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Camels - so hot right now; Tiger; monopolies; and more
The future of innovation is global. We discuss it here.
Camels, so hot right now
Last month I wrote about the spate of new VC memos on how to manage the downturn. The lessons are not new. In fact, outside of Silicon Valley, they’ve been standard practice for ages. The best global startup founders build camels, weaving sustainability and resilience into the business model from the get go.
Fun to see my piece on how to execute a camel strategy start trending again in HBR’s top pieces two years later.
Startup ecosystem development
We have discussed startup ecosystem development in the past. Good report on global startup ecosystems and worth noting the acceleration of many emerging ecosystems in recent years, notably Sweden, France, Singapore, Ireland, Denmark and others.
Of particular note is Europe, with many startup ecosystems reaching critical mass.
Thoughtful analysis on how return expectations have changed and what that means for VC investors: “the median public SaaS market cap exploded from $1.5b to $9.8b in 2021. The return potential 10xed. The largest startups kissed $100b in market cap and higher…Competition fueled a surge in valuations. Then the stock market’s fall reversed the effect. Mean market cap halved to about $4.5b…Re-running the multiples math for today, return projections for the typical growth round collapsed. Series Cs dropped from 11x to 5.3x. Series Ds cratered from 5.6x to 1.9x by 66% - which is inline with the public market drop. The more market caps on unicorns compress, the greater the downward pressure on rainbow foals’ valuations.”
The current valuation downturn in technology publicly traded stocks as well as in late-stage startups explains some of the losses cross-over investors like hedge funds are facing. Good long-form narrative on the rise of Tiger riding the internet wave, and its recent woes. “What this investor could not have imagined is that the geeky tech analyst would one day run one of the world’s largest private-investment firms and that he would also become both a central player in a frenzied years-long global tech bubble — one driven by ‘unicorn’ companies trading at absurd valuations — and its bursting over the past six months. The guy who started as a shy analyst would put up impressive gains for years, then suffer mind-boggling losses: $25 billion (and counting) as of June, a record figure even in the lofty world of hedge funds.”
Government has a role in innovation, and one area is standard setting. The plethora of plugs drives me insane. Excited to see rules come out around USB-C in Europe. “European Union co-legislators have reached provisional agreement on a common charging solutions for smartphones, laptops, tablets and other small and medium-sized electronics — some 15 different categories in all — agreeing that, by autumn 2024, USB Type-C will be the common charging port for in scope devices.” This type of regulation makes device manufacturing and interoperability so much cheaper & simpler, which in turn drives access.
Government also has a role in managing monopolies. Loved this segment on John Oliver.
Not new news, but fun to see the emerging market SME credit opportunity get greater mainstream coverage, this time from S&P. “The opportunity is massive. Small and medium-sized enterprises represent 99% of businesses in Latin America and the Caribbean and 67% of employment, according to the Organisation for Economic Co-operation and Development. The lack of access to adequate financing has led to an estimated funding gap of $1.2 trillion…The convergence of technological innovation and adoption has created the opportunity for financial inclusion.”
The crypto markets have faced pressure. “Over the last two years, as the prices of Bitcoin and other virtual currencies surged, crypto start-ups proliferated. Companies that market digital coins to investors flooded the airwaves with TV commercials, newfangled lending operations offered sky-high interest rates on crypto deposits and exchanges like Coinbase that allow investors to trade digital assets went on hiring sprees. A global industry worth hundreds of billions of dollars rose up practically overnight. Now it is crashing down.” Besides a general pull back in the markets globally, has been some shakiness in some of the institutions. Terraform Labs (which operates a stable coin) went down, with many peripheral casualties. “The total value of the cryptocurrency market has dropped by about 65 percent since autumn, and analysts predict the sell-off will continue.” In my view this doesn’t change the long term potential but will cause some short-term heartache.
Predictable unintended casualty? “A year after El Salvador adopted Bitcoin as legal tender, it could default on its sovereign debt in 2023…Owing to El Salvador's $800 million sovereign bond due in January 2023 and an implied default probability of 48%, international financial markets think there’s about an even chance that the Central American country stops scheduled repayments in eight months, just over a year after adopting Bitcoin as legal tender.” Read here.
In these new market conditions, what questions should startup employees be asking? Startup employees’ incentives are different than founders in three key areas. “Access to information — you will not (and should not) know everything (even if it feels like you do); Decision making authority — you will not be the ultimate decision maker in the toughest situations; Incentives — you took less risk and will receive less reward if things go well. Because of these differences, there are discussions you should be having now to help you understand how much risk you are carrying in your current job. Understanding this risk is foundational for working out how you can help, or what your next move should be.”
Book of the month
This month I read Sebastian Mallaby’s “The Power Law: Venture Capital and the Making of the New Future”.
As the NY Times reviews it: “It might be hard for most Americans to muster much sympathy for ultrarich venture capitalists, but Sebastian Mallaby wants us to try… funders of troubled outfits like WeWork and Uber have been unfairly maligned as exceedingly greedy and insufficiently skeptical — all too willing to look the other way when the entrepreneurs they back do something stupid or reprehensible, as long as there’s oodles of money to be made. The truth, Mallaby says, is at once simpler and more complicated. After all, venture capital from the beginning was supposed to be about actual adventure — taking chances on technologies that were too far-out for a traditional bank loan.”
Ultimately, the author’s conclusions about venture capital’s contribution to the world are net positive. “‘V.C.s as individuals can stumble sideways into lucky fortunes,’ or can sometimes do unhelpful things. But [the author] is ultimately bullish on what they have to offer: ‘Venture capital as a system is a formidable engine of progress — more so than is frequently acknowledged.” That engine, Mallaby reminds us, has funded such ventures as the development of synthetic insulin and, more recently, plant-based alternatives to ecologically damaging meat.”
And finally, Happy Canada Day and 4th of July to those celebrating!