate hikes(and boy has it been hammered).
I'd sell more but a lot of it was already in dividend paying stocks like Kraft Heinz which are doing ok and should weather the storm a bit better.
I'd sell more but a lot of it was already in dividend paying stocks like Kraft Heinz which are doing ok and should weather the storm a bit better.
> You should be learning that stock market corrections or bear markets are normal and nothing to worry about.
People are increasingly holding their money in stocks even close to when they need it (e.g. retirement) because rates for safer bonds have been mostly below inflation. Of course the market can go down, if you get really unlucky, it can take a few decades to recover, but that hasn't happened for just short of a hundred years now (as long as since the last major pandemic).
People are increasingly holding their money in stocks even close to when they need it (e.g. retirement) because rates for safer bonds have been mostly below inflation. Of course the market can go down, if you get really unlucky, it can take a few decades to recover, but that hasn't happened for just short of a hundred years now (as long as since the last major pandemic).
Some days Mr. Market is euphoric will buy at any price; some days Mr. Market is depressed and thinks the world is end and sells for a song; most days Mr. Market is moderately optimistic. But what Mr. Market is willing to pay for your portfolio and what its actual value is are not the same thing. Focusing on the actual value is the important thing (note that the actual value can only be estimated). This pairs well with a long-term outlook. Warren Buffet says "my favorite holding period is forever".
If the swings bother you, investing in companies with dividends has the additional upside that they generally pay dividends regardless of the stock price.
If the swings bother you, investing in companies with dividends has the additional upside that they generally pay dividends regardless of the stock price.
Benjamin Graham is the best
Comment I read on here a year or so ago stuck with me. "time in the market beats timing the market"
Latest market moves changed my net worth by 3.5% (from peak). In 12 years of investing I have never had less money than I put in.
Granted cherry picking any specific time period is not very predictive.
The only two prices that matter are the price you buy at and the price you sell at. Everything in between might as well have never happened.
Granted cherry picking any specific time period is not very predictive.
The only two prices that matter are the price you buy at and the price you sell at. Everything in between might as well have never happened.
Stick to VTI and VXUS? VTI is up 12.4% the last year and flat 0% since October. https://www.bogleheads.org/wiki/Main_Page
The S&P 500 is also flat since October and up 16.3% in the last year. VXUS is down in the last year. If you want a simple strategy buy into an S&P 500 index fund and don't worry until you're closer to retirement.
So less than 2 years? Who cares? Don’t be like the folks who sold off in 2008.
Related: how will the correction in the crypto market impact (crypto) startup fundraising?
most tech stocks still much better than they were 1 year ago... it is just a very very small correction, nothing really crashed and there is nothing to panic at all.
to avoid recency bias, take a look at history and I mean from 1910-2010, at this perspective, few weeks are barely visible.
to avoid recency bias, take a look at history and I mean from 1910-2010, at this perspective, few weeks are barely visible.
A more useful analysis would look at data during the 2000 to 2002 period, during which the market caps of many prominent, high-quality tech stocks declined by 80% or more. What happened to startup fundraising during that period?
Or it would look at data from the 1973-1982 period, during which many so-called "nifty fifty" tech stocks (think IBM and Xerox in their heyday) declined by large double-digit percentages and did not recover for nine years. What happened to startup fundraising during that period?