Hello July.
Good riddance to the first half of 2022.
It was the worst first half of the year for the S&P since 1970.
Our supreme court celebrated the first half of the year by taking us back pre 1970 with Roe vs. Wade.
I guess the good news is we all can shoot our robo advisors with AR-15’s and claim mental anguish to avoid punishment.
My gut is a lot more valuation compression lies ahead for us.
With high inflation and rising interest rates come valuation compression. Sure rates and inflation can reverse, but people and therefore markets, have recency bias so we will not get to the heights of 2021 even if a financial miracle were to happen.
There is not much I can do as valuations compress in the public markets.
In the seed stage markets I am looking for teams and ideas that can get started in this era of valuation compression with all this in mind.
I said this on Twitter yesterday which started a lot of conversations:
Smaller teams, engineering light, unique wedges and plans to get to revenue/even profitability fast (capital efficiency) and a valuation that allows for optionality along the way.
As valuations compress it is most important that founders and investors honor the power of momentum by holding it close. That means lower valuations early so that there is more optionality as the company builds momentum and more optionality if momentum is slow to take hold. I believe it is much harder to build momentum in 2022 because of the costs of customer acquisition and the lack of new platforms to harness inexpensive acceleration.
In the early days of web 2 we saw hints of what we will see in web 3 with Instagram and WhatsApp. They both took advantage of the platforms of the era and grew really fast with very few employees. They chose to sell because the platforms they relied on made advertising their best/only business model.
The opportunity/promise of Web 3 is that it allows for new business models.
I am confident there will be hundreds of Instagrams and WhatsApps that will not have to sell to Facebook or Google, but it also means that these companies will have to start off at lower valuations with unique wedges into smaller markets (TAM) and manage to a new set of expectations with their investors if they choose to take investment at all.
