It’s Buck Jordan, and I’m back to help you make sense of the current financial climate.
There was lots of important news about the economy, the venture capital, and startup market this week. So today I thought I’d talk about what information I’m tracking to inform where I think things are going in the next year.
The big news of this week was the latest release of the Consumer Price Index (CPI) report from the Bureau of Labor Statistics. We’ve all been holding our breath for a slowdown in inflation. Unfortunately, we didn’t get it. This week saw inflation coming in red hot at an annualized rate of 9.1%, beating the 8.8% most analysts expected.
As I’ve written before, inflation is one of the great destroyers of wealth, and we’re experiencing the highest rates of inflation in the country for 40 years. And, I’ve also written about why investing is the best hedge against inflation. You can recap why I say that here.
Our blazing inflation is forcing the hand of the Federal Reserve, which has been increasing interest rates all year. Analysts are now 100% sure the Fed will raise the rate by at least 0.75% in its next cycle. The market is pricing in the probability of a full 1% increase! This would put the rate over 3.5% by February 2023, a rapid and steep increase in interest rates.
Rising interest rates are going to slow our economy down because they make borrowing more expensive for businesses (which will reduce investment as a result) and for consumers (who will buy fewer homes and cars).
It’s looking increasingly likely that we will be going into a recession by the end of this year.
But how does this all affect the venture capital and startup world we live in?
Well, across the board we’re seeing something of a shakeout.
Q2 2022 saw the total amount of venture capital funding raised by startups drop by 27% from the previous quarter to just under $60 billion. The number of startups funded has also dropped by 23% in Q2 2022. The VC market is cooling down and investors are getting more disciplined.
The exit market for startups is also cooling down. Last quarter, the number of VC-backed public listings reached a 13-year quarterly low. Just eight listings have been completed in the first half of 2022 compared to 183 listings in the first half of 2021 (which I will admit was a record year for VC-backed exits).
It all sounds pretty gloomy, doesn’t it?
But you might be surprised to know that I’m optimistic about how things are going to pan out throughout the next year.
Our latest inflation report was definitely painful reading. But our inflation reports are always lagging indicators and a few weeks behind the latest trends.
In the last few weeks, we’ve seen commodity prices, which have been a significant driver of inflation, dropping like a rock across the board. Relief is finally starting to arrive.
Similarly, I’m sure you’ve noticed the price of gas has started dropping in most places, down from a national high of $5.014 to $4.631. Oil prices have also dropped below $100, which is right where it was trading before the Russian invasion of Ukraine.
Similarly, while VC funding slowed down in Q2 2022, it’s not because VCs don’t have the money to invest. In fact, according to Pitchbook, VC firms have a record amount of capital sitting on the sidelines (we call this dry powder).
So, here’s the deal…
We’re most likely heading for a recession. Business investment and consumer demand is going to fall as people lose their jobs and as interest rates continue to go up. This is going to continue until we get inflation under control. I’m hopeful we’re already starting to see signs of this with the drop in commodity and fuel prices. At some point we’re going to turn a corner, probably towards the end of 2023 or early 2024 and we’ll get back on track and start growing again.
While all that is happening, VCs are locked and loaded with capital and ready to deploy it to the best companies now and when the economy picks back up again.
The number of problems that need solving in the world is endless. Recessions and high interest rates don’t change that. The opportunity to build huge, defining startups is as big as ever.
In fact, I think the COVID-19 pandemic hugely increased the addressable market for every technology product out there.
Do your due diligence, keep an eye on the data, keep investing to hedge inflation and build a smart portfolio of bets to maximize your angel returns. That’s a pretty good formula to follow in the next year – and, quite frankly, always.