Nov 2021 — Jan 2022 market repricing
“normalization” — post-Covid rates expected to return to Jan 2020 levels (c. 2%), and growth multiples retreat from record high (30-50% above 5-year average growth multiple pre-Covid)
Contraction was always going to be painful.... Fears of hyperinflation + war in Ukraine have exacerbated the contraction + uncertainty ... dot plot exploded higher, expectations of forward rates went higher, etc.
^^^ software at about 5-year average
^^^ internet well below 5-year average
\TL;DR valuations reverting back to historical mean >> “reasonable ranges”
At 0% rates: 8x topline revenue given reasonably high margins + growth in software business
Every 1% increase in rates decreases valuation by 15-20%
Fed: by -2% real rates by EOY
- Expect EOY inflation to be 4.3%
- Expect EOY 10Y to be 2.3%
>> rate path is much more certain
(under prior Fed protocol, 4% inflation = 4.5% rates >> growth multiples would need to come down c. 30% below their 5-year average)
Substantial uncertainty ahead now revolving around inflation — EOY projections now Citi + Goldman 10Y at 2.7%, EOY 2023 3.5%
therefore less allocation to risk assets and lower prices for risk assets
but
5-10Y horizon: not expecting global stagflation or hyperinflation
Easy to ignore macro when inflation at 2% and 10Y at 2.5% (had a decade+ of this)
No longer sufficient to ignore macro and exit multiples >> exit price is essential.
“Multiple expansion hides many sins.” (Brad)
“In the last innings of a bull market you have incredibly irresponsible behavior.” (Chamath, i.e. buy at any price)
What this really reveals is the importance of company selection.
Some obvious blowups
- Excess of 15 minute delivery firms competing vs. Uber and DoorDash (both FCF positive...can self-fund their competitive products)
- Neo banks (borrow at 0%, lend at 1% works until rates go up)
- Bottom-up SaaS (managing LTV/CAC when input costs go up fast ruins unit economics if costs can’t be passed on...and unlikely they can be passed on fast enough)
At present time if you can’t show that you are default-alive, then you are a price taker.
Founders: lengthen runway and be more capital efficient. Expect substantially lower ARR multiples at next raise.
Altimeter public market RAR: 20% (2.5x SP500 historical 8%)
3 things that matter...
...in up market: growth, growth, growth
...in down market: growth, burn, margins
Silicon Valley is full of companies that are walking dead and they don’t even know it. (Frank Slootman)
The law of economic reality is interest rates and inflation and it remains.
See burn multiple ... use as governor to growth e.g. grow as fast as possible...while keeping burn multiple below 2x.