Will the prophets profit?
VCs got the dangers of coronavirus right. Getting the recovery right will be harder.
Obviously, someone made a lot of money while the market crashed in March.
And we don’t even need to say “someone.”
We know the big winner is Bill Ackman. Ackman spent $27 million putting on hedges that netted him a profit of $2.6 billion. He exited these positions on March 23, which has so far held as the market’s coronavirus low.
It’s going to be hard to find someone with a bigger nominal win on their bet against the market. My suspicion is if they were out there, we’d have heard about it by now. So, Bill, you win. Congrats.
But as we move past the most terrifying market moments of this pandemic and start to look back at how February and March unfolded, we can see who in the expanded investing universe was most right about the dangers of the novel coronavirus.
The answer to me is the VC community. And specifically the VC world’s public coronavirus warning avatar Balaji Srinivasan.
Balaji, like many VCs, rubs a lot of people the wrong way for lots of reasons. Mostly the tweets. But it doesn’t matter right now what you, or I, or anyone thinks of Balaji’s tweets.
All that matters is that he was dead right about coronavirus. And his warnings raised the level of concern in the tech industry higher than we saw in any other sector of the economy. And if the 2007-08 world required Michael Lewis to go digging to find the folks who were yelling loudly about how dangerous the housing market had become, the 2020 media landscape gives everyone a 280-character platform to broadcast their concern in real-time. Balaji’s warnings were early, consistent, and right.
Through all of January and most of February, I would describe my own attitude towards the coronavirus as cavalier. Sure, I was aware that Wall Street economists were trying to factor into their outlook what a slower first quarter in China might mean for 2020 global growth and I saw reports that Apple would face problems after China’s economy did not re-open following the Lunar New Year.
But it wasn’t until I met a friend of a friend at a party in late February and this person — who runs money for wealthy individuals — told me they’d sold everything that I started to wonder if maybe I was wrong. And yet I walked away from this conversation still thinking it was all a bit much, that it was definitely not me who was being crazy.
Twenty trading days later the S&P 500 was down 34%. I was wrong.
Before this conversation, however, coronavirus came onto my radar in the most sustained way just like everything else does: through a Twitter beef. The tech/finance/VC/media Twitter worlds collided over Valentine’s Day weekend because of this story. Balaji was NOT pleased about the idea his tweets in and of themselves were a story when it was the content of his tweets that were — correctly in his mind and correctly in general — a much bigger story! Unlike many Twitter fights that get lost in the platform’s disastrous archive, Balaji has outlined his problems with the whole episode in a Medium post.[1]
So but it is fair to say that up to and through much of February my view on coronavirus was to not really have a view. I read the Balaji/Recode story as a media story, not a coronavirus story. It’s jarring to realize now that I was unconcerned with the virus and its spread — and especially because by March 8 I was writing in this very space that things were going to be bad — but in mid-February we were still focused on the October wedding: our guest list needed to be finalized and save the dates out sent out. Fortunately, neither task got completed.
As this crisis period continues to unfold, its snowflake-like qualities — its completely unique character — continue to impress. So little of what has happened and is happening has any useful parallels. We are left facing the future as it presents to us, unable to draw useful comparisons from prior episodes.
And this sets up a particularly interesting conundrum for the broad VC investment community that has been most right about this crisis. In The Big Short, the people who were right ultimately get to bask in their correctness by getting paid. Sure, Mike Burry might’ve lost a bunch of investor money, but his bets were eventually correct. (Though too early is still wrong. Especially if it results in redemptions!) In the movie version of the story, we end with Steve Carell pissed off that he made so much damn money. But at least his group made the money.
Now, VCs could’ve made bets against the stock market in personal accounts or rejiggered some holdings such that they have indeed profited handsomely from what’s happened in the market of late. The venture world’s being early to the dangers coronavirus posed to public health and the economy could’ve resulted in a windfall. Making a new investment at a large discount to prior valuations is also a roundabout way to profit off this dislocation. And all this might be happening.
But as far I know no one in Silicon Valley has some big, multi, multi million dollar profit to show for being so right about coronavirus. No venture firm converted to a hedge fund in February and made money off the market’s decline. And I think we can be confident in this being true for one reason: if there was some huge winner out there I think we would know by now.
And so it seems that at least so far the prophets don’t have profits.
Building > hacking
If the broad venture community has been the most correct about the dangers posed by this crisis, then it should follow that the industry will be best-positioned and ready to take advantage of the environment that comes next. Seeing a crisis coming should empower you to see what lies on the other side more clearly. Though as many financial crises heroes learned, the years after can be challenging and painful.
And what’s more, before this crisis there were headwinds facing the VC sector. And it’s unclear that these have abated. Last weekend, Marc Andreessen published a blog post titled: IT’S TIME TO BUILD.
Everyone agrees with his argument on some level. It is a total bummer that in the richest country in the world the state has so spectacularly failed its citizens. Andreessen notes that our limp institutions are the result of decisions made over years and years. Our current shortcomings are a choice and we are not fated to make the same uninspiring decisions again. It is, indeed, time to build something new.
But Andreessen’s prescription is too often for more of what got us here. The following challenge, for instance, presumes that there is a viable left in American politics with meaningful policy pull and that our default solution isn’t just to support more public-private failureships.
The left starts out with a stronger bias toward the public sector in many of these areas. To which I say, prove the superior model! Demonstrate that the public sector can build better hospitals, better schools, better transportation, better cities, better housing. Stop trying to protect the old, the entrenched, the irrelevant; commit the public sector fully to the future. Milton Friedman once said the great public sector mistake is to judge policies and programs by their intentions rather than their results. Instead of taking that as an insult, take it as a challenge — build new things and show the results!
This is a straw man. The neoliberal center-right’s complete hegemony over U.S. fiscal policy is why our sclerotic state struggles to get emergency funds to citizens and businesses. How we discuss the federal government’s spending power is at the center of this problem. The Overton Window on deficits has certainly shifted in the last month. And while it is to be expected that faux-deficit hawks who intentionally misunderstand the government’s fiscal capacity will express their “alarm” at the size of the national debt, there is no practical reason these big numbers are an impediment to empowering the state.
Fortunately, Andreessen seems unbothered by deficits. And he challenges his critics to advance a better model than private sector empowerment and I think the model is simple: the federal government should actively compete on wages. It is a competition the government cannot lose because money is a resource it cannot ever be short of. The private sector’s biggest cost center is labor and their suppression of labor’s share of income for 40 years is why the private sector now enjoys total say over which citizens get taken care of and which don’t.
But the broader call to build also contains an implicit acknowledgement that the future for the venture industry is not as rosy as it looked nine years ago when Andreessen presciently noted that software was eating the world. Arguing that it’s time to build suggests that it is no longer a time to hack. Disintermediation is over; bottom-up restructuring is here. The former is highly profitable, the latter is not.
John Luttig at Founder’s Fund had a great piece this week that laid out the challenges ahead for venture investors. These challenges are partly coronavirus related but also about themes we’ve discussed in this space as well. The Jerry Neumann argument that the deployment cycle is here as capital seeks different kinds of returns continues to grow considerable legs as a consensus operating framework.
Just because something is consensus doesn’t mean it’s going to be right, but more and more folks are surveying the landscape and seeing fewer ways to wedge themselves into inefficient consumer categories while keeping the bloated Series C funding profits for themselves.
As Luttig writes:
Like any mature industry, Silicon Valley must battle to maintain growth in the face of immense economic gravity. For the first time in Internet history, startup growth will require a push from the company and not a pull from the market. Unlike the organic pull that drove many of the dotcom-era successes, today’s Internet startups need to fight for growth by investing more heavily into sales, marketing, and operations. [...]
Internet companies have spent the last 20 years capturing opportunities with the highest margins, lowest operational complexity, and strongest market pull: search, social networks, CRMs, ecommerce.
As the Internet growth tailwinds subside, what’s left? Harder problems. Today, startups tend to focus on problem spaces where there is higher operational and go-to-market complexity. This could mean companies with an atoms component, or with a tougher sales process, perhaps stemming from a weaker market need or more robust competition. This often means higher marginal costs to sell and provide services. More software sales reps chasing the same customers, and more ad dollars chasing the same clicks, means more expensive customer acquisition – it’s a simple matter of supply and demand. This translates into higher investments into SG&A, and eventually lower gross margins.
To pose the inverse of the opex reduction question: if you had an extra million dollars for your startup, where would you spend it?
For venture investors, these challenges are both professionally and intellectually stimulating. But the solutions are likely to be less profitable.
Venture capital positioning itself as a technology version of the defense industrial complex can empower the sector to have a big role in what follow this crisis. Like, say, through the inevitable digitization of our healthcare system.
But building the next General Dynamics isn’t as fun as building the next Instagram.
Though as Fed chair Jay Powell said recently, “None of us has the luxury of choosing our challenges; fate and history provide them for us. Our job is to meet the tests we are presented.”
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1: This also, as happens on Twitter, led to a meta conversation about many things, not the least of which is what it means to report on tweets. If you’re going to use someone’s tweets as the backbone of a story, do you need to DM them to ask about the tweets? What is the value of asking for comment when a person or company has already publicly said something? Does a source whose tweets are going to be a story in and of themselves need to elaborate on their thinking behind the tweets? And what do you do with a story when your source tweets out your own reporting process and challenges your premise? Should you bail on a story when the central thesis is being actively attacked by the story’s main character or just plow through? But these are timeless questions. When COVID-19 is a memory, none of these questions will have answers.