20VC WTF Is Going On 3 Outcomes for What Could Happen From Here; What Needs to Happen To Avoid Recession Why Stagnation is Most Likely and What This Means for Startups and Venture & Why Catastrophe is More Likely Than Ever and Switzerland Could Be a H



In this episode of 20vc, host Harry Stebbings discusses the current state of the market and future scenarios with renowned investor Fabrice Grinda, founding partner at FJ Labs. Grinda, an influential figure with over 700 investments and 250 exits, including stakes in Alibaba, Airbnb, and Instacart, shares his insights on macroeconomics, the impact of interest rates on tech valuations, and the potential paths the economy could take: an optimistic scenario with a return to normalcy, a stagnant market with moderate growth, or a more pessimistic outcome with further downturns. He emphasizes the importance of technology in addressing significant global challenges and the need for startups to raise enough capital with prudent valuations to navigate uncertain times. The conversation also touches on the role of venture capital, the evolution of his investment approach, and the potential for significant shifts in asset prices due to various geopolitical and economic factors.

Summary Notes

Introduction to Market Outlook

  • Harry Stebbings welcomes Fabrice Grinda to discuss the current market situation and future scenarios.
  • They explore three potential market outcomes: optimistic, stagnant, and negative.
  • Probabilities are assigned to each scenario to anticipate the future of the market.

"The markets are changing fast and stay with our guests. We dig into where we are today and then outline three different cases for where it could go from here, the good, the bad and the stagnant. And then we attach probabilities to each."

The quote explains the purpose of the discussion, which is to assess the current market conditions and predict possible future scenarios.

Fabrice Grinda's Background and Investment Strategy

  • Fabrice Grinda is celebrated for his investment success, including notable exits and portfolio companies.
  • His investment philosophy is based on understanding marketplaces, applying consistent criteria, and utilizing a structured decision-making process.
  • Grinda's approach to investing is informed by his experience as a tech founder and CEO.

"I've always had the dual track founder investor because I was so busy as a tech founder, I was like, okay, I need to only invest in things I understand innately."

This quote summarizes Grinda's investment strategy, which is to focus on areas he knows deeply due to his background as a tech founder.

Evolution of Investment Approach

  • Despite the growth of his team and process, Grinda's core investment criteria have remained consistent.
  • The main change in his investment process is the addition of a preliminary team review before his final decision.
  • Grinda emphasizes the importance of trust in his investment dealings, often auto-signing legal documents based on verbal agreements.

"So funnily enough, not that much has changed. It's always been the same four criteria."

Grinda remarks on the stability of his investment criteria over time, highlighting the consistency of his approach.

Founder Funds and External LP-Funded Funds

  • Grinda discusses the appropriateness of founders managing external LP-funded funds while running their companies.
  • He emphasizes the importance of time allocation and transparency with LPs and VCs.
  • Grinda shares his personal experience of balancing founding a company with angel investing, believing it enhanced his capabilities as a founder.

"So it's a question of how people are allocating their time, right?"

This quote addresses the central concern of whether founders can effectively manage external funds without compromising their primary responsibilities.

The Current Macroeconomic Situation

  • Grinda refers to his macroeconomic piece, "The Great Unknown," to discuss the current economic climate.
  • He outlines historical economic bubbles and the factors that led to their eventual burst.
  • Grinda explains why the current situation is unpredictable, with multiple plausible outcomes.

"Now, today, the reason I call it the great unknown is I can make a reasonably compelling argument or case that we have three outcomes ahead of us."

Grinda introduces the uncertainty of the current economic situation, which he dubs "The Great Unknown."

The Optimistic Scenario

  • The optimistic scenario involves a return to normal inflation rates, which would alleviate pressure on interest rates and asset valuations.
  • This scenario considers the possibility that recent inflation is a temporary result of the Covid-19 pandemic and supply chain issues.
  • Grinda suggests that if inflation stabilizes, the market could recover and return to a positive trajectory.

"Now, imagine that instead of inflation spiking in the remaining 8%, we get a return to the status quo ante of two to 3% inflation."

Grinda presents the optimistic case where inflation rates normalize, potentially leading to a more favorable economic environment.## Supply Chain Constraints and Inflation

  • The inflexible nature of dock workforces and ship landing slots has led to increased pressure on supply chains.
  • The Covid-19 pandemic resulted in a shift towards purchasing goods due to restrictions on travel and leisure activities.
  • Supply chain constraints are not expected to be fixed soon due to the system's design.
  • A potential decrease in supply chain pressure may occur if Covid-19 restrictions are lifted and geopolitical uncertainties, such as the situation in Ukraine, are resolved.
  • Lower energy prices could result from geopolitical stability, potentially reducing inflationary pressures.
  • Technology's deflationary impact could lead to a productivity revolution in sectors previously untouched by technology, such as healthcare, education, and public services.

"And so that unprecedented shift put massive pressure on our supply chains, which has led a massive increase in shipping costs and all the underlying raw materials that go into the making of all the things that we order."

The quote explains the cause of the increased pressure on supply chains and the resultant rise in costs due to a shift in consumer behavior during the pandemic.

"So I don't expect that to shift. But Covid is perhaps on the way out, right?"

This quote reflects skepticism about resolving supply chain constraints soon and a hint of optimism regarding the potential easing of Covid-19 restrictions.

"If we reach some level of status quo in Ukraine, and I'm not saying it's a good one or a bad one, but I'm just saying if the geopolitical uncertainty of Ukraine ends in some way, shape, or form, maybe we see a return to lower energy prices, which have exacerbated inflationary pressures."

Here, the quote suggests that a stabilization in Ukraine could lead to lower energy prices and ease inflationary pressures.

"And technology is actually extraordinarily deflationary."

This quote indicates that technological advancements can lead to deflation by increasing productivity and efficiency.

Capital Flows into Crypto and Web 3

  • Capital flows into Web 3 and crypto continue despite market corrections.
  • There is a belief that the percentage of asset allocation in Web 3 and crypto will increase over the next two decades.
  • The term "Web 3" is preferred over "crypto" as it encompasses a broader range of decentralized web applications.
  • There is optimism about laying the foundations for the next decentralized internet, regardless of potential short-term price corrections.

"So that actually is also interesting because the capital flows into web three are continuing and they were maybe unprecedented last year."

The quote highlights the ongoing interest and investment in Web 3 technology, despite its novelty.

"I care about like in ten or 20 years, will we have laid the foundations for the next decentralized Internet? And I think the answer is yes."

This quote reflects a long-term vision for Web 3 and confidence in its foundational role in the future of the internet.

Macroeconomic Conditions and Technological Progress

  • Historical technological progress has consistently led to improvements in the human condition, despite economic downturns.
  • The macroeconomic conditions have less impact on early-stage investments focused on solving long-term problems.
  • There is a concern about the availability of follow-on capital for startups, given the current market pullback.
  • The quantity of venture capital and the number of startups have increased significantly, raising questions about future trends.

"The last 200 years have been a history of technological progress that has led innovation, that has led improvements in the human condition."

This quote emphasizes the positive impact of technological progress over the past two centuries, regardless of economic challenges.

"The most interesting companies in the last decade were all created in the seven nine recession."

The quote suggests that economic downturns can be fertile ground for the creation of innovative companies.

"The current macro we're in has very little bearing on whether or not those companies will do well in the coming decade relative to are they solving the problems that humanity faces in a meaningful new way."

Here, the focus is on the importance of solving humanity's problems rather than the current macroeconomic conditions for the success of companies.

The Case for Stagnation

  • The case for stagnation involves entrenched inflation expectations and political reluctance to significantly increase interest rates.
  • High levels of public debt and sensitivity to interest rates may lead to a tolerance of higher inflation to erode overall debt levels.
  • Geopolitical uncertainty, such as the ongoing conflict in Ukraine, could contribute to continued inflation and nominal asset value stagnation.

"But if all of a sudden the expectation is oh, we have this inflation. Therefore, we need to get seven, eight, 9% wage increases every year. You start entrenching inflation expectations, and then it becomes really hard to deal with."

This quote discusses the risk of inflation expectations becoming entrenched, making it difficult to manage the economy.

"Could I see a world where we end up with 5678 and 9% inflation kind of forever, which has a lot of downsides."

The quote presents a scenario where high inflation persists indefinitely, with significant economic consequences.

"So I suspect the sideways move where we increase rates but not enough, we still have too much more inflation than we probably should. Is the fault likely? Most likely outcome."

Here, the speaker predicts a likely outcome of moderate interest rate increases coupled with sustained higher inflation.## Fiscal and Monetary Policy

  • The need for responsible fiscal and monetary policy is emphasized.
  • The challenge of raising rates carefully to manage inflation without causing a recession is discussed.
  • Structural changes, such as productivity improvements in harbors, are suggested as deflationary measures.
  • The difficulty of implementing changes due to nimbyism and political forces is acknowledged.
  • The impact of COVID restrictions on the shift back to services is mentioned.

"needed a more responsible fiscal policy and monetary policy simultaneously. Now, at this point, do you need to raise rates carefully? But I would try to find a ways to remove the inflationary pressures that, without needing to push on the brakes too much."

This quote highlights the speaker's opinion on the need for a balanced approach to fiscal and monetary policy, suggesting that raising interest rates should be done with caution to avoid excessive economic slowdown.

Inflation and Recession Risks

  • The likelihood of a recession due to consumer and business sentiment decline is discussed.
  • Historical data on oil prices and recession correlation is mentioned.
  • The difficulty of slowing down the economy without causing a recession is acknowledged.
  • The challenges of intergovernmental coordination in preventing a recession are noted.

"So I think more likely than not, we're going to have a recession."

This quote conveys the speaker's belief that a recession is a probable outcome given current economic indicators and historical patterns.

Probability of Economic Scenarios

  • The speaker assigns a 60% probability to a scenario with persistent inflation and moderately high interest rates.
  • The expectation of negative real asset price movements and a "yucky" economy is expressed.
  • The potential impact on the startup market is considered.

"Oh, 60%. It's by far the most likely scenario."

The speaker quantifies the likelihood of the previously described economic scenario, indicating it is the most probable future state.

Asset Allocation and Investment Strategy

  • The speaker's personal asset allocation is heavily weighted towards early-stage startups.
  • The belief in the resilience and growth potential of tech companies is expressed.
  • The role of technology in addressing global challenges like climate change and social injustice is highlighted.
  • The speaker views technology as a means to achieve productivity growth and deflation.

"My asset allocation, my personal net worth is still 60%, basically early stage startups, because they can grow very dramatically."

This quote reveals the speaker's investment strategy and confidence in the growth potential of early-stage startups, particularly in the technology sector.

Catastrophic Economic Outcomes

  • The possibility of interest rates rising to unexpected levels is discussed.
  • The risk of a crisis of confidence in government debt, particularly in Italy, is highlighted.
  • The potential for the eurozone to collapse is considered.
  • The speaker analyzes the risk of Switzerland defaulting due to the exposure of its banks.

"I could see a massive flight of safety driven by the fact that because of COVID states have become more indebted than ever before."

This quote addresses the increased level of government debt due to COVID-19 and the potential consequences, such as a flight to safety and a crisis of confidence in government debt.

Labor Productivity and GDP

  • The historical relationship between labor productivity and GDP growth is discussed.
  • The speaker refutes the idea that technology destroys more jobs than it creates.
  • The examples of new job categories that emerged due to technology are provided.

"Historically, technologies always increase labor productivity and humans plus machines working together has always led."

This quote underscores the speaker's belief that technology has historically increased labor productivity and will continue to create new types of jobs.

Interest Rate Increases

  • The Bank of England's decision to raise interest rates to 1% is mentioned.
  • The expectation of the Federal Reserve to increase rates is noted.
  • The speaker reflects on the unfamiliarity of the current generation with "normal" interest rate levels.

"Bank of England confirmed that interest rates will rise to 1%, the highest in 13 years."

This quote reports on a recent decision by the Bank of England to raise interest rates, indicating a shift in monetary policy.

Recession Risk Assessment

  • The speaker acknowledges the risk of a recession due to debt overhang and geopolitical uncertainty.
  • The probability of a recession and the need to raise rates to address inflation is discussed.

"Sadly, we do have a massive debt overhang from COVID and from running deficits for the forever that we need to deal with at some point and before we have a crisis that forces us to deal with it."

This quote highlights the speaker's concern about the long-term effects of sustained government deficits and the potential for a crisis that could force corrective action.

Venture Capital Deployment Strategy

  • The speaker discusses adjusting capital deployment strategies in response to the increased number of startups.
  • The importance of capital reserves for portfolio companies is emphasized.
  • The speaker shares their approach to late-stage investments and maintaining a shopping list for potential deals.

"So make sure if you're one who leads and has a large quantity of capital in the startups, which is not our case, you should probably have capital for saving the companies in the portfolio that we're going to need the cash in the future."

This quote advises on the importance of having capital reserves to support existing portfolio companies, especially in uncertain economic times.

Limited Partner (LP) Market Reactions

  • The speaker observes the speed of reaction from LP markets to economic changes.
  • The experience of LPs requesting a halt on capital calls during economic downturns is shared.

"What's happening is, is they have"

Unfortunately, the transcript cuts off at this point, leaving the quote incomplete and without context.## Capital Allocation and LP Concerns

  • Public and private market portfolio balancing is critical for investors.
  • LPs (Limited Partners) may restrict additional capital allocation due to overexposure in venture capital.
  • Rapid repricing in public markets can inadvertently double venture allocations.
  • LPs may instruct funds to avoid raising additional capital or making capital calls.

"If your public market portfolio is at 50%, but your vc portfolio is not repriced yet, which it hasn't, then your allocation of venture just doubled. And so that's a problem."

This quote highlights the issue of imbalanced portfolios due to differing repricing speeds in public and private markets, leading to unintended overexposure to venture capital.

"They'll tell you, don't go raise any fund, don't make capital calls. So you need to be thoughtful and careful of what the lps want."

This quote reflects the importance of adhering to LPs' wishes regarding fund activities, especially in the context of market volatility and capital allocation strategies.

Market Dynamics and Fundraising Challenges

  • Large funds have absorbed significant capital, impacting the availability for others.
  • Many LPs have fully allocated their budgets for the current year, limiting new commitments.
  • Fundraising for new funds can be challenging due to LPs' prior commitments.

"All these billion dollar funds suck up. All excess capital budgets were spent for 22 and 21."

Harry Stebbings notes that several large funds have consumed the available capital for the years 2021 and 2022, making it difficult for other funds to raise capital.

"Most lps, new lp relationships that we're trying to have, we're like, look, we've already fully allocated for this year, so we're happy to chat. Maybe it'll be for the next month."

Fabrice Grinda explains that when approaching new LPs for fundraising, they often find that LPs have already allocated their capital for the year, suggesting discussions for future opportunities.

Investment Excitement and Strategy

  • Seed stage investment remains attractive due to untapped potential in various sectors.
  • Precede investments are riskier due to potential competition in the same category.
  • B and beyond stages are anticipated to have significant repricing and opportunities for discounted investments in strong companies.

"So I remain extremely excited about seed because everything remains to be built."

Fabrice Grinda expresses enthusiasm for seed stage investments, emphasizing the vast opportunities still available in the technology revolution.

"We're going to see major repricing. We're going to see lps who are going to want to decrease their exposure to some assets, and hopefully we're going to see big discounts in secondaries of these extraordinary leaders."

This quote reveals Fabrice Grinda's anticipation of market adjustments leading to lower valuations and the possibility of acquiring stakes in leading companies at substantial discounts.

Personal Preferences and Changes in Perspective

  • Fabrice Grinda's favorite book is "Sapiens" by Yuval Noah Harari, due to its comprehensive history of humanity.
  • He has shifted his view on bureaucracy, recognizing its necessity in managing other people's capital, especially with regulations in crypto investments.

"Favorite book is sapiens. I don't read many books that are business e. I love the way he covers the history of humanity and the concepts that we've created."

Fabrice Grinda shares his admiration for "Sapiens," highlighting its insightful exploration of human history and its impact on society.

"You cannot imagine to the extent I abhorred, which is why I auto docusigned documents for 15 years without ever reading them."

This quote reflects Fabrice Grinda's initial disdain for bureaucracy and his past practice of avoiding detailed document reviews, a stance he has since revised.

Reflections on Missed Opportunities

  • Venture capital involves numerous missed opportunities.
  • Fabrice Grinda discusses specific missed investments and the lessons learned from each.
  • He emphasizes the importance of backing exceptional founders and the potential regret of passing on foundational companies.

"I have more misses than I have wins, right? Every year we're seeing 200 deals a week."

Fabrice Grinda acknowledges the nature of venture capital, where missed investments are common due to the high volume of deals reviewed.

"If you write that, make the investment. So, yes, I was a total idiot, because I actually wrote my own conclusion that I was going to regret it in my debrief."

Reflecting on a particular missed investment, Fabrice Grinda admits that ignoring his own foresight led to regret, underscoring the value of trusting one's instincts in venture capital decisions.

Investment Decisions and Public Market Strategies

  • Deciding when to sell shares post-IPO is a nuanced decision.
  • Fabrice Grinda discusses his approach to selling shares, including the concept of "schmuck insurance."
  • He evaluates the potential for continued high returns before deciding to sell or hold public shares.

"I should have looked at it somewhat differently, which is like Juniper penetration is China 6%. There's a way. Ways to go."

This quote illustrates Fabrice Grinda's realization that he should have considered the growth potential in China before selling his shares in Tencent at IPO.

"Is there a ten x still from here? Is there still a venture outcome possible in the public markets? And if the answer is yes, we keep going."

Fabrice Grinda describes his criteria for holding onto public shares, focusing on whether there is still significant growth potential akin to venture returns.

Insecurities and Check Size Limitations

  • Fabrice Grinda feels his check sizes are too small for his investment strategy.
  • He desires to write larger checks but is constrained by the number of deals and available capital.
  • Some founders may prefer larger capital commitments as a sign of investor engagement.

"My check sizes are too small."

Fabrice Grinda candidly expresses his concern that the size of the investments he is able to make does not match his ambitions or the needs of the market.

"Some founders don't want you to write such little checks."

This quote highlights the challenge Fabrice Grinda faces when founders expect larger investments as an indication of commitment and support from investors.

Exciting Recent Investments

  • Topsort's recent Series A funding round and its value proposition for marketplaces is highlighted.
  • The company's potential to improve unit economics for marketplaces through advertising monetization is emphasized.

"Topsort is a product for marketplaces to sell advertising, basically like monetize their placement."

Fabrice Grinda explains the business model of Topsort, a company he is excited about due to its service that helps marketplaces monetize through advertising.

"That company, I think is genius because they're basically a tool for helping marketplaces monetize better."

This quote underscores Fabrice Grinda's enthusiasm for Topsort, which he believes offers a smart solution for marketplaces looking to improve their monetization strategies.

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