In this episode, the host Harry Stebbings explores the cyclical nature of markets and the lessons learned from past downturns with insights from seasoned investors such as Bill Gurley, Doug Leone, Jim and Arthur of Accel, and Keith Rabois. They discuss the importance of maintaining investment momentum, realistic valuation, and managing reserves during busts. Mark Carney, former governor of the Bank of England, delves into the implications of rising interest rates on risk assets and the need for planning for potential failures. Michael Eisenberg emphasizes the constant nature of innovation despite market cycles, while Sonali De Rycker and Oren Zeev share the significance of partnering with entrepreneurs and learning from past crises. Fabrice Grinda concludes by highlighting the resilience and growth potential of the technology sector, regardless of macroeconomic conditions.
"Every once in a while there's what we call a bubble where people say, well that's invincible. It can only go up. When that confidence is withdrawn, then the prices can collapse."
This quote underscores the nature of market bubbles where assets are perceived as infallible and their value only appreciates. The quote also highlights the vulnerability of such confidence and the potential for a market crash when that confidence is lost.
"It struck me, it really landed for me. And there's an old saying in venture capital that the way to protect yourself against the downside is to enjoy every last bit of the upside."
Bill Gurley reflects on the cyclical nature of venture capital and the necessity of fully capitalizing on the positive phases of the cycle to mitigate the impact of the inevitable downturns.
"Boom and bust inject a sense of fear to balance, a sense of greed, a sense of reality, and it just grounds you, and it gives you the experience and the strength to overcome the next bus that we absolutely know is coming."
Doug Leone emphasizes the balancing effect of boom and bust cycles, suggesting that they instill a healthy sense of caution and ground investors in reality, ultimately strengthening their ability to navigate future market downturns.
"My only advice is be a realist and recognize that when it turns, it's not always obvious that it's turning. But be a realist and start to look for when it really has turned, and then adjust quickly."
The quote from the founders of Excel advises investors to maintain a realistic perspective and to be prepared to act swiftly when the market shows signs of a downturn, highlighting the importance of recognizing and responding to market shifts.## Market Valuation and Potential Contraction
"Price to revenue of companies, three to five x, where we were at the peak ever before, so that leaves a lot of room for contraction."
This quote highlights the current high valuation of companies in the market and suggests that there is a significant risk of a market downturn.
"I mean, everything reverts to the mean at some .1 hundred times revenue is just not sustainable."
The speaker emphasizes the unsustainability of extremely high revenue multiples, implying that such valuations will eventually normalize.
"I would invest in seed companies with the right team, with the right vision, all day, every day, in any cycle."
This quote demonstrates the speaker's confidence in investing in early-stage companies with strong teams and clear visions, despite market conditions.
"In the growth rounds, I absolutely would only invest in things that are priced appropriately because you really do only have a two or three year window."
The speaker stresses the importance of prudent investment in growth-stage companies, highlighting the short timeframe for realizing returns in this phase.
"Both Peter and I figured out this market was crashing last summer and we really tried to stop people from investing at ridiculous prices."
This quote reflects the speaker's market foresight and attempts to mitigate overvaluation by advising against high-priced investments.
"The problem for younger vcs over the last three or four, maybe even five years, is with everything inflated, most of that inflation is paper, not real."
The speaker points out the potential misconception among less experienced investors regarding the true value of inflated assets.
"You mentioned too, there was a whole bunch of other stuff that's kind of fed into my perspective."
The quote suggests that the speaker's market view is informed by a history of witnessing various market events and their impacts.
"While you may be super smart, smartest people in the world get carried out if their models are wrong or if an unexpected thing happens and they can't chart an exit path."
Here, the speaker warns against overconfidence in market models and the importance of having an exit strategy in the face of unforeseen events.
"I think the difference between this and say, 87 and 97 with LTCM is that this is not a shock, this is not an episodic jolt."
This quote contrasts the gradual nature of the current market situation with the sudden shocks experienced in previous market crises.
"It's the combination of the Fed taking the air out of the balloon of liquidity, and then you have this valuation extremes, particularly in growth, that very hard to support with valuation models."
The speaker attributes the current market conditions to the Federal Reserve's reduction of liquidity and extreme growth valuations that are difficult to justify.
"One of the lessons of a boom, which you've only seen the boom side of, not the bus side of, but what happens in a boom is that there's big capital gains."
The quote emphasizes the need to be cautious during boom periods and to consider the potential for downturns.
"The market can be wrong longer than you can stay solvent."
This quote is a reminder of the importance of financial prudence and the potential for the market to defy expectations for extended periods.## Impact of Interest Rate Increases on Markets
"Well, what tends to happen when interest rates increase is that there is an amplified impact on the interest rates of risk assets or the discount rates on risk assets."
This quote explains that when central banks raise interest rates, the effect on riskier assets like stocks or cryptocurrencies is more pronounced than on safer assets. The discount rates, which are used to value these assets, increase by a larger margin than the actual increase in bank rates.
"You could crypto various defi applications in that camp. They've had a very large run up."
The speaker is categorizing cryptocurrencies and decentralized finance (DeFi) applications as risk assets that have recently experienced significant price increases, suggesting they may be more susceptible to pullbacks when interest rates rise.
"But it turns out that the best time to invest is when it busts."
Michael Eisenberg highlights that downturns can present the best investment opportunities, as asset prices may be lower and there is less competition for deals.
"There's a lot of unknown and uncertainty and bust."
This quote captures the challenges that come with investing during a market downturn, emphasizing the unpredictability and the need for caution and strategic thinking in reserve management and support networks.
"Reserves is an art and not a science."
Michael Eisenberg suggests that determining how much capital to reserve for future investment is not a precise process and requires judgment and experience.
"Busts are psychologically impactful far more than they're financially impactful."
This quote emphasizes the psychological toll of market downturns on founders and investors, which can be more significant than the financial impact, highlighting the importance of being prepared and opportunistic.
"The minute you lose your confidence, you lose your right to exist."
Sonali Derika stresses the importance of maintaining confidence and continuing to invest, regardless of market conditions, to remain relevant in the venture capital industry.
"It's your partnering mindset. You have to partner with your entrepreneurs."
This quote underscores the importance of building strong relationships with entrepreneurs, especially when they are receiving conflicting advice and facing challenging times.
"First of all, I think every crisis is different, just like every war is different."
Doug Leone shares his perspective that while there may be lessons from past crises, each one has distinct characteristics that require a unique approach to investor psychology and strategy.## Overcoming Past Failures
"Every single deal that I did in 1999 tanked was a bad deal. Every single deal is 0% success."
This quote highlights the complete failure of investments made in 1999, emphasizing the severity of the situation.
"So don't over obsess about saving. It would be my advice, by the way, it's a good advice regardless of crisis."
The speaker suggests that one should avoid fixating on failed ventures and instead move forward, which is applicable in any crisis.
"I can make a reasonably compelling argument or case that we have three outcomes ahead of us, and I can make a good argument for all three of them."
This quote introduces the concept of considering multiple future economic scenarios and the ability to argue for each one's plausibility.
"The last 200 years have been a history of technological innovation that has led to improvements in the human condition over the last 200 years, despite world wars, the Great Depression, and frankly, even the last 40 years of, like, Black Monday, the massive recession of 81 82, a recession in 92, a recession in 2001."
The speaker reflects on the historical trend of technological progress leading to overall human improvement, despite various economic crises.
"The most interesting companies in the last decade were all created in the seven, nine recession. Uber, Airbnb."
This quote illustrates how successful companies can emerge from economic recessions, using Uber and Airbnb as examples.
"My personal net worth is still 60%, basically early stage startups, because they can grow very dramatically."
The speaker shares their personal investment strategy, which heavily favors early-stage startups due to their growth potential.
"I think tech companies have pricing power."
This quote suggests that technology companies have the ability to set prices and potentially benefit from inflationary environments.
"There's no place I would rather be other than tech."
The speaker concludes with a strong endorsement of the technology sector as their chosen investment focus.
"It was also quite a humbling episode for me, hearing some of those incredible people share their wisdom and just realizing the body of work that we've built over time here at 20 vc."
The host expresses gratitude and humility for the insights shared by guests on the podcast and the evolution of the podcast itself.
"Do let me know on Twitter at Harry Stebings but before we leave you today..."
The host encourages listener engagement and introduces the transition to sponsor messages.
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