The more and more I grow older I think these types of forums are pure unreadable garbage.
There are nuggets of great information and wisdom here and there, but the people that dish that out aren't commenting that often. However; you have no way of knowing if a given poster- most of the posters you are reading from- have any fucking idea what they are talking about. I'm reminded of being told not to believe anything you read on the internet by my elders in the early 2000s...
Instead what I find is that I'm participating in a massive maw of negativity and panic, almost a desired state of entropy and failure. I think it May Be Time To Stop Posting. I think I'll keep my head down and do my best to keep food on the table instead.
Bogleheads is a forum of primarily disciplined investors interested in becoming wealthy over the long term via steady contributions to a risk diversified portfolio. It's a pretty knowledgeable community with a lot of high earners in medical & technology fields.
These are investors who are diligently adding to their $VTI position not dabbling in high-risk venture capital backed companies.
Easy to predict doom, though. If you do it enough, you'll eventually be right.
These are strange times. Interest rates rising, inflation crazy but economy and job market is pretty hot.
As a Bogleheader myself, I'll keep plunking money into my ETF's at discounted prices and believe it'll pay off long term. :)
That's why we need usenet: back then nice posts, human knowledge flow, at least in some groups, while under all platforms, even the most open and targeted like HN platformisation effects bite.
I agree with this to a certain extent. But it seems like this economic downturn is more a result of pumping the economy full of (near) zero-interest rate money and that cash inflating a growth stock bubble, as opposed to a tech bubble being inflated by VCs directly.
In an economic downturn, VCs are going to have more power and preach more financial prudence. But VCs are awash in capital right now.[1] Their money needs to flow somewhere in order to provide a return to their LPs. How does that factor into this analysis?
My hypothesis is that the negative unit-economic businesses that the article refers to will falter, but there are plenty of early-stage startups (the ones that didn't need a multi-billion dollar round from Softbank to win their category) that will be fine.
Looking at startup hiring in the last couple of years, its kinda clear that most of these startups have just way too many employees. Their operations are not capital efficient at all.
Why does a D2C brand like Casper, for instance, not make a profit? Their physical counterparts are able to turn profits despite the cost of running physical stores.
Or why does a crypto exchange like Coinbase need 5,000 employees?
> Or why does a crypto exchange like Coinbase need 5,000 employees?
Because in many tech software companies there are also 5,000 employees, who are bored and over-engineered current tooling and best practices. It’s self perpetuating.
Can LPs claw back money? If the market doesn’t look good this year and all of the LPs need to reallocate cash to public markets.. then why would the VCs hang onto it?
It depends on the terms. I know of at least one 2000s banking startup that was on track to make cash flow positive but had their cash clawed back by desperate investors that needed to cover other things. I used to own their CVS server (sparcserver 10) that I used as a random openbsd box for years. Bought it for $100 at their fire sale. Still had all their code on the HDD.
Still have my nice office chair from when dot com imploded (company was literally named Software.com), and the facilities guy just said "take whatever you want". Remember devs wheeling everything out into the parking lot
I bought a bunch of equipment at a failed dotcom auction in 2001 (and still use the desks).
None of the computers were wiped, so we had a look around. My friend’s prediction was spot-on: “I bet you’ll find more porn than business plans on them…”
From what I understand, the way it usually works is that LPs don't give the VC funds all of the money upfront. They pay in a portion, and then the VCs have the ability to subsequently make "capital calls" up to the total commitment value.
If the market is really bad, you could see LPs start to default on these capital calls. There are consequences to doing this, so this isn't a likely scenario, but it could happen in a worst-case scenario.
Exactly, to me from what I read in the media, it almost feels like VCs are rooting for a haircut to gain more bargaining power with companies. It has become expensive to get a piece of the pie and they want it easier. Not that I don't agree that everything is inflated, just that the only ones who I read talking about the downturn are he VCs and not the founders. (Also saying this as an outsider with limited exposure)
Anecdotally, there have been 2-4 partial washouts in the last 12 years of “bad” companies. However each time this came up, new money came in and saved the day. Bubbles have been called since 2013, in 2016 Uber, Lyft, and Wework all started looking shaky. The big crypto rumpus each resulted in a crash.
Now, the problem is that if you took the pessimist view at any of these times - you’d have missed the big “wins”. But now we have 100 Billion dollar companies which may not be viable businesses. Few to none of the unicorns ever went down.
Thing is, if you got in early on Uber and Lyft you still did well. Only SoftBank really got screwed on that one. Same goes for all the pandemic companies crashing now like Zoom. They IPO'd at $62, meaning if you invested pre-IPO you got over 10x returns at the peak.
You have to remember that VCs are really middlemen between investors and startups. The supply of funding is very much driven by investor psychology as well as various exogenous factors and startup valuations are driven by supply and demand rather than by what VC fund managers consider a good valuation to attain a reasonable return on investment.
I always think of 90% of the companies in SV absurd. Makes it really hard to work in the tech industry, I could never be a VC. I just dont know if this another bust/boom cycle or it'll be really dead now.
I'll be graduating and entering the job market in two years--does this mean I will be finding a job in the middle of a recession? I know all economics is speculative, but I'm to get a realistic sense of what all this means.
On the one hand, I've seen the YC memo which writes as though a big crash is obviously on the horizon, but in daily life, it seems like the economy is still going strong, wages are higher across the board (from tech internships to my parent's retail job). I'm not hearing anyone outside of HN/tech talking about any recession.
Is this downturn in CS/tech jobs a likely outcome or just speculation? Is there anything I should do/expect different to prepare?
recessions usually affect the top tier and the bottom tier the most. Bottom tier will have trouble finding a job, and very top tier talent might have to settle for making 500k instead of 700k. The folks in the middle...well, mostly it doesn't affect them much.
Literally a huge swathe of the tech community could just choose to ignore it and they'd go about their business. Sure you could get laid off but that happens in good times too, it's just not as talked about. If your chances of getting laid off go from 3% to 6%, you don't really live your life any differently. Good to be aware it can happen, but mostly just go about your day.
Don't sweat it. This pain will be at the top and by the more senior folks.
I got into the business in 02 at a startup. Moral was low, lots of folks had seen their options become worthless and extreme growth had stopped.
Once the frat party was over, just as the post said, the company had to learn how to live off the land. So while it wasn't easy doing more with less, working with smart people that were forced to be ingenuitive was invaluable.
The other positive with starting out in a rough patch is you'll get to learn what to be skeptical of during those quartly earnings calls (there are only so many times EBITDA adjusted ARPU can be said before you start to wonder why there's little talk about profit)
I guess what I'm saying is, you're going to be OK, the bits still need to flow, servers will still need to scale and software won't write itself.
Focus on being employable & excellent by having real accomplishments, humility, and great attitude. No matter how many people there are looking for work, there's always a shortage of people w/ these traits.
If you're entering the job market in two years, that is going to be closer to when the recovery is likely to have started.
Your first job might not have as large of a salary as you'd like. You should be prepared to job hop a bit and not get too attached. Stay flexible for a bit and don't make life plans that require stability.
Looks like an opportunity to allow the time series to be adjustable at this point; I suspect "Transportation", "Food", and "Travel" will top that "Startup layoffs by industry since COVID-19" for quite some time.
I really don't envy late-stage VC at this point. They either need to double down or write-off their portfolios. And doubling down carries the possibility of replacing CEOs, and dozens of other nasty tooling decisions that rarely make a difference.
So if a VC can predict 1/10 companies that are going to be successful, does that mean they can pick 1/10 recessions/market crashes? All kidding aside, I agree with others here that the overreaction of doom and gloom really needs to be put in a wider context. The S&P has gone bonkers, RE has skyrocketed, and tech valuations are utter insanity.
If the S&P falls another 10%, if RE crashes 35%, and tech valuations go to a third of what they were getting in the last two years....so what? That's what things were in ~2019? I bought a house 18 months ago and if it lost 35% of what it's valued now, I'd still be up from when I bought it.
Sky high valuations will definitely kill some companies that were funded in the last two years, but will it affect most of them much?
If Databricks and Discord and Stripe lose a few billion from their valuations, other than some grumpy employees does that kill the company? I don't see how it's cause for a crash...
If you want a wider context, take your favorite index, switch to log scale, and adjust for inflation. Then you'll have a pretty useful visualization of real returns.
If you take S&P 500, you'll see a period of sustained growth from the late 1940s until the mid-1960s, followed by a period of poor returns until the early 1980s. At least according to one interpretation. Then there is a period of growth until 2000, followed by poor returns in the 2000s. We are currently in another period of growth that started in 2009.
The risk people are afraid of is not a simple crash (like in 2008 or 2020) but a lost decade or 15 years. It's a plausible scenario, as such things do happen. On the other hand, the current period of growth is the shortest of the three, so maybe the growth is still sustainable and there are many good years ahead of us.
And for an even wider context: The US has been stable and prosperous for over 150 years. That's a long time by the standards of historical empires. Maybe Pax Americana is over, and we are now starting the decline towards our version of the Crisis of the Third Century. If you are working age, there is a nontrivial chance of that happening in your lifetime.
I'm not even arguing that growth will continue. I'm arguing that a correction is happening, it's probably a good thing some capital is being wiped out, but we aren't in a scenario where we'll likely see cascading failures across the entire financial system.
If by the end of the year things are 'reset' to ~2019... that sucks for some investors, it sucks for people who got options grants in the last couple years, it might negatively affect the job market some, but it's not doom and gloom. Four years ago was a perfectly workable amount of capital, reasonable valuations, decent salaries, etc.
- Technological progress has increased worldwide interdependence, to the point of destroying resilience. The world is one vulnerable system now to a much larger extent than any time in the past. Think Ukrainian grain exports to the North Africa. Hundreds of millions have grown to rely on that. Hardly even technologically possible 100 years ago.
- Physical limitations to economic growth. Technological progress has made humans increasingly expert at exploiting natural resources on an ever larger scale. The same cannot be said of management of negative externalities. In other words, we can probably manage peak oil. Peak water? Less so. Global warming? Do you see a way out of that?
The grim part is that global warming is still too cheap, so people don't take it seriously.
Even the regions that are most affected by it and could do things to better prepare, are carrying on as business as usual. Yes, heatwaves kill a few hundred people, but apparently that's "fine".
Ambitionless short-term local-maximum thinking rules the world.
Crashes are about leverage and derivatives. Once those trades start unwinding, you end up with panics and other issues.
We live in an era where regulators are toothless and guys like Elon flaunt criminal behaviors. If they get away with that in the open, lord knows what’s happening out of sight.
(this ignores the legal yet malicious actions of Musk attempting to have the Cooley LLP law firm employing an ex-SEC attorney previously engaged in matters with Musk fire the attorney through coercion: https://www.cnbc.com/2022/01/15/tesla-asked-cooley-to-fire-l...)
This is a case where words used are inflammatory on purpose to paint a damning picture of someone. The context in which that phrase is used is much much more nefarious than shunning the SEC over some dumb tweet or hiring a legal firm, which someone on HN doesn't approve of because they don't like one of their lawyers.
Please look up the context in which the phrase "criminal behavior" is typically applied.
HN is not a court room that's why I'm having a hard time understanding why language like that is becoming more and more common place here. Maybe it has something to do with many prominent startup CEOs being lawyers, Cloudflare CEO comes to mind.
Can we keep HN spirit the same? The same spirit that values geeks, rewards going against the grain and celebrates individuals not based on how society judges them, but on how intrinsically interesting and beneficial their work is to humanity.
Real estate will not crash anywhere near 35%. Even before Covid, housing economists have been warning for a decade that we’ve spent the entirety of the 2010s underbuilding housing[1]. Against that we have huge demographic demand from Gen Z reaching prime home buying years.
People who aren’t familiar with the underlying fundamentals of the housing market assume the Covid boom was a RE bubble. In reality it was just demand getting pulled forward. A generation of new entrants played musical chairs to grab a house before the supply ran out. 28-year olds who were waiting until they were 35, moved out of city apartments to grab suburban SFHs because they were afraid of being priced out of the market forever.
Those same people, sitting on cheap mortgages, aren’t going to sell their house to move back to the city, just to buy a house again at a much higher price in a few years. Covid compressed 7 years of price appreciation into 2, but these prices are the new normal.
Massively annoying to hop on Zillow and see how many homes sold for $N in '20/21 get re-listed for $2*N a year later. But you're likely right though. It'd take a depression to reset anything back to '19/20 pricing now that everyone got addicted to listing their homes for 2x the $/sqft and being rewarded with people throwing cash offers in their face with no inspections.
And it really isn't going to get better. You've also got cash flush boomers making their economic exit to retirement-land who will continue this problem.
Depends on the local tax laws. You pay income tax on vesting of RSU. In the US and Europe, RSUs are difficult to get wrong because of share withholding.
In other countries, they are risky if you don’t watch out:
1. RSU vest at $10
2. You have to pay additional income tax eventually of let’s say $2 because of that valuation. (the US and Europe would only hand out shares worth of $8 and withhold the $2 taxes for you. Other countries make this your responsibility and give you the full $10).
3. Stock crashes, your shares are only worth $1 if you would sell them now.
How do you pay the $2 tax from 2., once tax is due, if your shares are only worth $1? Multiply that by 1,000 to 100,000 RSU that vested and you get into difficult decision territory quickly.
Obviously, you can hedge against that by selling the appropriate amount of RSU on vesting day.
> In the US and Europe, RSUs are difficult to get wrong because of share withholding
I believe the withholding is 22% by default. If you're living in CA and have a large RSU vest, then your actual tax liability is much higher. Friends at Coinbase had an initial $75k (yearly) grant vest at $750k. They didn't sell, and that grant is currently worth $150k. Their 2021 W-2 claims they made much more money though.
(This is neither tax advice nor investment advice, or any other sort of financial or legal advice, ofc.) IIRC, RSU grants are taxed as income, but only at their value when they vest. So, gains or loss don't "matter", in the sense that they don't affect the amount you need withheld for taxes. I.e., you're taxed on the current value, which then becomes the cost basis; any further gains/loss is taxed as capital gains/loss.
In this particular example, I would have expected the employer to withhold the appropriate amount when vested. (The subsequent loss is, ofc., unfortunate, but it's no different than any other investment.)
Now, if their employer didn't withhold the appropriate amount, and they didn't know about it / didn't account for it, and combined with the rather exceptional circumstance of that stock (although… you're in crypto, and you're not accounting for volatility?) … yes, that is going to be a large tax bill. But the type of person here getting this level of a grant ($75k) can most likely cover it[1]. (Though, I do grant that this is exceptional — but that's also part of the point, too.)
AIUI, when this situation applied to me, the idea was that the employer knows that they're in CA, and should thus account for that & withhold appropriately.
[1]: assuming a 30% tax on the vest, that's a $225k bill. The un-withheld portion from your assumptions is $60k; there's still $150k in stock that could be liquidated to cover that bill, or, I presume the type of individual getting a $75k grant is more than likely going to have $60k in savings. If it's 0% withheld, that's $225k - $150k = $60k in savings one would need. We can, ofc., contrive a situation here where that person has $0 in the bank.
While I wasn't aware other countries didn't do the automatic withholding … seems like you can (and should) still do that yourself. You know you're going to have a tax liability. But even then, in the event that I had forgotten, the few RSU awards I've gotten amount to "nice bonus" amounts. The tax liability would be easily covered by normal salary/bank account.
And, after vesting, I've always considered any RSU then just … a normal stock. You have to decide whether you believe enough in the company to continue holding it, or if it'd be better off turned into cash &, if you want investments, then just mixing the cash into whatever you normally put your money into.
> Multiply that by 1,000 to [$1M of RSU awards] and you get into difficult decision territory quickly.
Getting RSUs doesn’t ever “suck”, but getting 70%+ less (denominated in $usd) money in your quarterly vesting than before is unpleasant - even if you knew it was coming at some point and don’t critically depend on that income.
Most new hires can simply quit and start again somewhere new with a better deal.
If a company can't adjust equity comp for new employees because they came on at the wrong time, then there's no reason to stay and vest at a bubble valuation. It's like being underwater and being told to just deal with it.
Going anywhere else will get you new RSU grants priced appropriately.
Talk to your manager. If they can't pull the right levers for your retention, you don't owe it to them to stay.
Your take on where housing prices can go is not realistic.
If you take a look at this chart you’ll see that corrections bring housing prices back to before the boom. Housing prices will fall way more than 35% in the coming recession and your house will be worth much less than it was 18 months ago.
The chart you’re posting ends in 2007 at the height of the housing bubble. Housing prices already corrected from this reference point 15 years ago.
Given the vast supply-demand mismatch, housing today is generationally underpriced. The simple fact of the matter is that new home construction plummeted after the GFC to levels not seems since the 1930s and it has never recovered. We’ve spent a decade drastically underbuilding housing, while enshrining NIMBY policies making it near impossible to ever pick even get back to pace let alone make up for lost time. Against that we have the largest generation in history aging into prime home buying age.
Maybe I don't understand how things work, but if you plan on enjoying and living in the house, does the house value matter except for property taxes? I bought a house to have stable "rent"
> Maybe I don't understand how things work, but if you plan on enjoying and living in the house, does the house value matter except for property taxes? I bought a house to have stable "rent"
You could end up being underwater on your mortgage, which could be a bad thing if other aspects of your financial situation deteriorate.
> You could end up being underwater on your mortgage, which could be a bad thing if other aspects of your financial situation deteriorate.
Being underwater on your mortgage is, in and of itself, not too bad. If you also can’t pay the mortgage, that’s bad, because being underwater means you can’t sell the house to get out of it.
OTOH, in a non-recourse state, especailly in a bad economy where you are very far from being alone in that situation (which, statistically, is when it is most likely to happen), there’s a sense in which that is more of a bank problem than a you problem.
In California & Washington mortgages are non-recourse, ie they are secured by the property itself and nothing else.
So if your financial situation deteriorates to the point where you are forced to foreclose, you lose the equity in the home, but your other assets are protected.
> But even a non-recourse foreclosure tanks your credit rating and makes it difficult to rent or buy another home, right?
Been through essentially that (it was actually a short-sale in a non-recourse state, not a foreclosure, but in most effects the two are pretty similar.)
So, yeah, because we didn’t rent the new place immediately when we realized that there was a problem but after some period of nonpayment (but before the short sale was finalized), we had to find an individual landlord who managed property directly rather than one managed through a management firm that ran applicants through a hands of screening process before even looking at them (who we found, before the apartment was publicly listed, through an real estate agent who we first contacted because they had listed their house for rent and it was at the high end of what we were looking at, and who we also ended up working with on the short sale.)
Once financial circumstances turned and we were in the market to buy again – within the 3 year period of ineligiblity after a short sale for an FHA loan – we had relatively little problem finding acceptable financing, though we paid slightly higher (but still tolerable) rates, and were able to refinance into better rates a couple years later.
Which is really influenced by how much you are financially leveraged, and less so about whether a home is underwater or not. In a case where capital is needed, if I "put 10% down on my primary residence with remaining capital in more liquid assets and the home becomes underwater" can often be a better situation than if I "put 40% down on my primary residence with little capital in liquid assets and the home decreases in value by 20%".
Well if house values go down it changes the size of the mortgage you can take out on it, and your stable "rent" will turn out to be stably high compared to market, but yeah, house prices going down shouldn't affect your plans too much if you'll just live in it.
Some people don't have "stable rent" as they may have something akin to an ARM.
Besides that, some people purchase homes to fixup/sell as a way of personal/business income. Others may have purchased just barely in their means and now inflation going up on necessities has pushed them out of their means ... and they need to sell but also can't afford the loss in a declining market. Others may be relying on the value of their home for retirement related expenses.
My point: there are a lot of situations that a declining market makes worse. Depending on how far down it goes, you can see a lot of people hit hard times which can lead to real economic pain for everyone.
I'm not sure where you live, but where I'm from, the hip leverage of.choice was to take HELOCs (home equity line of credit), which a lot of people use to extract the "value" they have in their homes to help fund their lavish unsustainable lifestyles. The sh*t hits the bricks and their houses are underwater, they're now basically double screwed because the home is worth way less and they can no longer extract money from the home (possibly being unrecoverable crippled in debt)... It'll get real bad really fast if we're in for a notable correction.
Got ya. I keep it pretty smart I think. Got a house for 270k and I make 150k a year. Mortgage isn't high at all. (1300) after all the add-ons. Don't plan on extracting value from the house less something terrible happens like a tree falls on my roof or something. fixed interest rate at 2.7%
Housing cannot fall without unemployment. So far the economy has lost workers not jobs. Unemployment is 3.6 % and going down. Real min wage is 22$.
In addition, there is a big wave of onshoring coming into the US due to supply chain issues.
Housing price will not fall due to 25% inventory levels from 2008. Also High mortgage locks sellers into their current homes. I predict another 20% rise in house prices (At least nominal rise).
Don't worry: the job of the Fed is exactly to increase unemployment! This is how they manage to create recessions in order to keep monetary policy under control.
How, Where are they are going to find the employees? Remember that half of the baby boomer retired. I think that the US is facing 20 years of tight label market. Especially if globalization is on its way out.
Look at unemployment pre and post GFC. To save you the time, 4% to 10% in a matter of months.
Unemployment is almost always lowest prior to a recession. It's exactly an overheated labor market that drives the Fed to tighten and induce a recession to cool off inflation.
Inflation cannot be defeated without driving unemployment up, when labor market is this tight. Wages rising at 6%+ is not conducive to 2% inflation
Saying it will crash because it's risen so high is not logical. Japan is obvious counterpoint. Housing prices rose, growth stagnated and they kept rising. Why? Supply and demand. Demand is still strong and new construction has slowed. We still have many years of pent up demand and no looming construction boom and not much desirable land to build on.
I’ve had similar thoughts, but then I realized there’s substantial inflation that seems to be sticking around for the foreseeable future. So even though certain assets I have are where they used to be 2-3 years ago, that’s in nominal dollars, not real dollars.
I had people telling me nonsense back when I bought in 2009 as well, that houses would be had for pennies on the dollar. I put my money where my mouth was and they're poor and still renting. In the real estate crash of 2008, how much do you think houses went down? And you think house prices will crash more this time than in 2008?
Anecdotal data point here. During the 2008 crash, I purchased a 2 bedroom / 1 bath home for $68k in foreclosure. It previously had a mortgage for $239k.
My sister bought a McMansion in ‘02, before things got crazy, and it took years for it to regain enough value post- recession to be able to sell it at a profit. At the peak houses in the neighborhood were going for over half a million and they got theirs for ~200k.
A lot of of the problem was the government didn’t let house prices fall and bought up tons of mortgages to keep them off the market for years for political reasons. Really depends on how the government decides to prop up the housing market this time, probably not as much since the whole bubble isn’t based upon it.
Looking back two recessions you have tech stocks going to the moon and basically no bailouts for the people playing the stock market slot machine. IIRC only really Chrysler got bailed out and that was on shaky political ground.
So you have a crash and the government’s response to speculators was “meh” or a crash where the majority of people were bound to lose a whole bunch of money out of their biggest asset and they turned on the money spout to save their jobs. You have to decide on your own which one the current environment more closely resembles to have an idea what the government’s response might be.
Ironically[0], my sister’s house was rented out for less than the mortgage payment for a few years after sitting empty for a couple years before that because she’s a slacker.
Paying rent (because they moved out of the state for school/job) and a mortgage for a house you can’t sell had to suck pretty bad methinks.
[0] perhaps according to Alanis Morissette‘s definition of irony.
The bail out tools available during the 2008 crisis is not available today. The 2008 can was kicked down the road with few safe guards to prevent what happened, happening again. You are in for a rough time. I recommend EconTalk Podcast to find out what I am talking about.
Literally all of the bailout tools from 2008, plus many more are available today. In fact the Fed is much more willing to quickly deploy QE because it has experience and has seen it work. This isn’t hypothetical, because it’s exactly what happened in March 2020, and why the Covid recession was a V-shaped recovery.
Inflation is a function of an overheated economy running with a tight labor and commodity market. If you're positing a 2008-like crisis followed by a deep recession, it's virtually certain that the economy will become deflationary, as people hoard cash.
You don't have to take my word for it. From 2007 to 2008 inflation crashed from nearly 5% to 0.1%.
You said the tool is available _today_ though. It's not. Of course on some other day when inflation is not out of control it would be available, but not today.
oh man, another one who thinks this crash will be worse than last time. Just articulate why you think cascading failure will happen in the real estate market at this point. You predict that people who are underwater are going to be forced to sell because...why? And you don't think the people who are renting will want to buy houses?
(Context: I'm a VC, but while I graduated just after the dotcom bubble and worked as an engineer through the '08 recession, I was not a VC until ~10 years ago.)
Directionally I agree with the post. Relative to a few months ago, there's more fear, and a much bigger emphasis now on cash efficiency, lower burn rates, etc. That said, I'm less pessimistic than the author and have different takes on a few of their points:
Point 2: "VC funds have new investment periods of 5-6 years" -- it's more like 1.5-3 years these days. Which means that LPs can back an existing VC's new fund in 9 or 18 months, and that new fund will have lower entry prices and higher ownership. A lot of established LPs I've talked to appreciate that downturns can be the best time to deploy a new VC fund. I do agree with the author's conclusion that funds might shrink in size, and many funds -- especially less established ones -- will shut down. But I believe there will continue to be lots of capital available, especially at earlier stages.
Point 3: "The compensation for software and business people will drop commensurately" -- this is the point I'm least certain about. Startup salaries have risen quickly in response to FAANG salaries. Once Google and FB started offering $400k and $600k total comp to sr engineers, startups raised their offers significantly as well. This is part of what's contributed to much bigger seed rounds in recent years: you now have to raise $4m to pay for your team of 6 in SF, instead of $2m. And if Google stops paying $400k and starts paying $250k then I do think startup salaries will drop as well. But if Google et al keep paying high comp, then I don't think startups will have much of a choice, and I think overall software comp will remain high.
Point 4: "VCs will invest more in convertible debt" -- maybe. There are benefits to debt, which the author outlined, but also drawbacks. I think most investors who write big checks will still prefer equity rounds. I do think employee equity and options will start being rebased, which we're already seeing: https://pitchbook.com/news/articles/instacart-valuation-groc...
Point 5: "Some sectors will really suffer" -- I agree with this. Here's a good take: https://twitter.com/lessin/status/1531713953293668352. Basically if a business model depended on the availability of cheap, abundant capital, then that business model will be hard to raise for in the near future. I think pure software companies will continue to attract capital at healthy (but lower) valuations.
One big difference between today and 20 years ago is that you can build a real internet business with a small team. While valuations exploded in the last 2-3 years, it was not uncommon before then to see a startup raise $2m-$3m and get to $60k or $100k MRR. And that's a great run rate for a company with half a dozen people. Your burn with 6 people and $100k MRR is probably minimal, and your dependency on future funding is low.
Fed does two primary things to regulate/stimulate the economy:
- sets interest rate (how much is the loan rate that many banks will change you is the fed borrowing rate plus change)
- print money aka quantitive easing or how much money to effectively give away from nothing by buying things like corporate bonds that then allows those companies to invest in ideally stimulate economic activity
Since 2009, US interest rates have been rock bottom and QE largely stopped recently before COVID ended. That's because the economy was largely back on track . The Fed's plan was to start pulling the fictitious money out of the system by selling off those corporate bonds and around 2019 markets started to wobble. COVID forced everybody to print money again, but this time too much money was printed and people threw money at anything. Now that COVID isn't affecting the economy as significantly, travel, etc.. There is now out of control inflation somewhat related to supply shocks but also greatly exacerbated by cash in hand buyers looking to spend regardless of the cost.
Now the fed has the opposite problem from 2009/2020 so they have to start making money more expensive again and start to extract money from the market once again. This is scaring the hell out of equity markets because there's less cheap money to help juice speculation and cheap expansion (think all the Ubers of the world who don't make enough money). Their business models start to go down south when there's no new bank to cover their largesse.
Aggressive rebalancing of portfolios in face of global uncertainty (supply chain, war, interest rate hikes/QT).
Lots of handwringing, but sell-off of last 3-4 months has been extremely localized to growth tech. All the rest pretty OK. It's just that wall street whales no longer have an appetite for speculation, and they pulled out fast and hard.
This speculative money is going to return at some point (6 months, 2 years (?)), ironically likely to the same companies that saw 50% valuation cuts this year.
I am seeing so much doom and gloom, I don't think we're in for a "correction" any time soon. Everyone thinks they're Michael Burry these days. If all of Wall Street and their mom says it's going to crash, it's probably not crashing. My prediction is choppy seas until the midterms, and then back to all-time-highs.
Housing will take a 30% haircut, and we'll probably see some of the over-extended corporate debt come to roost as well. But tech is going to be fine, and crypto will bounce back by EOY.
I suppose in this case a "correction" is a crash of some form. A fundamental shift, and Agreed there's no basis for a fundamental problem.
Valuations are too high so a "30% hair cut" is warranted, but something like "ninja" loans or IPO'ed tech companies with 0 revenue isn't a thing right now.
There were market wide fundamental issues that cause huge shifts. This simply missing this time. The VC space isn't wallstreet and it definitely isn't mainstreet. Even if a crypto+vc crash happened, we'd only be in "haircut" not full on crash as a general populous.
That's possible, but also dismisses the role of the Fed in the current expansion. The "Fed put" has been replaced by a Fed dedicated to lowering demand until inflation comes down. If inflation doesn't come down this summer it could get ugly.
I think that the biggest blocker to the market hitting ATHs that soon is rising interest rates, given the predictable valuation haircut that high-growth unprofitable companies take when interest rates rise. Rising interest rates increase the discounting rate on their future cash flows.
Interest rates have already been priced in for a while. Hence the S&P 500 going up 3% when the Fed announced they were hiking by 50 bp for the foreseeable future. The only way another crash happens is if the Fed is forced to hike by 75bp.
Not quite. The market is pricing in a certain trajectory of rate hikes - basically another four 50bp increases with terminal rates around 2.5-3%. If inflation doesn’t start coming down that trajectory will change and the market will adjust accordingly.
If interest rates have been priced in for a while why has the market gone down so much in May?
Also the Fed has already said that they are going to raise rates much higher than 75bp. And in fact they have to to control inflation. Interest rates should be above eight or 9% right now and it’s not.
Depends on which side of the life begins at conception/birth debate you're on ;)
I took your suggestion as suggesting the fed should bump the rate up to nearly 10% in one go, with no warning, which isn't what they did back then.
I also think the artificially induced recession wasn't even necessary. It's more likely that Regulation Q reform is what actually ended that inflationary period.
Because the Fed previously announced they were only hiking by 25bp/meeting and they were forced to go to 50bp. Plus there were several big earnings misses.
Nearly everyone either bought a new home or refinanced within the last 12-18 months due to historically low rates. This also means that almost all mortgages are pretty much capped out in terms of loan to value.
If houses lose 30% of their value, a substantial amount of people would be underwater and would likely be better off walking away. Could be very bad.
Most people will not go underwater (not that many people, proportionally speaking, bought in the last 2 years), but either way, there's zero chance anyone's walking away if it's their primary residence. What are they going to do, live in a van down by the river?
Rentals in the near-future will be of higher cost until re-adjusted or if the demand goes much lower. Also, renting with a bankruptcy on the record could be challenging.
Not trying to patronize, but going underwater does not mean bankruptcy. The only way people are going bankrupt is if they can't afford their mortgage (e.g. they lose their jobs). The job market is extremely hot right now, so it's unlikely we'll have bankruptcies. Worst case scenario, homeowners contribute more to their loan than to house equity every month. Yeah, that kind of sucks, but still way better than renting or being homeless.
> Nearly everyone either bought a new home or refinanced within the last 12-18 months due to historically low rates. This also means that almost all mortgages are pretty much capped out in terms of loan to value.
How do you figure? Refinancing does not, in most cases, mean taking additional equity out, thus LTV should not change for the majority of refis.
Admittedly, the raw numbers are difficult to find in an article I can link. However, there has been a significantly higher volume of cash out refis than we've seen in the last 15ish years.
Cash out refis accounted for ~25% of all refinances in 2021 (roughly similar numbers in 2020). Remember at the start of the pandemic many people tapped their equity because of uncertainty and extremely low rates.
>if houses lose 30% of their value, a substantial amount of people would be underwater and would likely be better off walking away. Could be very bad.
That would only be true for people who did cash out refis, not for someone who just wanted a lower interest rate. All they did was re-amortize their current existing loan (on a house that they already had equity in) and get a lower rate.
This is what I remembered from Econ 101--inflation is good for debtors and bad for lenders because the real value of what you have to repay on a loan decreases, vice versa for deflation. I'm not sure why everyone is following the media into a fear of inflation when deflation would be far worse for anyone with house/car/card debt.
I wasn't trying to say that anything is coming or not, just that homes losing 30% of their value would be bad for people even if you don't intend to sell immediately.
All the folks that are pretty much capped out on their debt with their new mortgages should be a great position going forward because they're locked in with their 2-3% mortgages and interest rates (and/or market returns) should surpass that.
Because wages don’t usually go up in lockstep with inflation so you have reduced spending power in the short term which a long term debt doesn’t help out with.
When the choice is pay for gas to get to work or feed the kids nobody cares they are benefiting on their 30 year mortgage because of inflation.
Nearly everyone should have been qualified- many folks couldn't take advantage or had a low enough balance that it didn't make sense.
I don't have the raw numbers, they're almost all paywalled off, but you can see the recent volume of refi has been a multiple of each quarter from 2013 through 2019.
The total outstanding residential mortgages today are roughly $12T. Since 2020 onward, over $5T in volume has been refinanced. That's a large portion of the population with a mortgage that is very early in its lifespan.
Defaulting on a mortgage isn't that easy, and could have negative consequences beyond just getting your house foreclosed on. You could end up having no house, and having to pay the remainder of the difference.
You could go bankrupt, but then you'd have a hard time finding a rental place for the same amount that'll accept people with very low credits scores.
I'm more thinking of factoids like "the top X% have Y% of the wealth." People find these to be profoundly illustrative about the state of the world, justice, and policy, and aren't normally placated by the information that this is paper money or that the inequality in actual consumption is much lower. If for example housing collapses relative to stocks, the world will seem a much darker place, at least to the extent that you think these stats indicate the kind of place the world is.
Even if that's the case, it will only change the ROI of big VCs from like 4,000x to "just" 1,000x. Boo hoo. (Edit #1: Ok, this is hyperbolic but you get the idea).
Similar to BTC, if you bought at 0.01USD you're still making a killing, even with the recent dip.
BTW, YC's ROI is on the order of 50x-100x by my guesstimate (0.5B invested in ~3,000 companies, ~10% stake on a market valued at 400B before the dip); open to discuss it.
I hate crypto but I have heard the “if you bought at the top” line about 7 times now and it always ended up coming back much stronger a year or two later.
EOY there might be a bounce-back, which may be starting already. But it is somewhat unlikely that the rate hikes the fed are planning will really get inflation in check. We're seeing sticky wage inflation due to fewer people in the workforce and the fed is going to have to invert the yield curve to get that under control. They are going to have to hit the brakes in a way that hasn't been seen since Volker and will cause significant amounts of pain.
By the end of 2023 things should have gotten very exciting.
My worry is that we are headed into the twilight years of the baby boomers and there aren’t enough people in their 40s to fill the gap. It will be like Japan’s lost decade. Easily.
America has always had huge amounts of immigration though. The entire country is built on it, just like other former British subjects like Australia and New Zealand. I'm genuinely unsure who has to get on board given that most Americans can trace heritage to immigrants? We're not talking about unskilled or illegal labour.
> I can't mention the sub sector which I see as most hyped of all (Forum rules). But when the tide goes out in VC funding, you will find some real flotsam & jetsam left on the beach. It won't smell pretty.
The whole thing stinks. Cryptocurrency is a scam. SPACs are mostly a scam. Our American economy is basically just moving boxes back and forth and showing ads.
Never understood the HN hate for BTC (not crypto as a whole which has plenty of scamming). If after 12 years you don't get it, I suppose you never will.
BTC is sound money, even if not yet as widely used for transactions yet. We literally have the worst inflation in 40 years with the likes of Janet Yellen admitting they were wrong about 'transitory inflation', and yet we're good with Central Banks being allowed to dilute money. I encourage you to read about why Bitcoin makes sense as the ultimate store of value that fiat is pegged against. The book called The Bitcoin Standard is a great read.
Yes and no. I agree it is taking it's time to be used for transactions, but countries adopting it as legal tender is HUGE. So many payment apps (Venmo, Cash app etc) have adopted it as a medium of exchange. I would have liked it to be used more widely and am hopeful that lightning will get us there in due course of time, but I don't know with certainty what that path might look like.
There are nuggets of great information and wisdom here and there, but the people that dish that out aren't commenting that often. However; you have no way of knowing if a given poster- most of the posters you are reading from- have any fucking idea what they are talking about. I'm reminded of being told not to believe anything you read on the internet by my elders in the early 2000s...
Instead what I find is that I'm participating in a massive maw of negativity and panic, almost a desired state of entropy and failure. I think it May Be Time To Stop Posting. I think I'll keep my head down and do my best to keep food on the table instead.