Post #2: Macroeconomic Supercycles & You
The Supercycle of the last 30+ Years is Done, So Now What?
Early in 2022, I wrote a post for NextView’s blog called “Pandemic, Boom, War, Correction. So Now What for Tech?” In some ways the topics I touched on in that post foreshadowed the creation of this Big Picture VC newsletter.
The TLDR for that post is basically the big macro forces that shaped the global economy from the late 1980s up until the start of 2022 had all started going in reverse. This roughly three decade period saw a prolonged period of peace, prosperity, population growth, global interconnectedness, and low interest rates. But as those distinct yet interrelated forces changed direction, I speculated early in 2022 that we'd likely to see some broken glass that would impact the tech ecosystem (more on this shortly).
Supercycles & Playing Tricks With Perspective
Economists and investors talk about "supercycles" that play out over many decades, distinct from “normal” business cycles that might go up and down in just a handful of years. The average human might see 1 - 1.5 supercycles over the course of their entire career, so they're not something most folks usually pay much attention to (except professional economists or macro hedge fund investors). It's like an ant that closely observes the leaf they have to climb over but has little conception of the entire tree, or the human who can perceive the trees around them but not the whole forest as they say.
So How Do Supercycles Impact Tech?
By definition, a phenomenon that plays out over decades is usually an incremental force and not something that's felt day to day. While startup founders aspire to build companies that will last generations, the actual company building stuff is very much focused on a days/weeks/months timescale. But occasionally macro supercyles generate sudden and dramatic outbursts. And even if the impacts aren't widespread, they can still be quite substantial in localized ways.
Again the period from the end of 1980s until roughly 2022 constituted a supercycle with the following features:
End of Cold War brings peace & prosperity —> non-state terrorism and smaller regional conflicts still occurred, but no conflict between major nation states
Rise of China drives era of globalization —> Deng Xiaoping ushers in market reforms and Western democracies embrace China’s economic role through WTO, massively expanding cross-border trade and lifting millions of Chinese out of poverty
Ultra-low interest rates —> rampant inflation of 1970s and early 1980s is vanquished by Volcker Fed, and globalization of capital & trade flows and era of peace lead to low cost of capital and expanding multiples for risk assets
So here in 2023 you can grab several headlines from the tech press in recent months and draw a direct causal relationship to macroeconomic events. And these macroeconomic events were all shaped by the supercycle forces of the last 30+ years.
1. “Five Years in Five Days: How I Panicked, Pivoted and Ultimately Survived as My Bank Melted Down” - The Information
The two largest banks catering to tech startups, SVB & First Republic, both failed and had to be taken over by the FDIC just a few weeks apart. This obviously created a widespread disruption as countless startups first had to worry about losses & liquidity of their cash and then had to rapidly level up in terms of their banking & treasury management sophistication.
There were of course multiple factors contributing to the failure of each of these institutions, but the dramatic and necessary end to 30+ years of low interest rates were the proximate cause. For context in the early 1980s the Fed Funds rate (which drives all other interest rates in the US economy) rate peaked at 20% and then declined consistently for the next several decades. Except for a brief period prior to the COVID pandemic, the Fed Funds rates was basically ~0% from late 2008 until early 2022.
After insisting inflation was transitory and that they'd keep interest rates low, the Federal Reserve embarked on the most rapid interest rate hiking cycle in US history in an attempt to vanquish inflation that peaked at nearly 10% in mid 2022.
2. “Skydio Soars to a $2.2 Billion Valuation After Raising $230M Series E” - TechCrunch
The massive increase in VC funding that occurred in 2020-2021 sort of inured us all to a startup raising hundreds of millions of dollars at a multi-billion dollar valuation. Remember a unicorn is supposed to be a rare sighting, not an everyday encounter. What's remarkable about this headline was that it came at the end of Q1 2023, not Q1 2021. The late stage VC market evaporated over the last 9-12 months, and other than monster rounds for OpenAI and Stripe (each outliers in their own ways) the Series D+ market was filled only with the song of crickets.
Here's a drone company raising hundreds of millions at $2B+ valuation, to build a factory in the USA to actually manufacture hardware. Narrative violation in 2023? Well turns out a huge chunk of Skydio's growth has been local and national level government customers. After 3+ decades of political detente and economic integration, the US and China have an increasingly tense relationship which has prompted the US government to embark on unprecedented industrial policy centered on the tech sector. In an environment where everyone from your local police department to the US Army is discouraged or prohibited from buying drones from DJI and other Chinese companies, turns out being a US-based drone company building a US factory is a pretty good strategy.
3. “Andreessen Horowitz is Now Openly Courting Capital from Saudi Arabia, Despite US Strains” - TechCrunch
Sovereign wealth funds from around the globe have been investing in the VC firms for a long time. Indeed Saudi Arabia’s Public Investment Fund (PIF), Abu Dhabi’s Investment Authority (ADIA) and Mubadala, and other sovereign investment funds in the Middle East have been allocating substantial capital to VC for the better part of a decade or more.
Allocation of capital to VC rose at an unsustainable pace from 2018-2021 and for multiple reasons, a slowing was inevitable for most institutions that traditionally invest in venture capital (more on this in a future post). But by 2022, few segments of the world had significant surplus capital seeking to allocate to risk assets. But early in 2022 Russia launched a full-scale invasion of Ukraine, the first land war since the end of WWII, bringing Russia and the US & EU into direct conflict.
Among other impacts, fossil fuel prices spiked creating an economic windfall for Saudi Arabia and other oil & gas producers across the globe. Apple may be the most valuable company in the world (by market cap), but Saudi Aramco is the most profitable company in the world by a long shot. Aramco generated $161B in net profit and just shy of $150B in free cash flow in 2022. So Saudi PIF and other vast institutional investors across the Middle East are still allocating substantial capital to VC at a time when many other capital allocators are pulling back.
Back to the Daily Grind
Again the day to day matters for startups more than the long run big picture supercycle. But supercycles are playing out all around us even right now:
Innovation waves like AI
Increased geopolitical tensions driving economic policy & regulation
Rearchitecting of energy sector towards zero/low carbon
So having one eye on these supercycles can help founders capitalize on long-run opportunity, hopefully avoid the occasional pitfall, and frame one’s startup within the bigger picture of our economy and world.