#33 – Winter Has Arrived – Part 1 – the Burst of the Bubble and the Crisis Upon Us

Winter Has Arrived - the Burst of the Bubble and the Crisis Upon Us… AND WE GOT IT RIGHT! In this episode, we share … that we were right, all along. We were in a bubble and the crisis is upon us. We share context on the current crisis and what is happening, exactly at a macro level - inflation, recession, over-stimuli, etc - as well as in the start-up and VC world. Navigation: Intro (01:34) Section 1: First of All… We Told You So… Repeatedly (02:05) Section 2: What is Happening…Exactly (04:25) Conclusion (41:37) Our co-hosts: Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder of App Annie / Data.ai, business angel, advisor to startups and VC funds, @bschmitt Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news Subscribe To Our Podcast Intro (01:34) Nuno Welcome to Episode 33 of Tech DECIPHERED. This will be the first of two episodes on the bubble bursting. We've called it very nicely. Winter has arrived when we're really in summer. Today's episode, we're going to go through what's happening exactly in this bursting of the bubble. But let's actually start with congratulating ourselves in having predicted the bubble. There was a dramatic bubble and that it was going to burst, which we did in our duology on the bubble a couple of episodes ago Bertrand. Bertrand Yes, we released these two episode in October or November, about the bubble and how was supposed to burst at some point. I guess timing was perfect to talk about the bubble when it was at the top of the bubble, right before it start to explode. I think you could fit it in a lot of our discussion in the past two years on our podcasters, that we were on one side amazed to see the increase in transaction values, in VC financing and startup financing, and at the same time, constantly reminding that didn't feel right, and this was probably just a big bubble, and we call it right. It's not just about congratulating ourselves. At the end of the day, it's a pretty scary times for everyone, but obviously, it happened for a reasonw and [inaudible 00:01:19] reasons, and that will help us understand what happened and what's going to happen. Nuno Maybe a parenthesis... I think we got it right in several ways because when COVID first hit, we were predicting that that mini-crash was going to lead to a fundamental crash, and it didn't. Part of what we're now going and suffering through was that, because there wasn't that crash, and the market continued to go bull market for another two years, thank you very much, because of governments giving money, incentives to consumption, a bunch of stuff that was really artificial now we know, we ended up actually having top of the market when we did launch the duology in 2021. Nuno I know it's not a great signal. I certainly, I think, in my own professional activity as an investor, in looking at companies et cetera I've used it. I used it throughout to advise my companies, "Raise now when never knows when it's going to burst", "Make sure that you have a plan B". There was a lot of things that instructed me in how I behaved within my professional activity. Nuno I'm sad to say that it didn't inform everything that I do. I probably could have avoided one or two things on that if I'd sort of followed my own advice on it. But in some ways, having been disciplined through the last year and a half, two years, and now we looked at investments. In some ways, I feel a bit vindicated. I don't want to do the "I told you so", but we told them so. Now, we have plenty of proof that we told them so. There's episodes, two episodes that talk about it in October, November, last year. Although I know this is not about really being vindicated or not, it is good to know that we weren't smoking dope, that we were seeing something that made sense. Bertrand I will say that the sad truths about this and about people who tell you they cannot see the bubbles, because actually, you can see the bubbles, actually. It's pretty obvious and I think you have to be pretty blind not to see them. Unfortunately, our officials, elected or not, seem to be totally blind to this sort of stuff. I don't know if it's simply incompetence or if it's on purpose, but this is what we have to deal with at this stage. Maybe to go back in time, as we discuss, indeed, initially, we are very scared about the impact of COVID you don't put hundreds of millions in lockdown. We saw consequence. Early on it was probably the best approach. You don't know what's happening. You don't know how bad it is. You don't know how it works. You don't even have access to masks or testing, so you have to take a lot of precautions. I think that initial reaction, which was not immediate, by the way, it was only after it was probably too late, made sense. Beyond that, I think that's when the craziness started, when we kept locking down too much, when we started to print money too much, I must say, I didn't see that we would be so fast on the printing press. Bertrand I was reading an article recently, and they were saying, "It took us two months in 2008 to push the printing button. It took us two weeks in 2020 to push the printing button. I was expecting myself it will go down further and it would take longer for recovery. But I was obviously underestimating what was the readiness of the government, the central banks to print money, distribute money and send checks to everyone, to do nothing. Obviously, it just delayed the inevitable and you probably could argue it made worse as inevitable. I'm really not happy to hear a lot of self congratulations from a lot of people to say it was the right thing. An early reaction was the right thing, but continually printing money as if nothing happened for two years is another story. That over-stimulus is probably the start of all of this. Do you have anything to add on the over-stimulus of the economy? When we talk about this, obviously it's happened in Europe, in US, in Japan, in many countries. Nuno I think the initial reaction was the right reaction. It was truly tragic and everything was happening at the same time. I think the stimuli that were applied in different parts of the world, obviously we don't know all the policies by heart, but we can look, for example, at the U.S. I think the indiscriminate stimuli, I'm not sure is a good practice. We need to follow the money when it happens at scale and you give money to everyone, even some people that might not necessarily need it, or it's extra savings or whatever. What are people going to do with it? They're going to apply it to something that they believe, "You know what? I might as well apply it to something that gives me high returns." Maybe it's higher risk. We saw, and we've talked about this before in a couple of other episodes, and move towards putting into public equities. We saw that the public equities were ridiculously overvalued. The reason for that is also because at some point in time, bonds stopped being attractive, and other things stop being attractive because of how the economy was moving. Where did you put your money? Nuno I'll put it to public equities. Then valuations public actors go through the roof. The multiples of public equity companies are commanding, are going through the roof. We always know what happens next. What happens next is then private markets going through the roof, the later stages goes first, then the mid-stages, and then early stage. We saw this panning out very cleanly. Then there's a little bit of lag in markets, the corrections starting in November. But it took, I think, until the beginning of this year, probably the end of first quarter, maybe beginning of second quarter, for us to start really seeing significant withdrawals in the private markets, where term sheets for early stage investments were being renegotiated because people didn't want to pay that valuation anymore. Investors were just scrambling at some points, there were a couple of term sheets that were left on the table where people and investors just walked away. Now we're back to a market that, obviously we'll go through a tough time, and we'll talk about what's next in our next episode. But it will go through a tough time necessarily. There was an exaggeration of everything. I mean, entrepreneurs that were raising left and right, and they were like, "We're the best thing to slice spread" and they were not. Nuno There was just a lot of capital and the capital needed to go somewhere. Everyone was flush with capital to give around. In some ways, after a big, big, big high of a bull market, now we're going to have a low, low, low, low because these things need to rebalance over time. For me, that's the big issue of the over stimuli... The over stimuli, if it hadn't been applied to other things, if it had been focused on consumption of things that were really necessary, if it hadn't been applied, for example, to savings accounts in certain circumstances, if it hadn't been done in discriminate way, maybe after the first check round. If it had been done in a different way, and I know politically this sort of creates all sorts of cans of worms, but if it had been done in a different way, maybe the over stimuli would have been more positive than it wasn't the end. In the end, it propped up a bunch of stock. It propped up, also a lot of investment in crypto assets, which were even riskier. That crash we haven't seen yet. We're going to see it. We started seeing some of the early signals of it, but it will happen and there will be consolidation. Nuno It's not that crypto is bad, it's not that Web 3 blockchain is bad. It's just it was too much....