There's a trend of global economic inflation, caused by supply issues in energy (oil, gas in all forms) related to the war in Ukraine, supply issues more broadly related to a hangover from COVID's supply/demand shocks.
Interest rates are rising, to appease inflation.
As the interest rate goes up, allocators of capital have less appetite for risky allocations. This makes access to capital for VC firms becomes more competitive. This makes access to capital for "startups" becomes more competitive.
There's also a bigger macrotrend, which is another hangover from COVID: investment poured into the tech sector, which was booming during COVID. Investors over-bullishly priced-in the idea that this boom was, in fact, a new baseline or indicative of future exponential growth. As we recover from COVID, these pricings are increasingly revealed to be wrong as companies generally report post-COVID numbers that are closer to pre-COVID numbers.
This is bad for investors leveraged on tech. Therefore, it's bad for VCs that raised LP capital on the basis of COVID performance. Therefore, it's bad for companies that raised >20x ARR multiples on the basis of COVID performance.
Basically, it's a single or double whammy for most of the economy, but a double or triple whammy for unprofitable startups.
Energy prices being high are only a small part of it. Unfettered stimulus, even when we didn’t need it (eg rent payment moratoriums and stimmy checks while at full employment), is what’s driving it.
Every once in awhile I look up PPP loans of companies I know didn’t suffer any Covid-relates downturn (some even thrived) and am never surprised to see fat checks fully forgiven.
The way I phrased it made it sound like energy prices were the only component, my bad.
Yes, stimulus is a contributing factor. But I don’t think it’s the primary contributing factor, it depends on the sector.
The price of oil affects the price of food, heavy things, etc much more than stimulus checks. I’m not saying stimulus has no impact on prices, but I think it’s erroneous to say it’s the “driving force” of 8% YOY inflation — maybe it’s the driving force of 2 or 3% of that? The price of gasoline is very underrated as an influence on prices generally: the cost of transport is the backbone of our globalized economy.
On the flip side, partially thanks to direct stimulus checks, child credits, etc, median household savings are at an inflation-adjusted high watermark, and the debt:income ratios are also in a decent spot so the median American is better prepared for this recession than previous ones.
Interest rates are rising, to appease inflation.
As the interest rate goes up, allocators of capital have less appetite for risky allocations. This makes access to capital for VC firms becomes more competitive. This makes access to capital for "startups" becomes more competitive.
There's also a bigger macrotrend, which is another hangover from COVID: investment poured into the tech sector, which was booming during COVID. Investors over-bullishly priced-in the idea that this boom was, in fact, a new baseline or indicative of future exponential growth. As we recover from COVID, these pricings are increasingly revealed to be wrong as companies generally report post-COVID numbers that are closer to pre-COVID numbers.
This is bad for investors leveraged on tech. Therefore, it's bad for VCs that raised LP capital on the basis of COVID performance. Therefore, it's bad for companies that raised >20x ARR multiples on the basis of COVID performance.
Basically, it's a single or double whammy for most of the economy, but a double or triple whammy for unprofitable startups.