Courtesy of Howard Lindzon
I have been spending all day, everyday the past week, talking to founders, reading quarterly letters and mea culpa’s (will share my faves tomorrow) and talking to hedge funds and venture fund managers trying to get a feel for any sense of a bottom, a turn or even an acceleration down.
I sense we are in a weird moment in time. A lot of funds and investors are carrying high cash levels of overvalued US dollars (other than energy one of the best performing asset classes the last year) that has nowhere to go because rates are not high enough and stocks are not low enough.
Thinking out loud, one event to cure that would be a crash.
I am not sure I have used that term on my blog in my 16 years of blogging.
This week we saw a few crashes in stocks including Target, Walmart and Tesla. These are large cap index stocks that can scare the index holders into selling. As we all know on this blog, there has been a slow motion crash the last six months in high growth software and cloud stocks.
The private markets have not had prices crash yet, but it is coming. Ranjan Roy had an excellent piece titled ‘Late Stage Prisoner Dilemma‘ that everyone should read. The gist:
In almost no scenario should those inflated private valuations hold. Even in the best-case scenario, a startup follows the suddenly-in-vogue pivot to generating cash, but that means they’ll have to slash growth. Those gigantic valuations were modeled on assumptions of strong growth and become dead in the water. But if startups don’t do this, they’ll need to go out and raise more, inevitably repricing to a down round. Given the state of the economy, public market comparables, waning consumer demand, and a million other negative factors, it’s clear companies should be revisiting those valuations.
The biggest question right now is what could trigger these revaluations?
Will it be the LPs who start the markdowns? I spoke with a friend in the industry who said there are certain provisions for institutional investors where audits and markdowns can and will quietly take place. Maybe that’s why you always hear the name Fidelity whenever some news of a markdown leaks to the press. Will Fidelity quietly be the HFC grim reaper?
So we’re back to that table where everyone’s sweating. Who will budge first? What incentives are there for any of the players involved to mark down the investment?
Personally, I have no ‘crash trades’ on. I have a high percentage of cash and have taken losses to get there. I intend to redeploy and am building scenarios and lists, but I don’t have to redeploy anytime soon.
If we do get a ‘crash’ or ‘whoosh down’ in the public markets in the coming weeks, I want to be prepared. If the markets just reverse course Monday and last week was a bottom, even better.
At some point, inflation will cool, prices will fall enough, rates will start heading down, and or comps for growth companies will start looking good again to get the next cycle going again. Those are some macro calls that I have no idea how to predict, so I will keep checking prices, making the calls, helping portfolio companies and continue to build lists.
Bear markets are a grind.