A guy I respect recently published this article, “Winter is Coming”:

I replied to him, “There’s a sequel, though….as the same or similar forces which floated RE values since the flames of AIG took hold….have also floated every other kind of asset, like:
Tech companies. The Fed printed nearly $4T between ’08-’15. That’s a shit-ton of fuel. Assuming that Winter is coming, what does it portend for investors/founders/employees of tech companies?

Here’s one answer — from our Deep Throat (unnamed VC):

I largely agree with the article. We are certainly later than early and it reads as sound advice.

I do not know if I agree with you on tech as a whole- much of public tech is very profitable and well capitalized. Tech headcount will shrink during a recession, but I’m not sure it would shrink much more so than employment in the economy more broadly. There are obviously select poster boys for low rate insanity like TSLA, SNAP, DOMO, but I’m not sure you can generalize for the sector as a whole, given strong cash flows and balance sheets at most of the largest tech cos.

Putting valuations aside, other sectors may be fundamentally more egregious, where debt + rates has produced otherwise uneconomical growth and $s are lit on fire buying back stock of secular decliners.

Certainly pockets of venture backed tech are much more fragile than tech broadly, and could hurt SF much more than they could hurt the economy as a whole. As a very rough proxy for better data, California VC $s invested avg $41B/yr from 2014-2017 vs a Bay Area GDP of ~$800B, 5% or so- nothing to sneeze at and hard to quantify further downstream effects or even more localized impacts. The attached excel sheet has a ton of good VC funding data. At some point the venture ecosystem won’t be pretty, I’m not smart enough to say when that will be.

Stock based compensation may become more of an issue if equity prices keep declining, as it will force companies to pay more cash comp and/ or cause effective compensations to decline. Many large tech companies, particularly in internet, report only GAAP earnings, but there will definitely be downstream effects on spending.

At a more macro level I do not really have any new thoughts.. as I have said before I would capitulate if the 10s1s (I think other measures like 10-2 or 5-2 are meaningless) treasury spread inverted and if real M1 growth goes negative. History is an imperfect guide (understatement), but the only good predictors of recession/ extended equity price declines are the 10s1s spread, M1 growth, and risk spreads, followed by y/y unemployment rising.

Of course, markets can go down without recession and/ or this time could be different (historical signals unreliable) given unprecedented dual rate increases + balance sheet reduction. Moreover, risk spreads, price action in banks, RE, energy, etc, + the length of the current cycle do give me some pause.

I attached a couple of notes from an economist I respect and largely agree with, though he is more confident in the Fed’s balancing act abilities than I.

Long way of saying I don’t know, and anyone who says they do is a charlatan. If I had to bet, I would say that this is a correction—repricing for lower growth/ more risk—and we will see yield curve inversion and M1 growth go negative 3-12 months ahead of the real deal. We are using the opportunity to upgrade the quality of our long portfolio, while maintaining low gross and net exposures and not really making any big bets.