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1) I’m excited to announce @EqualVentures’s 5th Annual Emerging Manager Circle Summit
8 years ago, this was just a few of us swapping stories, trying to help each other. I couldn’t imagine what EMC would become
Now, we need events like EMC more than ever
newsletter.equal.vc/p/announcing-t…
8 years ago, this was just a few of us swapping stories, trying to help each other. I couldn’t imagine what EMC would become
Now, we need events like EMC more than ever
newsletter.equal.vc/p/announcing-t…
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The Cost of Capital
We’ve been in an era of historically cheap capital - quantitative easing, low interest rates and an explosion of private credit have defined the post GFC era.
This isn’t the first time we’ve seen this, but often time has a tendency to erode our memory of cycles like this.
As much as folks choose to ignore it, all investments eventually tie to a DCF. In periods where capital is cheap and interest rates are low, the DCF favors long-duration opportunities…ones where cashflows aren’t generating til the far distant future. This explains (to a certain degree) the explosion of interest in deep j-curve hard tech investments. We literally have companies with valuations in the tens of billions that don’t have revenue (and won’t for the foreseeable future), let alone cashflow. We have others that are hemorrhaging tens of billions of FCF each year, even as massively mature companies. Others that are taking on hundreds of billions of capital commitments (there are about $5T of off balance sheet commitments from hyperscalers, LLMs and neo clouds). These strategies REQUIRE cheap capital.
But capital is very clearly starting to get more expensive and scarce. Interest rates are rising, fundraising cycles are extending, asset managers are starting to balk at negative FCF (as evidenced by the major drawdowns). This has yet to ripple through to private markets, but ultimately that is an eventuality. It’s as certain as gravity, having proven itself across every cycle. The inevitable outcome isn’t that ALL assets go down - it actually rotates into companies where the cash-flows are more tangible and near-term. The companies that generate cash flow become inherently more valuable when cash is scarce. That sounds intuitive, but it’s almost universally forgotten as folks ignore these dynamics time and time again, until it’s too late and abundantly obvious.
A “boring” cashflowing company might not look as cool as another that is pursuing a moonshot technology, but if you believe that the money supply is tightening and the cost of capital is on the rise (which I do), then recognize that cashflow will be VERY cool in the years to come.
We’ve been in an era of historically cheap capital - quantitative easing, low interest rates and an explosion of private credit have defined the post GFC era.
This isn’t the first time we’ve seen this, but often time has a tendency to erode our memory of cycles like this.
As much as folks choose to ignore it, all investments eventually tie to a DCF. In periods where capital is cheap and interest rates are low, the DCF favors long-duration opportunities…ones where cashflows aren’t generating til the far distant future. This explains (to a certain degree) the explosion of interest in deep j-curve hard tech investments. We literally have companies with valuations in the tens of billions that don’t have revenue (and won’t for the foreseeable future), let alone cashflow. We have others that are hemorrhaging tens of billions of FCF each year, even as massively mature companies. Others that are taking on hundreds of billions of capital commitments (there are about $5T of off balance sheet commitments from hyperscalers, LLMs and neo clouds). These strategies REQUIRE cheap capital.
But capital is very clearly starting to get more expensive and scarce. Interest rates are rising, fundraising cycles are extending, asset managers are starting to balk at negative FCF (as evidenced by the major drawdowns). This has yet to ripple through to private markets, but ultimately that is an eventuality. It’s as certain as gravity, having proven itself across every cycle. The inevitable outcome isn’t that ALL assets go down - it actually rotates into companies where the cash-flows are more tangible and near-term. The companies that generate cash flow become inherently more valuable when cash is scarce. That sounds intuitive, but it’s almost universally forgotten as folks ignore these dynamics time and time again, until it’s too late and abundantly obvious.
A “boring” cashflowing company might not look as cool as another that is pursuing a moonshot technology, but if you believe that the money supply is tightening and the cost of capital is on the rise (which I do), then recognize that cashflow will be VERY cool in the years to come.
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So excited to welcome @rosemajeed8 to the @EqualVentures family!
Rose is one of those people who reminds me of how much more impressive and hard working young people are today than when I was coming up. Rose had more experience in PE AND VC at 20 then I had when I was nearly 30, having served as Managing Partner of The Johns Hopkins University student led venture fund (@ALevelCapital) and worked at Graham Partners (a $5b AUM PE fund). She also interned at multiple venture-backed startups and graduated JHU in 3 years with a double major! That’s hustle!
Please join us in welcoming Rose to the team! 🎉🎊🥳🎉🎊🥳
newsletter.equal.vc/p/welcoming-ro…
Rose is one of those people who reminds me of how much more impressive and hard working young people are today than when I was coming up. Rose had more experience in PE AND VC at 20 then I had when I was nearly 30, having served as Managing Partner of The Johns Hopkins University student led venture fund (@ALevelCapital) and worked at Graham Partners (a $5b AUM PE fund). She also interned at multiple venture-backed startups and graduated JHU in 3 years with a double major! That’s hustle!
Please join us in welcoming Rose to the team! 🎉🎊🥳🎉🎊🥳
newsletter.equal.vc/p/welcoming-ro…
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United: We’re cancelling your flight (for no reason)
Me: What are my options?
United: We’ll rebook you on flight that leaves before the sun goes up…in the middle seat…in the back…and the plane won’t have any wifi
Me: Ok, anything else?
United: We’re gonna delay the flight by an hour and have you sit on tarmac
Me: …anything else?
United: mumbles to others in the room “hey guys, what else can we do to mess with him?”
@united 👏👏👏
Me: What are my options?
United: We’ll rebook you on flight that leaves before the sun goes up…in the middle seat…in the back…and the plane won’t have any wifi
Me: Ok, anything else?
United: We’re gonna delay the flight by an hour and have you sit on tarmac
Me: …anything else?
United: mumbles to others in the room “hey guys, what else can we do to mess with him?”
@united 👏👏👏
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This is why I can't take sick days...when I come back, I'm working a 15 hour day just to catch up
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Everyone always says to "own the company selling picks and shovels during the gold rush", but let me tell you about my great, great, great grandfather "Mike" (see picture below)
Mike was early to the gold rush, but saw a greater opportunity than just digging for gold himself. He pment for the booming demand of the gold mining industry and realized most miners struggled to get the necessary parts fast and cheap enough to compete in what was a historic opportunity.
So he called up a contact of his named "John" at the AMES company (the largest picks and shovels maker at the time) and told him that he wanted to buy product to sell to the emerging trend of gold miners.
Business boomed!
Mike and John became close friends and eventually John decided to extend additional credit to Mike to let him sell more picks and shovels. He eventually invested in the company, too. Mike decided he would do something similar with his customers providing them with the necessary equipment to pan for gold on credit that he secured from his own bank (the banks would never give credit to the miners, but they would to Mike given how fast his business was growing. Mike started getting closer and closer with customers, sometime even giving away free picks and shovels to promising customers in exchange for some of the gold they might find.
The business was doing great and it was a happy time.
But then the gold rush started petering out. Customers didn't pay their bills and the royalty stakes he had in the mining operations were worthless. Worse yet, he was stuck with a ton of inventory and had payments due to AMES and the bank. AMES tried to keep them afloat as long as they could (hoping the lull in the market was temporary...it wasn't), but it wasn't enough.
Eventually my great, great, great grandpa's company defaulted and AMES (which had its own share of debt issues, but was fortunately diversified into other businesses as well) and the bank took ownership over it.
He ended up with nothing, but it was a helluva ride
Mike was early to the gold rush, but saw a greater opportunity than just digging for gold himself. He pment for the booming demand of the gold mining industry and realized most miners struggled to get the necessary parts fast and cheap enough to compete in what was a historic opportunity.
So he called up a contact of his named "John" at the AMES company (the largest picks and shovels maker at the time) and told him that he wanted to buy product to sell to the emerging trend of gold miners.
Business boomed!
Mike and John became close friends and eventually John decided to extend additional credit to Mike to let him sell more picks and shovels. He eventually invested in the company, too. Mike decided he would do something similar with his customers providing them with the necessary equipment to pan for gold on credit that he secured from his own bank (the banks would never give credit to the miners, but they would to Mike given how fast his business was growing. Mike started getting closer and closer with customers, sometime even giving away free picks and shovels to promising customers in exchange for some of the gold they might find.
The business was doing great and it was a happy time.
But then the gold rush started petering out. Customers didn't pay their bills and the royalty stakes he had in the mining operations were worthless. Worse yet, he was stuck with a ton of inventory and had payments due to AMES and the bank. AMES tried to keep them afloat as long as they could (hoping the lull in the market was temporary...it wasn't), but it wasn't enough.
Eventually my great, great, great grandpa's company defaulted and AMES (which had its own share of debt issues, but was fortunately diversified into other businesses as well) and the bank took ownership over it.
He ended up with nothing, but it was a helluva ride
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Rick Zullo retweeted
so i have been in the sf tech scene for a couple of months now, and i learned the games that ppl play
1. land a $3M lab order in 2 weeks, *26 = ~$80m as the annual revenue
2. schedule all orders to be signed in the same month, and multiply the best month by 12
3. sign $5M LOIs with friend's companies and batchmates. they sign one back (also happens at scale with large labs/compute)
4. buy github stars at 6 cents each
the last company that swapped invoices with a partner reported $220M - and it's bankrupt now
sad that it's a whole gresham's law game right now and if you dont play you just get downvoted
1. land a $3M lab order in 2 weeks, *26 = ~$80m as the annual revenue
2. schedule all orders to be signed in the same month, and multiply the best month by 12
3. sign $5M LOIs with friend's companies and batchmates. they sign one back (also happens at scale with large labs/compute)
4. buy github stars at 6 cents each
the last company that swapped invoices with a partner reported $220M - and it's bankrupt now
sad that it's a whole gresham's law game right now and if you dont play you just get downvoted
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Wayne Dyer said “If you follow the herd, you’ll end up stepping in shit”
VC feels like mass consensus hysteria right now but I’m convinced that the mean return of today will not live up to the past
Survival in this market requires deviation from the herd
newsletter.equal.vc/p/stop-being-s…
VC feels like mass consensus hysteria right now but I’m convinced that the mean return of today will not live up to the past
Survival in this market requires deviation from the herd
newsletter.equal.vc/p/stop-being-s…
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Rick Zullo retweeted
Announcing Prosperity One: a proposed 6.6 gigawatt nuclear campus in Lewis County, Kentucky
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I now feel whole 🙏
Best Ideas
hbs.edu/ris/Publicatio…
We find that the stocks in which active mutual fund or hedge fund managers display the most conviction towards ex-ante, their “Best ideas,” outperform the market, as well as the other stocks in those managers’ portfolios, by approximately 2.8 , depending on the benchmark employed. The vast majority of the other stocks managers hold do not exhibit significant outperformance. Thus, the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.
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“Those Who Do Not Learn History Are Doomed To Repeat It.” - George Santayana
I was at a dinner with a more experienced GP (multiple time Midas lister) who explained this same dynamic to me with the dot com hosting providers. For all the knowledge and experience in the tech industry, I don’t know why more people don’t look to the past for answers on how the future would unfold as the comparison is remarkably striking and suggests the terminal outcome for almost every neo cloud will be zero (especially as we enter an accelerating interest rate environment). I try to read everything I can about past bubble cycles (epically GFC, 1999, clean tech bubble, stagflation in the 70s and the Great Depression) because they help unveil clues on what might happen in this cycle. I try to learn from folks who have seen these cycles before and how they navigated through them.
I understand the rational to spend scarce time/resources learning about the bleeding edge of AI (which is an equally acceptable approach), but seems like more have chosen ignorance out of the sake of arrogance, preferring to follow the mentality of the herd.
There are infinite distractions in this world, but the single greatest resource we have available as a society is the ability to access thousands of years of wisdom from millions of people who have experienced them and most of it will cost you less than a beer at a bar on audible.
I was at a dinner with a more experienced GP (multiple time Midas lister) who explained this same dynamic to me with the dot com hosting providers. For all the knowledge and experience in the tech industry, I don’t know why more people don’t look to the past for answers on how the future would unfold as the comparison is remarkably striking and suggests the terminal outcome for almost every neo cloud will be zero (especially as we enter an accelerating interest rate environment). I try to read everything I can about past bubble cycles (epically GFC, 1999, clean tech bubble, stagflation in the 70s and the Great Depression) because they help unveil clues on what might happen in this cycle. I try to learn from folks who have seen these cycles before and how they navigated through them.
I understand the rational to spend scarce time/resources learning about the bleeding edge of AI (which is an equally acceptable approach), but seems like more have chosen ignorance out of the sake of arrogance, preferring to follow the mentality of the herd.
There are infinite distractions in this world, but the single greatest resource we have available as a society is the ability to access thousands of years of wisdom from millions of people who have experienced them and most of it will cost you less than a beer at a bar on audible.
Ben Horowitz explains why a16z doesn't invest in neoclouds after living through the dotcom bubble
"If you get into a pathological debt situation, that can wreck anybody. It's why, by the way, we're not invested in any of these neoclouds, for that reason. That whole thing scares it."
"It can end up being a very dangerous arbitrage business where you can get upside down easily."
"You look at Loud Cloud just as an example, here's a simple thing that happened to us in 1999. Bandwidth was $1,500 a megabit. And you couldn't get it, it was very hard to get. And so you had to get a long-term contract, three years."
"By 2001 it was $50 a megabit. So if you were holding bandwidth, you were just dead."
"So that kind of thing is so out of the control of the entrepreneur. And so different than what we'd like to fund. That, you know, it just scared me to death."
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