Posts from economics

The Light At The End Of The Tunnel

In my Jan 1st post talking about what I expected to happen this year, I wrote:

I think we will see the end of the Covid Pandemic in the US sometime in the second quarter. I believe the US will work out the challenges we are having getting out of the gate and will be vaccinating at least 40mm people a month in the US in the first quarter. When you add that to the 90mm people in the US that the CDC believes have already been infected, we will have well over 200mm people in the US who have some protection from the virus by the end of March.

Seven weeks later, it seems like that is pretty much what is playing out. I have read that about half of the population of the US now has some protection against the Covid 19 virus, either via having had the disease or by being vaccinated at least once. At the current vaccination rate of 1.8mm a day, the number of people who have at least some protection against the Covid 19 virus will be about 70% by the end of March.

What that means is the virus will spread less, infecting less people, and less folks in the hospital or worse. I believe that means a gradual re-opening of the economy throughout much of the US in the second quarter with schools, stores, restaurants, and nightlife coming back. I am sure that precautions will continue for much, if not all, of 2021 because nobody wants to take this lightly after what we have all been through.

If that is in fact the case, and we don’t know for sure that it is, what does that mean for the economy, businesses, tech, and more?

I wish I knew. But I have some suspicions.

As I have written here quite a few times, I believe that habits that we have formed in the last twelve months will stick with us even when we don’t need to use them anymore. I believe work from home has proven to be very effective for some, possibly even a majority, of knowledge workers. E-commerce has delivered (no pun intended) and the gains it has made against in-store retail will not be given back much, if at all. Remote learning is here to stay. So is telehealth.

I also believe that the things we have not been able to do in the last year; travel, be tourists, see live music, live theater, live sports, and all of that will be in more demand than ever. As Joni Mitchell said, “you don’t know what you got until it is gone.” We want all of that back and I think we will embrace being with others experiencing things in the real world with a passion.

But where all of this lands is anyone’s guess. And there are many businesses whose near-term fortunes depend on how the balance of remote vs in-person lands over the rest of 2021.

I also think a re-opening may not be great for the stock market, which was a major beneficiary of the pandemic. The NASDAQ is basically up 100% since March 20, 2020. I wrote a bit about why I think that might be the case last week. I don’t know how quickly a re-opening will impact the stock market, but I do think it could.

But let’s not get negative here. And end to the Covid pandemic and a re-opening of the economy would be about the best thing that could happen to the US and the world and I am becoming more and more optimistic that it will start happening in the second quarter of 2021.

#Current Affairs#economics#employment#stocks

How This Ends

We are in the middle of one of the great asset bubbles of modern times. It has been brought on by the easy money policies of central banks around the world aimed at weathering the global Covid 19 pandemic. Interest rates are near zero or negative in most developed economies and asset prices have gone way up as a result.

When interest rates are zero or negative, the value of future cash flows is huge and that is how you get PE and EBITDA ratios of over 100 and price/revenue multiples approaching 100.

The big question is how does this end?

I believe it ends when the Covid 19 pandemic is over and the global economy recovers. Those two things won’t necessarily happen at the same time. There is a wide range of recovery scenarios and nobody really knows how long it will take the global economy to recover from the pandemic.

But at some point, economies will recover, central banks will tighten the money supply, and interest rates will rise. We may see price inflation of consumer goods and labor too, although that is less clear.

When economies recover and interest rates rise, the air will come out of the asset price bubbles that have built up and the go go markets will hit the brakes.

When will that happen? Your guess is as good as mine. It could be later this year. It could be in a few years. It could take longer. A lot of damage has been done to the global economy and it is unclear how quickly it can recover.

A good chart to watch is the one year treasury bill.

When the one year treasury yield gets back above 2%, we are leaving the easy money era. We aren’t close to that right now.

#Current Affairs#economics

The Revenge Of Retail

A number of people have been asking me what I think of the Game Stop situation. This is not really my world. I don’t trade stocks, we hold them. I don’t use Robinhood, though I have an account thanks to my friend Howard. I don’t hang out on Reddit, though I visit it from time to time.

So I have not paid enough attention to this one, but it certainly is fascinating. The generational aspect of this is important. Boomer hedgies getting crushed by young folks self-organizing in social media. It feels like a moment where you realize that the power structure has shifted and things won’t be the same.

The financial system in the US, and in other developed countries, is a rigged system and has been for a very long time. Only big institutions can get into hot IPOs. Only rich people can invest in startups. Many of these rules are designed to protect “widows and orphans” but all they really do is make the rich richer and keep those without money out of the game.

Not anymore. Whether it is crypto (Coinbase) or day trading (Robinhood), the retail investor now has the tools to get into the game and win the game.

The new startup investing is buying into the Ethereum crowdsale. Had you done that in the summer of 2014, you would be looking at roughly 1,000 times your money right now. And that crowdsale was launched by a team led by a 20 year old. Though the SEC and others would like to impose the same rules on crypto that protect the rich and keep out everyone else, that has not happened and I pray that it won’t.

The new hedge fund is the Robinhood army self organizing on Reddit. They can move a stock more easily than the largest hedge fund.

There will be calls to regulate this “madness.” But it is the same madness we have always had. It is just a different crowd in charge.

I do worry that this Game Stop short squeeze will end badly and not only the hedge funds will get hurt. Markets can be brutal. But regulating markets to protect the small investor is not the answer. As we can see, the small investor is often a lot smarter than the large investor.

What we need to do is stop printing money to stabilize the economy. And start addressing the real economic issues that exist on main street, not wall street. Monetary policy is not the answer. Fiscal policy is. That won’t stop more Game Stops from happening. They are a by-product of markets. But it will get the money to where it is needed versus where it is just gameplay.

#crypto#Current Affairs#economics#stocks

The Work-Life Balance Revolution

Yesterday, I had a gap in the middle of the day. So the Gotham Gal and I took an hour-long walk with our dog Ollie. It cleared my head and when I got back to work, I was full of energy and clarity.

I’ve been working exclusively from home since the end of November 2019 when we left NYC to go to LA. It has been a stretch of incredible productivity for me.

I am not arguing against going back to the office. As I’ve said in many posts recently, I can’t wait to go back to the office. But I am sure that many of us have had the same experience that I have had working from home during the pandemic. It has its advantages.

And in that realization exists the possibility that we are on the cusp on a revolution in how many of us can find work life balance going forward.

My friend Tom wrote this post last week suggesting that a husband and wife can now work a total of 50 hours a week between them and have two full-time jobs and raise a family. This part sums up the idea pretty well:

Why do I think 25 hours/ week is the equivalent of a 50-hour week (counting commuting)?

Given a nine-to five schedule with an hour for lunch, the 40 hour work week was only 35 to begin with.

As an ex-CEO, I think that at least ten hours of each workweek go to socialization, surfing the internet, checking with the spouse or checking up on the children, chatting on smartphones etc. (Mary thinks only five).

Meetings and travel to meetings waste a huge amount of time and money. One reason that Zooming appears not to have reduced productivity is that many of the meetings weren’t productive to begin with.

Office space and often parking are expenses to the employer but they are not income to the worker. If office space and all its attendant costs can be drastically reduced, employers can afford to pay more dollars in salary for the same productivity.

Commuting expense including perhaps even the second car, daycare, clothing and dry-cleaning bills, and paid before and after school activities whose purpose is to supervise school age kids are all expenses which go away when parents can work from home. Even if the WFH employee has less gross taxable income, he or she will have more cash at the end of each month.

https://blog.tomevslin.com/2021/01/newnormal-the-50-hour-family-work-week.html

Even if Tom is off by a bit with his math, he makes a terrific point. Companies can ask for less of a family’s time, pay them more, and get the same amount of work done using the techniques we have perfected during the pandemic.

I realize that not all jobs lend themselves to this approach. But maybe more than you think. Take doctors. We used to have to go see doctors in their offices. Now with digital health services like those offered by our portfolio companies Brave and Nurx, the doctors are seeing the patients from their homes (or wherever they are).

Teaching is another occupation that presents a lot of opportunity to rethink time and location. Many teachers have been learning how to help their students master new things from their kitchen counters over the last year.

I want to say it again. I am not suggesting that we won’t be going to offices anymore. I am not saying doctors won’t have offices anymore. I am not saying teachers won’t be in classrooms anymore.

What I am saying is that we can and should be asking how much of our work time needs to be in person, face to face, and how much can be virtual. And I am certain that we will be asking that. In our year-end reviews at USV, we heard again and again from our team that they wanted to ask those questions. They should. Commuting and business travel are not the necessities they were last century.

And, naturally, this coming work-life balance revolution presents tremendous opportunities for new products, services, and companies. We have been seeing many of them crop up over the last year and have invested in a few of them.

From bad comes good. This pandemic and all of the things that have come with it has been awful. But I believe it will unleash all sorts of new behaviors and businesses that will be for the better. If you squint, you can see them coming.

#climate crisis#economics#employment#enterprise#entrepreneurship#Family#hacking education#health care#management#VC & Technology

What Is Going To Happen In 2021

Hi Everyone. Happy 2021.

Today, as is my custom on the first day of the new year, I am going to take a stab at what the year ahead will bring. I find it useful to think about what we are in for. It helps me invest and advise the companies we are invested in. Like our investing, I will get some of these right and some wrong. But having a point of view is very helpful when operating in a world that is full of uncertainty.

Let’s start with the elephant in the room. The Covid Pandemic will end in the developed world in 2021. I think we will see the end of the Covid Pandemic in the US sometime in the second quarter. I believe the US will work out the challenges we are having getting out of the gate and will be vaccinating at least 40mm people a month in the US in the first quarter. When you add that to the 90mm people in the US that the CDC believes have already been infected, we will have well over 200mm people in the US who have some protection from the virus by the end of March. By the end of the second quarter in the US, anyone who wants to be vaccinated will have been able to do so. All of this will be aided by at least two additional approved vaccines in the US in January and new and improved protocols, like emphasizing the first dose over the second one.

The second half of 2021 will be marked by two conflicting trends. First, we will see people returning in droves to offices, restaurants, bars, clubs, gyms, stadiums, concerts, parties, travel, theaters, and anywhere that they can be social with others, ideally many others. I personally cannot wait to do all of that when it is safe to do so.

But ironically, this mass socializing trend will not materially and/or permanently change many behaviors we adopted in the Covid Pandemic. I believe that we will continue to want to work from home, exercise from home, shop from home, watch first run movies from home, order in, livestream, and all of the other new behaviors we learned to enjoy and perfect in the last year.

Where all of this shakes out will be the big reveal of 2021 and will impact many tech companies and many tech stocks. As I wrote yesterday, I think the trends that were accelerated in 2020 will not reverse in 2021, although the slope of the adoption curves will likely flatten a fair bit.

While we are out mass socializing, we will also be picking up the pieces of our world that was shattered by the pandemic. In the US, we have racial equity issues that are longstanding, real and demanding to be addressed. We also have an economy that is in tatters. And we have sectors of our economy like retail, commercial real estate, carbon based energy, and more that will never be the same. The restructuring of our economy and government and corporate balance sheets and income statements that have been blown wide open will take a decade or more to work out.

Sitting above all of this is an atmosphere that is getting warmer by the day. As I wrote in last year’s looking forward post:

The looming climate crisis will be to this century what the two world wars were to the previous one. It will require countries and institutions to re-allocate capital from other endeavors to fight against a warming planet.

https://avc.com/2020/01/what-will-happen-in-the-2020s/

At USV, we have begun that reallocation of capital and we will be investing heavily in companies and technologies that can help the world address this existential threat. I believe that many of our colleagues in the venture capital world will do the same because not only does the world need this investment, it will generate fantastic returns too. Climate will be to this decade what cloud was to the last one.

The twin terrors of the Covid Pandemic and the Climate Crisis will drive the great US migration of the 21st century and we are already experiencing it. We will see it accelerate in 2021. If, because of what we learned in the Covid Pandemic, a good job no longer requires someone to live in a low lying flood-prone city like Miami or NYC or a city that is burning like SF or LA, we will see many people in the US choose to leave those places and adopt new homes that are less impacted by the climate crisis. We call this “adapting to the climate crisis” at USV, and this will be a huge investable trend for many years to come.

I believe that governments will respond to all of these economic challenges by continuing to print fiat money without restraint and by taxing and regulating innovative new companies to protect old and dying companies. This will lead investors to continue to allocate capital to new forms of money (crypto) and new ways of creating and financing innovation (decentralized projects and organizations). We are already seeing that happen in the finance sector, with breakout projects in decentralized finance in 2020 like Compound, Yearn, and Uniswap (a USV funded project). We will see this approach accelerate in 2021 and expand into areas beyond the financial sector. The idea of financing and executing innovation inside of a global decentralized autonomous organization is such a powerful idea and one whose time has come.

As I go back and re-read this post, I am struck by how obvious and unprovocative all of these predictions are. Either that means that I am not getting far out enough on the curve to see things before everyone else does, or it means that the trends that will define 2021 have been building for years and are finally coming of age. Maybe it is a bit of both.

In any case, 2021 will be a year of returning to normal, but it will be a new normal and not like one we have experienced before. Adapting to change is my mantra for 2021. Happy New Year everyone.

#climate crisis#crypto#Current Affairs#economics#entrepreneurship#life lessons#VC & Technology

Location and Work

I am confident this pandemic will end. At some point, we will have a vaccine, therapeutics, and/or broad based immunity. When that will happen is less clear to me. I believe that at some point, we will be able to resume living and working as we did prior to the pandemic.

However, I am also confident that we will not resume living and working exactly as we did prior to the pandemic because some of the things we have adopted to get through this will reveal themselves as comparable or better than what we were doing before.

One of the places this is happening is knowledge work which is a growing percentage of the workforce in the US. What we have seen in this pandemic is that knowledge workers have been able to be comparably productive working from home and that has caused many large (and small) employers to consider different work/location options.

Yesterday, Twitter told their employees that most of them can work from anywhere going forward:

A number of our portfolio companies have made that decision already as well:

I can imagine large and small banks, law firms, accounting firms, media and entertainment companies, and other knowledge based businesses making similar decisions.

I am not saying that remote work is ideal. There is something very valuable about being able to be in the same physical space as your colleagues. USV will likely keep an office for exactly that reason.

But it is also true that USV is operating incredibly well during this pandemic and we have not (yet) missed a beat.

What this means for large cities where many companies that engage in knowledge work are centered is an interesting question.

I saw this chart this morning on Benedict Evans’ Twitter:

That compares two of the most expensive cities in the US (and world) to each other. And as bad as NYC is on the affordability index, SF is way worse.

So when you combine these two situations; large knowledge work hubs getting prohibitively expensive and remote work normalizing, it would seem that we are in for a correction.

What is less clear is where knowledge workers who can increasingly work from anywhere will choose to live (and work). Will cities remain attractive for the quality of life they offer (arts, culture, nightlife, etc)? Or will the suburbs stand to gain? Or will more idyllic locations like the mountains or the beach become the location of choice? Or will second and third tier cities become more attractive? I do not have a crystal ball on this question. I suspect it will be some of all of the above.

But this may become a big deal. Like the “white flight” that happened in the 50, 60s and 70s in a number of large cities in the US. Wholesale movement of large groups of people can have profound changes on regions.

Like many disruptions, this is both bad and good. Affordability (or lack thereof) and gentrification have been a blight on our cities. If we can reverse that trend, much good will come of it. This may also be helpful in addressing the climate crisis which remains the number one risk to planet Earth. So there are reasons to be excited about this. But wholesale abandonment is terrible. We should do whatever we can to avoid that.

It is early days for this conversation. But it is one we are going to have all around the US, and possibly all around the world. So it is time to start thinking about it.

#climate crisis#Current Affairs#economics#employment#NYC

The Venture Capital Math Problem Revisited (aka How Could You Be So Wrong?)

Back in 2009, I wrote a post called The Venture Capital Math Problem.

I was reminded of it yesterday when I saw this tweet:

In that post, I argued that the venture capital business could not sustain more than $20bn a year of new capital coming into it and continue to produce good returns to the investors in VC funds.

The venture capital business has been raising north of $50bn per year for much of the last decade and so far, the returns continue to look quite good.

So what did I get wrong in my attempt to solve the venture capital math problem?

I think it set the problem up correctly but I got one assumption very wrong and it was this:

And I assume that the biggest exit each year is $5bn. Yes, it is true that some venture investments turn into businesses like Apple, Google, Microsoft that are worth $100bn and more. But it is also true that most VCs are long gone from those deals before the valuations get to that level. So for the sake of solving this problem, I’d assume the largest exit each year is $5bn and then you have a power law distribution of another 999 deals.

……..

I’ll assume that the biggest deal, $5bn, represents 5% of the total value of all 1000 exits and that the total value of all exits is $100bn per year.

That was off by maybe an order of magnitude or more. Uber IPO’d at $70bn and still trades at north of $50bn. Zoom is now trading at $32bn. Out of the USV portfolio in the last decade we have Twitter at $26bn, Twilio at $16bn, and MongoDB at almost $10bn and a number of high quality public companies trading in the single digit billions.

I suspect that last paragraph that I quoted should read “the biggest deal, $50-100bn, represents 5% of the total value of all exits (likely north of 2000, possibly a lot more) and the total value of all exits is $1-2 trillion per year”

By that math, keeping all other assumptions, formulas, and math the same, the max that can be invested in VC is maybe as much as $100bn per year and we are still well below that level based on the numbers I am seeing.

So what did I learn from this mistake?

I learned that you can’t assume that the past is a predictor of the future. And I learned that it is helpful to ask yourself “what could go right?” instead of “what could go wrong?”

It is also true that the last decade has been one of incredibly low interest rates/cost of capital, and conversely very high PE and revenue multiples on growth stocks. And we have seen companies like Uber, Facebook, etc stay private much longer so the VCs have exited at much higher valuations than was once the case.

We cannot assume that will continue either and it may well be true that the $50bn-$100bn that is going into the venture capital business right now will not get the same returns that the $20bn that was going into the venture capital business in 2009 has gotten.

But regardless, I was dead wrong in that post back in 2009 and I have learned from it. As I have aged, I tend to underwrite to the upside not the downside. That has not been my nature but I have learned that it works better, particularly in the VC business.

Finally, I do not regret writing that post one bit. As I replied to Ben’s tweet when I saw it:

#economics#life lessons#VC & Technology

Tech Jobs For All Who Want Them

The tech sector is the fastest growing sector of the economy in NYC and around the US and around the world. The tech sector offers high paying jobs and a growing number of them.

But, as we all know, the tech sector lacks the gender and racial diversity that would allow everyone to benefit from this growing sector of the economy. Most of the studies that have looked at the lack of diversity point to a skills gap standing in the way.

So last year Tech:NYC (where I am co-chair) and a few large employers (Google, Verizon, Bloomberg LP) and the Robin Hood Learning and Technology Fund commissioned a study of the skills training programs in NYC to see where there are gaps and what must be done to close them so that tech jobs are available to everyone in NYC who wants one.

This report was done by the Center for an Urban Future and was released yesterday. You can read it here.

What the report reveals is that NYC has a rich and expanding ecosystem of tech skills training opportunities, including K-12 and adult education. But, as we all know, the quality is uneven and so are the outcomes.

The report makes twelve recommendations which are detailed here. They are:

1. Make a significant new public investment in expanding and improving New York City’s tech education and training ecosystem. 

2. Set clear and ambitious goals to greatly expand the pipeline of New Yorkers into technology careers. 

3. Prioritize long-term investments in K–12 computing education. 

4. Scale up tech training with a focus on programs that develop in-depth, career-ready skills. 

5. Build the pipeline of educators and facilitators serving both K–12 and career readiness efforts. 

6. Close the geographic gaps in tech education and skills-building programs. 

7. New York City’s tech sector should play a larger role in developing, recruiting, and retaining diverse talent. 

8. Increase access to tech apprenticeships and paid STEM internships through industry partnerships, CS4All, and the city’s current Summer Youth Employment Program. 

9. Expand efforts to market STEM programs to underrepresented students and their families. 

10. Develop and fund links from the numerous computer literacy and basic digital skills-building programs to the in-depth programs that can lead to employment. 

11. Expand the number of bridge programs to provide crucial new on-ramps to further tech education and training for New Yorkers with fundamental skills needs. 

12. Develop major new supports for the non-tuition costs of adult workforce training. 

I participated on the advisory board of this study and support all of these recommendations. Elected officials and policy makers in NYC (and really everywhere) should read and heed these recommendations.

The tech sector faces many headwinds in society right now for a host of reasons. Not all of them can be solved by an employee base that mirrors the planet. But many of them can be and we need to work to get there.

I want to thank the Center For An Urban Future, Tech:NYC, Robin Hood Learning and Technology Fund, Google, Verizon, and Bloomberg LP for giving us a roadmap on how to get there.

#economics#employment#enterprise#entrepreneurship#hacking education#hacking government#management#NYC#policy#Politics

What Will Happen In The 2020s

It’s 2020. Time to look forward to the decade that is upon us.

One of my favorite quotes, attributed to Bill Gates, is that people overestimate what will happen in a year and underestimate what will happen in a decade.

This is an important decade for mankind. It is a decade in which we will need to find answers to questions that hang over us like last night’s celebrations.

I am an optimist and believe in society’s ability to find the will to face our challenges and the intelligence to find solutions to them.

So, I am starting out 2020 in an optimistic mood and here are some predictions for the decade that we are now in.

1/ The looming climate crisis will be to this century what the two world wars were to the previous one. It will require countries and institutions to re-allocate capital from other endeavors to fight against a warming planet. This is the decade we will begin to see this re-allocation of capital. We will see carbon taxed like the vice that it is in most countries around the world this decade, including in the US. We will see real estate values collapse in some of the most affected regions and we will see real estate values increase in regions that benefit from the warming climate. We will see massive capital investments made in protecting critical regions and infrastructure. We will see nuclear power make a resurgence around the world, particularly smaller reactors that are easier to build and safer to operate. We will see installed solar power worldwide go from ~650GW currently to over 20,000GW by the end of this decade. All of these things and many more will cause the capital markets to focus on and fund the climate issue to the detriment of many other sectors.

2/ Automation will continue to take costs out of operating many of the services and systems that we rely on to live and be productive. The fight for who should have access to this massive consumer surplus will define the politics of the 2020s. We will see capitalism come under increasing scrutiny and experiments to reallocate wealth and income more equitably will produce a new generation of world leaders who ride this wave to popularity.

3/ China will emerge as the world’s dominant global superpower leveraging its technical prowess and ability to adapt quickly to changing priorities (see #1). Conversely the US becomes increasingly internally focused and isolationist in its world view.

4/ Countries will create and promote digital/crypto versions of their fiat currencies, led by China who moves first and benefits the most from this move. The US will be hamstrung by regulatory restraints and will be slow to move, allowing other countries and regions to lead the crypto sector. Asian crypto exchanges, unchecked by cumbersome regulatory restraints in Europe and the US and leveraging decentralized finance technologies, will become the dominant capital markets for all types of financial instruments.

5/ A decentralized internet will emerge, led initially by decentralized infrastructure services like storage, bandwidth, compute, etc. The emergence of decentralized consumer applications will be slow to take hold and a killer decentralized consumer app will not emerge until the latter part of the decade.

6/ Plant based diets will dominate the world by the end of the decade. Eating meat will become a delicacy, much like eating caviar is today. Much of the world’s food production will move from farms to laboratories.

7/ The exploration and commercialization of space will be dominated by private companies as governments increasingly step back from these investments. The early years of this decade will produce a wave of hype and investment in the space business but returns will be slow to come and we will be in a trough of disillusionment on the space business as the decade comes to an end.

8/ Mass surveillance by governments and corporations will become normal and expected this decade and people will increasingly turn to new products and services to protect themselves from surveillance. The biggest consumer technology successes of this decade will be in the area of privacy.

9/ We will finally move on from the Baby Boomers dominating the conversation in the US and around the world and Millennials and Gen-Z will be running many institutions by the end of the decade. Age and experience will be less valued by shareholders, voters, and other stakeholders and vision and courage will be valued more.

10/ Continued advancements in genetics will produce massive wins this decade as cancer and other terminal illnesses become well understood and treatable. Fertility and reproduction will be profoundly changed. Genetics will also create new diseases and moral/ethical issues that will confound and confuse society. Balancing the gains and losses that come from genetics will be our greatest challenge in this decade.

That’s ten predictions, enough for now and enough for me. I hope I made you think as much as I made myself think writing this. That’s the goal. It is impossible to be right about all of this. But it is important to be thinking about it.

I know that comments here at AVC are broken at the moment and so I look forward to the conversation on email and Twitter and elsewhere.

#climate crisis#crypto#economics#employment#entrepreneurship#Food and Drink#hacking energy#hacking finance#policy#Politics#Science#VC & Technology