Why We’re Still Open For Business At Asymmetric

July 5, 2022


Sam Clayman

By now, we’re assuming you’ve heard from tech pundits of all stripes that now is the time for something ranging from safety and caution to outright panic. After all, the Nasdaq has fallen ~30% from its all-time peak in November 2021. Public cloud software companies have experienced greater pain, with 40%+ declines from peak and ~70% destruction in average prevailing ARR multiples. Many recent IPOs are trading for a small fraction of their opening market cap. We understand the fear engendered by this rate and scale of market decline. Today, however, we wanted to share why we don’t believe the sidelines are quite as safe as they may feel. Indeed, we not only remain open but are aggressively pursuing investment in the highest quality founders driving the most meaningful innovation.

Let’s start with the oft-cited catalysts for this reversal in performance after the Nasdaq had in aggregate returned over 500% in the decade ended Q4 2021, which are varied: 1) a shift in the forward interest rate curve and associated discount rates as inflation increasingly appears durable rather than transitory; 2) supply chain issues that have limited availability of goods; 3) a shortfall in workers that has limited availability of services and meaningfully raised the price of labor; 4) looming recession risk; 5) expiring fiscal stimulus and the unwind of an overloaded federal balance sheet; and, 6) increased geopolitical uncertainty as both the ongoing Russian war in Ukraine and the United States’ fraught relationship with China show no signs of abating. Of course, most ink spilled explaining market corrections presumes prices were appropriate beforehand and have fallen due to new and negative news feeding diminished expectations. We actually aren’t confident that valuations in the back half of 2020 and all of 2021 made any sense at all. As in all bubbles since Holland in the 1630s, “this time is different” remains on a permanent winless streak.

Seemingly every venture capitalist with access to a laptop has shared his or her thoughts on how early stage companies should navigate what appear to be treacherous waters. Extend runway, eliminate side projects / experimentation, focus on a path to profitability, and raise now if your plan had been to raise over the next few quarters have graced nearly all lists. In addition, many firms have publicly or privately signaled they plan to slow their deployment pace as they prioritize portfolio preservation and wait for more clarity in the newfound investing climate. As we heard recently from one founder, “The only investors who seem rational today are both early stage and have a new fund.”

At Asymmetric, we agree with aspects of the logic above but feel it tells only part of the story. We are no doubt likely to enter a relative downturn in venture investing activity of uncertain duration. Everything else equal, rounds will be harder to raise in this period than they were for much of the last half decade. It is clear that some of the lowest expectation capital has left the market, and rightfully so. Venture can certainly be a self-sustaining party, and the bad times can circularly reinforce just as well as the good times did. Properly, though, investors at all stages are now more focused on profitability and less apt to fund marginal ideas. The 75 cent dollar store is hopefully closed for good - or at least for a while. As we’ve expected would happen at some point since our founding in late 2020, investors are now far more focused on unit economics and relatively less on capital consumptive growth. We have counseled each of our portfolio companies to ensure they are well-positioned to weather a harsher fundraising environment. However, building towards a permanently sustainable competitive moat should be the objective in all market environments. As the cost of capital increases, so should the relative urgency of securing that moat. Thriving is more important than simply surviving; commercial market opportunities are fleeting.

These ivory tower - or more likely, Tahoe and Brooklyn - missives tend to both (i) ignore the opportunity that dislocation has historically created and (ii) reflect market participants’ tendency toward hyperbole in moments of excess volatility. Stripe, Block, Slack, Uber, Airbnb, Cloudflare and many other decacorns were founded in the depths of 2008’s Global Financial Crisis, when many intelligent people discussed the inevitability of a Greater Depression and the fracturing of the global financial system. Instead, dynamic market interventions averted a greater crisis and catalyzed one of the great tech bull market runs in history. Investors who were quick to appreciate the novel advantages that adversity had won for them - broadly lower valuations, lighter competitive intensity between companies and investment firms as new business formation fell and investors pulled back in the name of responsibility, greater availability of talent, retrenchment from incumbents, crisper revealed feedback from more budget-conscious customers, among others - were richly rewarded for staying the course. Being greedy when others are fearful is always more difficult to live than to say.

Said simply, reports of the coming end of the world have always proven premature; core technological innovation has not died because public SaaS multiples have finally and perhaps appropriately contracted. While the last year’s and last decade’s simultaneous monetary and fiscal excesses dampen the odds of intervention as dramatic as that seen in 2008-2009 and the spring of 2020, we remain long technology and long the United States. Driven by true commercial advances in AI, health care and financial technology, among others, real innovation continues to take place fully independent of the forward yield curve. If cartoon photos of primates and obscure tokens have lost their value, so be it. Every period has oscillating sideshows that dance around and obscure the positive long term trendline. We think capital will continue to be available (albeit sometimes at lower prices) for extraordinary companies serving their customers well.

Particularly in the earliest stages, a single investment in an enduring category champion more than compensates investors for a slate of failures: the asset class is inherently asymmetric. The salient question for investors today is not whether the world feels riskier than it did a year ago (it does), but how their ability to invest in the generational companies of tomorrow has shifted as the world has changed. While superficially soothing and seemingly prudent in the moment, electing to sit on the sidelines as future decacorns are founded over the coming year - which, with certainty, will happen - feels to us closer to an abdication of our responsibilities to our LPs than a fulfillment of them. If you are or know wildly talented founders hungry to build the companies that will define their industries, we’d love to talk - and we remain open for business.

(Image Source: Shutterstock) 

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