The macro environment has changed quite a bit since our last update to our community in December, 2021. The current market uncertainty is challenging and paints a picture of a market slowing though, hardly stopping, and we continue to see compelling opportunities at the early stage.
On the overall environment — we would highlight 3 themes:
Real Inflation — To simplify it: oil and more broadly, fossil fuel pricing is going to impact basically everything in the real goods inflation basket. Oil prices have gone way up (over $100 / barrel currently). This flows through into the price of real goods that everyday people purchase. We suspect the primary driver here is supply uncertainty and capacity reductions associated with Russia. Oil was under $50 / barrel at points in 2021, so this isn’t some long building phenomenon. Russia’s supply loss is a shock to the system. It takes time for additional oil supply to come online because it’s connected to actual physical infrastructure and projects — but there is a lot of supply out there that will materialize if prices stay above even $80, that will become available with time. That said — we don’t expect monetary policy to ease a ton until oil prices are under control because there will be real price inflation and inflation expectations will start to set in.
Crypto Crash — Important to note but less of an impact than fuel and food prices on the broader economy is Crypto and its tie to financial asset inflation — money supply increases have definitely contributed to the increase in value of overall crypto — especially out on the edges. The idea that policy will tighten due to concerns about real inflation logically flows through to a decrease in crypto asset values. The decrease is most acute in the stuff that is purely speculative — looking at you; Dogecoin! But this shouldn’t have a long term impact on whatever value you attribute to real economy improvements from web 3 / blockchain (we think there are many, but timing is uncertain) and maybe this is the reason we are not seeing a total collapse of BTC and ETH values.
Software Still Eats the World — We continue to believe that there’s a lot of real value to be created as people apply software, cloud computing and mobile technology to all corners of the economy. New companies will continue to be created to do this — Leadout’s view is that we are still in the early innings of the process of capturing structured data for everything and applying software and automation to make the economy more efficient. That means that companies that will add a lot of value will continue to be created and that means opportunities for investors at all the different stages of the market. Tactically, the market is seeing pricing resets of some magnitude over the next 6 months even in the seed and pre-seed stages. It may also be challenging for businesses to complete follow-on financings over the next 3–12 months, so early stage investors will likely need to consider some seed extension and possible down rounds. The caveat to all this being that there’s a combination of market timing and picking correctly (finding great value) despite a lot of the challenges faced by the market at the moment. And downturns are when great companies get built (see net returns for the 2010, ’11 and ’12 VC vintage, following the 2008 Financial Crisis).
And so, we are actively looking for new investment opportunities with continued price discipline and a high premium on objective demonstrated progress and customer segment expertise. As we continue to experience the market retrenchment and micro-industry shocks like in the case of the crypto space, we are spending extra time with our current portfolio to help them navigate the market volatility with a focus on cash burn and hitting core KPIs and business metrics essential for the next round of financing.