Naked 🍑
#48 Angelinvesting.it - From idea to Series A - Weekly Newsletter
3 Minutes to reflect
We're sailing into a tempestuous sea, where the winds of monetary policy are shifting faster than ever before. The cost of money is skyrocketing, heavily impacting the venture capital boat. Not everyone has their eyes open to the brewing storm. A few thoughts to help you digest the challenging new norm of high interest rates
A leading American bank offered me a 5.5% annual return on a deposit account in pounds. It's a top-tier bank, and while there's a risk of it failing, I would consider that risk remote.
Imagine a VC fund coming to me, asking to lock up my money for 10 years and then maybe giving me significant returns. Even if they promise the moon, I would think long and hard before writing them a check.
On a different scale, this is what large institutional investors are saying to various fund managers around the world. I feel the pain of fund managers getting doors slammed in their faces. I must confess, I find it slightly amusing thinking about the more arrogant ones.
If investor money doesn't flow into VC funds as before, it subsequently doesn't reach startups.
But it doesn't end there; there's a second order of consequences. Startups in a fund's portfolio struggle to find money on the market because, as we've seen, VCs themselves have a hard time raising it.
At this point, the VC has two options: (1) finance bridge rounds for their portfolio companies themselves or (2) let them fail. In both cases, the VC's portfolio suffers.
Bridge rounds are done at lower valuations than previous rounds affecting performances. Failures turn the fund's theoretical multi-million dollar investments into zero.
Institutional investors start reading about failures in the investor reports they receive from funds and see the performance of their funds deteriorate. This leads to less appetite for VC funds, accelerating the vicious cycle just described.
2 Resources to pro
1. Mr Buffett greatest quote
Interest rates rise, revealing who was swimming naked, the various crypto scandals, the funds that VCs invested too much, too quickly at too high valuations. The spectacle of exposed bums is interesting in its own way :)
2. Stronger than gravity
The best startups are said to be born in years of crisis. Just as entrepreneurs are forged in the steel of difficulties, so too, in my opinion, do the best investors emerge in these moments. In the article of a highly recommended newsletter, you will find the story of one of those VC funds that operate under the radar and generate stellar returns
1 Reason to be happy
A true story of how zero interest rates have created market distortions that I hope we won't see again for a while. A very happy CEO and some very angry LPs. All true!
Have a great weekend,
Simone
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