Tech Deciphered

Tech Deciphered


#33 – Winter Has Arrived – Part 1 – the Burst of the Bubble and the Crisis Upon Us

July 26, 2022

Winter Has Arrived – the Burst of the Bubble and the Crisis Upon Us… AND WE GOT IT RIGHT!


In this episode, we share … that we were right, all along. We were in a bubble and the crisis is upon us. We share context on the current crisis and what is happening, exactly at a macro level – inflation, recession, over-stimuli, etc – as well as in the start-up and VC world.


Navigation:


  • Intro (01:34)
  • Section 1: First of All… We Told You So… Repeatedly (02:05)
  • Section 2: What is Happening…Exactly (04:25)
  • Conclusion (41:37)

Our co-hosts:


Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news


Subscribe To Our Podcast

Apple PodcastsSpotifyGoogle PodcastsTuneIniHeartRadioCastBoxOvercastBlubrryBreakerPodbeanPocketCastsCastroRSS


Intro (01:34)


Nuno

Welcome to Episode 33 of Tech DECIPHERED. This will be the first of two episodes on the bubble bursting. We’ve called it very nicely. Winter has arrived when we’re really in summer. Today’s episode, we’re going to go through what’s happening exactly in this bursting of the bubble. But let’s actually start with congratulating ourselves in having predicted the bubble. There was a dramatic bubble and that it was going to burst, which we did in our duology on the bubble a couple of episodes ago Bertrand.


Bertrand

Yes, we released these two episode in October or November, about the bubble and how was supposed to burst at some point. I guess timing was perfect to talk about the bubble when it was at the top of the bubble, right before it start to explode. I think you could fit it in a lot of our discussion in the past two years on our podcasters, that we were on one side amazed to see the increase in transaction values, in VC financing and startup financing, and at the same time, constantly reminding that didn’t feel right, and this was probably just a big bubble, and we call it right. It’s not just about congratulating ourselves. At the end of the day, it’s a pretty scary times for everyone, but obviously, it happened for a reasonw and [inaudible 00:01:19] reasons, and that will help us understand what happened and what’s going to happen.


Nuno

Maybe a parenthesis… I think we got it right in several ways because when COVID first hit, we were predicting that that mini-crash was going to lead to a fundamental crash, and it didn’t. Part of what we’re now going and suffering through was that, because there wasn’t that crash, and the market continued to go bull market for another two years, thank you very much, because of governments giving money, incentives to consumption, a bunch of stuff that was really artificial now we know, we ended up actually having top of the market when we did launch the duology in 2021.


Nuno

I know it’s not a great signal. I certainly, I think, in my own professional activity as an investor, in looking at companies et cetera I’ve used it. I used it throughout to advise my companies, “Raise now when never knows when it’s going to burst”, “Make sure that you have a plan B”. There was a lot of things that instructed me in how I behaved within my professional activity.


Nuno

I’m sad to say that it didn’t inform everything that I do. I probably could have avoided one or two things on that if I’d sort of followed my own advice on it. But in some ways, having been disciplined through the last year and a half, two years, and now we looked at investments. In some ways, I feel a bit vindicated. I don’t want to do the “I told you so”, but we told them so. Now, we have plenty of proof that we told them so. There’s episodes, two episodes that talk about it in October, November, last year. Although I know this is not about really being vindicated or not, it is good to know that we weren’t smoking dope, that we were seeing something that made sense.


Bertrand

I will say that the sad truths about this and about people who tell you they cannot see the bubbles, because actually, you can see the bubbles, actually. It’s pretty obvious and I think you have to be pretty blind not to see them. Unfortunately, our officials, elected or not, seem to be totally blind to this sort of stuff. I don’t know if it’s simply incompetence or if it’s on purpose, but this is what we have to deal with at this stage. Maybe to go back in time, as we discuss, indeed, initially, we are very scared about the impact of COVID you don’t put hundreds of millions in lockdown. We saw consequence. Early on it was probably the best approach. You don’t know what’s happening. You don’t know how bad it is. You don’t know how it works. You don’t even have access to masks or testing, so you have to take a lot of precautions. I think that initial reaction, which was not immediate, by the way, it was only after it was probably too late, made sense. Beyond that, I think that’s when the craziness started, when we kept locking down too much, when we started to print money too much, I must say, I didn’t see that we would be so fast on the printing press.


Bertrand

I was reading an article recently, and they were saying, “It took us two months in 2008 to push the printing button. It took us two weeks in 2020 to push the printing button. I was expecting myself it will go down further and it would take longer for recovery. But I was obviously underestimating what was the readiness of the government, the central banks to print money, distribute money and send checks to everyone, to do nothing. Obviously, it just delayed the inevitable and you probably could argue it made worse as inevitable. I’m really not happy to hear a lot of self congratulations from a lot of people to say it was the right thing. An early reaction was the right thing, but continually printing money as if nothing happened for two years is another story. That over-stimulus is probably the start of all of this. Do you have anything to add on the over-stimulus of the economy? When we talk about this, obviously it’s happened in Europe, in US, in Japan, in many countries.


Nuno

I think the initial reaction was the right reaction. It was truly tragic and everything was happening at the same time. I think the stimuli that were applied in different parts of the world, obviously we don’t know all the policies by heart, but we can look, for example, at the U.S. I think the indiscriminate stimuli, I’m not sure is a good practice. We need to follow the money when it happens at scale and you give money to everyone, even some people that might not necessarily need it, or it’s extra savings or whatever. What are people going to do with it? They’re going to apply it to something that they believe, “You know what? I might as well apply it to something that gives me high returns.” Maybe it’s higher risk. We saw, and we’ve talked about this before in a couple of other episodes, and move towards putting into public equities. We saw that the public equities were ridiculously overvalued. The reason for that is also because at some point in time, bonds stopped being attractive, and other things stop being attractive because of how the economy was moving. Where did you put your money?


Nuno

I’ll put it to public equities. Then valuations public actors go through the roof. The multiples of public equity companies are commanding, are going through the roof. We always know what happens next. What happens next is then private markets going through the roof, the later stages goes first, then the mid-stages, and then early stage. We saw this panning out very cleanly. Then there’s a little bit of lag in markets, the corrections starting in November. But it took, I think, until the beginning of this year, probably the end of first quarter, maybe beginning of second quarter, for us to start really seeing significant withdrawals in the private markets, where term sheets for early stage investments were being renegotiated because people didn’t want to pay that valuation anymore. Investors were just scrambling at some points, there were a couple of term sheets that were left on the table where people and investors just walked away. Now we’re back to a market that, obviously we’ll go through a tough time, and we’ll talk about what’s next in our next episode. But it will go through a tough time necessarily. There was an exaggeration of everything. I mean, entrepreneurs that were raising left and right, and they were like, “We’re the best thing to slice spread” and they were not.


Nuno

There was just a lot of capital and the capital needed to go somewhere. Everyone was flush with capital to give around. In some ways, after a big, big, big high of a bull market, now we’re going to have a low, low, low, low because these things need to rebalance over time. For me, that’s the big issue of the over stimuli… The over stimuli, if it hadn’t been applied to other things, if it had been focused on consumption of things that were really necessary, if it hadn’t been applied, for example, to savings accounts in certain circumstances, if it hadn’t been done in discriminate way, maybe after the first check round. If it had been done in a different way, and I know politically this sort of creates all sorts of cans of worms, but if it had been done in a different way, maybe the over stimuli would have been more positive than it wasn’t the end. In the end, it propped up a bunch of stock. It propped up, also a lot of investment in crypto assets, which were even riskier. That crash we haven’t seen yet. We’re going to see it. We started seeing some of the early signals of it, but it will happen and there will be consolidation.


Nuno

It’s not that crypto is bad, it’s not that Web 3 blockchain is bad. It’s just it was too much. There were too many things getting financed. There were too many things getting capital that shouldn’t be getting it because there was just too much capital in the market.


Bertrand

I guess the crash of crypto is already with us at this stage and probably got accelerated with linear explosion for [inaudible 00:08:05] that followed. Actually, I would argue that even before cash went to investment, however risky is it were, cash went to very, dumb stuff is a bit extreme, but particularly, I still remember being shocked when I heard from France in the HiFI industry that in 2020, the business exploded like never before. You’re like, “Just to be clear, just give a bunch of money to people” because conclusion is people are all buying HiFi equipment, sound speakers, TVs. That’s really where our money went. It was that and Robin Hood and other places. That’s very scary because I feel that there is strictly no accountability. Just “I’m going to create stories, talk on TVs [inaudible 00:08:51] and you just channel the money in every direction. Pretty scary here, at least. People, instead of saving the money, of using it for stuff that matters, they do whatever with it. It’s pretty scary and sad. For me, it was already bad sign that is going in the wrong direction, and it’s going to be a waste and of course, at some point it’s payback time, and that’s really what’s happening right now.


Nuno

It was even worse than that Bertrand in that sense, because you’re talking about accountability, we’re talking about a lot about consumers. Retail, as we would call it, consumers got the money and they did whatever they wanted with it. But companies as well, because of the loan programmes that were applied, and it was, I absolutely would defend it, it was strictly necessary to create a program like that to keep many businesses afloat. But there are many businesses that received money from that programme that I’m like, “Really?”. Again, accountability, and I understand you can’t make the process too cumbersome, because if you make the process too cumbersome, becomes too long and too complex, and the people that actually need the capital won’t get it. But there should be some accountability. I mean, if the company didn’t need the cash, or if the company is in an area that you couldn’t really justify the assumptions behind the loans. Why the hell did they get it? This was like a free for all for a period of time. You got to a point that they weren’t even accepting more applications. It’s just a free for all.


Bertrand

This was crazy shit. I’ve heard stories about businesses who got money and they got more money per month that were given to them than what they were making, typically an average sales this month. It just cannot work. You cannot be that dumb and accept everything. It does happen in Europe, in U.S. It’s pretty scary, again, you work hard to make money, to generate money, then you give it to the government tax you, and then they do whatever the hell they want with your accountability. Any business work like this, any individual work like this, they go bankrupt. But government, they keep doing it, and they keep getting elected. It’s pretty shocking.


Nuno

It keeps illustrating that a lot of people say that the problem with most governments is policy, that they’re bad at doing policy. It’s actually not just that. They’re actually extremely poor with execution. In many cases, they’re inefficient. They don’t know what they’re doing with the money. They can’t do targeted they can only do a hammer. They can’t do like targeted things. They can only do the hammer thing. It’s like, okay, this is why it’s going to go. I honestly understand that policy stuff to approve. There’s political interest, et cetera, et cetera. I understand that’s difficult, but then even the ability to deploy things and do things is mind-boggling to me. I was in China when the 2008 correction crash happened, the Chinese government, the way they deployed capital, they make the capital get to people for them to spend in buying, in this specific case, white goods for the home, like washing machines and automotive so cars, et cetera, which were the two things they were trying to really stimulate in terms of consumption. I mean, they did it, honestly, they did it. I’m not sure there weren’t flaws. There’s always leakages in these programs, but they did it.


Nuno

But it’s like, you can’t have leakages on programmes, which is a significant part of the programme went to the wrong hands. You can’t do that. Then what’s your use? What are your vehicles? What are your abilities as the government to do and enforce policy to your constituents? How does that work?


Bertrand

I think you are making a great point. When you listen to politicians, it’s all about the policy programmes. It’s never about how I’m going to execute better, which should be 50%, 60%, 70 % of the discussion actually. But no, it’s not sexy, it’s not fun for a lot of these people. But at the level of waste, years ago, I was thinking, okay, there’s some government waste. It’s 10%, 20%, 30%. Now I stop being blind. We’re talking about waste to levels that is simply mind-boggling. We’re probably talking in the 80-90 % level of waste, especially here in the U.S. Also in some other places, like in Europe, the waste level is just insane. It would have made any normal company bankrupt. But instead of having smart discussion about, “Okay, you want that policy, let’s make sure it execute well.” We don’t have these discussions. It’s pretty scary. I just read an old article written in 2014 about literally a sinkhole where files and folders were going to manage government pensions in the U.S. For federal employees. It’s just so insane to read. Basically, they tried to digitize that for like 30 years.


Bertrand

Couldn’t achieve. The digitization of the process first three or four times burnt hundreds of millions of the last. This is stuff like any normal company would have achieved in the 1st place. If not in the 1st place, a bunch of people would have got fired and the next time it would have worked. But no, not when it’s run by the government. I hope that at some point we have discussions beyond the policies, but more into the processors, the execution, because that can make a huge difference, especially in time of crisis. In time of crisis, money is scarce. You need to find ways to not build on crazy everyone individual employees, either by inflation or by increasing taxes. You need to do more with less, and in a ways, the positive news is that it should be absolutely possible to do more with less, given how inefficient is a system. But I cannot say I’m optimistic because no one talk about it and obviously we have right now in the U.S. And many countries, governments are still blind to inflation, its causes, its, a solution. Just even a few months ago, they were claiming it was transitory.


Bertrand

You can’t believe it, right? Are you guys kidding or something? Or don’t you know what’s going on? Which is even worse.


Bertrand

That’s a scary part is a level of incompetence at [inaudible 00:14:23] from governments to central banks. Again, anyone who have made some of this decision in a normal company would have been fired.


Nuno

They could have been sued in many cases if they got erroneous guidance.


Bertrand

Yeah. But look at Jerome Powell. I mean, he just got restricted his position as chairman of the Fed. This is the same guy who told us it was transitory. Janet Yellen, she just recognized that she was mistaken when she talked about the inflation being transitory. This was a two top people in the U.S. Who should have done better, and they were totally wrong. They’re still in place.


Nuno

Powell now says he can’t guarantee a soft landing. Changing the tune of that.


Bertrand

I love his euphemism. I hope everyone translate it properly, it means that it’s going to be a crash landing, of course.


Nuno

Without any personal attacks or any specifics, but talking about the numbers for second. U.S. Economy shrank 1.4 % annual rate in the first quarter.


Bertrand

A surprise as well, no one expected that and suddenly came up as a bomber.


Nuno

It’s all of a sudden, “Oh, it shrank. Oh, okay, that’s cool. Thank you.” Inflation accelerated to 8.5 % in March. But you were telling me in April it’s even worse.


Bertrand

In March, I believe it was 8.4. It was 8.5. The consensus was 8.3. Thinking we’re at the top. It’s starting to be behind us. It’s decelerating. Guess what? This morning it was announced it was 8.6 %, actually, for fire period so instead of decelerating it is accelerating.


Nuno

I have to take my hat off, because the two of us have been talking this for a while, but you have been always hampering on this inflation thing. It’s like, “I can’t believe these guys are talking about it’s going to be managed and whatever. There’s no way.” I think you got it absolutely right.


Bertrand

It’s been a year I’m going nuts about this. It’s shocking, because you see these officials, you see academics. Academics were all following the lead from government officials. That’s where you understand they are part of all of them, of a system with different tools to analyze what’s happening. This is quite frankly, disconnected from the real world. It’s more systems that try to justify insane policies and build around that. Just let’s build the system to justify crazy international policies and have nice talks and be able to tell the world our crazy policies make sense. Then, of course, when the crisis happens, they don’t even get it. I’m not even sure it’s because they are lying to us. It might simply be that the tools and systems equated are unable to help them comprehend what’s really happening and then when it really happening, it’s too late. I guess now they get it, hopefully, even good news. Even the ECB finally decided to increase its rates. Amazing, after months telling us that for some magical reason, Europe didn’t need to increase its rates. Of course, Europe need to increase rates, the ECB need to increase them because is being inflation happening in Europe, and it will continue to happen.


Bertrand

I know it’s easy right now to put everything on the war in Ukraine, and it’s obviously part of the reason, but it’s definitely not the main reason. We talk more about the details of why it has been happening.


Nuno

We’re going to go a little bit more micro and talk about companies and investing and all those landscapes that we are so deeply embedded in. But maybe before that, let’s talk a little bit about the externalities. Because if all of that wasn’t quite enough, obviously we had COVID, there were issues because of COVID with a supply chain. There’s been second, third waves of COVID in certain parts of the world, obviously, China finally had their second wave, which then locked them down again, if that was enough, just to make supply chain even worse, where you can’t get stuff. We’ve talked about it in previous episodes, getting a car you can get maybe preowned and you pay above MSRP, above the price that you would buy it new. If all of that really wasn’t quite enough, we obviously had the war in the Ukraine just to make things just, let’s make this a little bit nicer, because it’s not bad enough yet. That had created its own issues in Europe. It created issues in Europe. It created issues of supply chain again, because there was actual manufacturing there. It created issues around that relationship with Russia and then around energy dependencies.


Bertrand

Just to be clear on the war in Ukraine, I’m feeling extremely sad and sorry for the people of Ukraine who are facing war and destruction and loss of life at a tremendous scale. I feel sometimes it’s a bit forgotten. I’ve got impression people are just, “Oh yeah, it’s great. They managed to push back and managed to defend themselves”, but at what cost. The other piece of proposal in Ukraine, for sure, one country invaded another one. But at the end of the day, when you dig enough in what happened since 2008 in Ukraine, one thing that is clear is that in a way we did everything we could to set up Russia for war and push them to invade Ukraine. From this perspective, it’s scary, again, the other one responsible ultimately but I would say the trap was set well, for me, it doesn’t make sense. Just to be clear, to do such a thing I certainly don’t support that. I can certainly imagine that for the poor people of Ukraine, being in that situation again is terrible but I feel that we did our best to make sure that peace as real chance.


Bertrand

If we look at what’s happening right now… The peace process has stopped, mostly because on the west side, we don’t want a peace process at this stage. That’s pretty scary because it means, is it another Afghanistan, except that it’s at the door of Europe and destabilizing an entire region. As we have seen, it’s not just going to impact Europe. First and foremost, it has impacted Ukrainian people, it has impacted Europe, it has impacted Russian people, it is impacting Americans. Everyone is getting impacted. On the worse, will probably come to developing markets. The food crisis that’s going to happen because of the war itself, but also our reaction to war. I think our reaction in terms of sanction is disconnected from what we should have been doing. We are hurting ourselves. We are hurting as a developing world. I’m not so sure where are team Russia. To create sanction on the basis of what seems right, versus of impacting the best way a situation and sanctioning the right people, I’m very worried we have done absolutely everything wrong there. Basically, for me, it has been adding gasoline to the fire, and that’s the scary part is, where do you see that ending?


Bertrand

Let’s not forget, Russia is one of the biggest, if not the biggest provider of gas in the world, also the biggest provider of aluminum. They are the biggest exporter of so many things that the West depend on that dominion to start to upend that. It’s a really big problem. Obviously, these are global markets. If the West doesn’t want the Russian products, then the East and India and China and the Brits and the [inaudible 00:20:57] , they are very happy and interested to buy the Russian products. We are just creating a situation of extreme stress in the economy, creating a lot of trouble in the world economy. I’m very, very worried that millions, if not dozens, if not hundreds of millions of people are going to pay the price of some of our policies where, again, it’s not about what is the right strategy game we want to achieve that [inaudible 00:21:22] sense, but it’s a lot about value signaling at the end of the day, even at the expense of lives of millions of people.


Nuno

It is truly a tragedy that cannot be ever fully understood by us. We have an investment in a company that most of the team was in Ukraine. A lot of the people on the team managed to get out. A few of the people who were men did not leave the country. One of them is the co-founder of the company. We now have board meetings where he is still in Ukraine, and they’re working and they’re working hard. You can’t really understand what is happening to these people’s lives. We just actually hired a Ukrainian person, and that person, by something, they predicted that there was going to be a war, and they actually left the Ukraine a couple of weeks before the war started, went to London. We run across his profile. We actually just hired this person, and his girlfriend have moved to Portugal now. I have to be very honest on this. It’s very difficult for me, even to have a conversation with the people on the team that we invested in, that are Ukrainian. This guy we just hired, a Belarusian guy that we were working with that we can no longer work with because there’s a sanction on Belarus, and we can’t pay the guy.


Nuno

I have difficulty even having conversations with him because I just can’t fathom what the country is going through. I think on the positive side, I would say, in all these conversations, it is very clear to me that there is a commitment by these people, these companies, to go back. In this case, for example, this company was asked or ask most of the employees, “Would you go back?” Or “Shall we start another office somewhere else and just start from there?” Almost everyone said, “We’re going back. Whatever’s there, we’re going to rebuild it.” It is incredible. There’s many stories of, obviously people that gone to the front, from athletes, celebrities, and they’re on the fronteople. People are dying. Again, we don’t want to underrepresent what’s happening there. It has having a tremendous effect in Europe. It is having, as you said, a tremendous effect in the world, and again, in geopolitical terms, changing the dynamics yet again. It’s added to maybe putting a nail in the coffin of this. Bubble does needs to burst, because the fundamentals are not there. We can’t hold this anymore. I don’t think the war self-justifies the burst of the bubble, but definitely I feel it was one of the final nails that in some ways really took us away from the la la land that we were in.


Bertrand

We got the peak of the bubble in November, 2021, caused by, as we say, that inflation, that influx of money, which at some point created price inflation, supply chain issues, and ultimately this rate increase. At the end of the day, it’s quite mathematical how stocks don’t connect to weights. Then we combine that with a war in Ukraine. We combine that, as you said, by a sudden wave of COVID crisis in China that seems much worse than before. It’s particularly connected to the fact that now most Chinese people did not have the best vaccine available, because for some reason, they did not use mRNA vaccines. We are in a situation where people are not properly protected. We have a virus that, it was bad initially, but the last COVID versions can diffuse much faster than before. It’s much more difficult and painful and costly to work it out the China way, and because everybody else has stopped trying, basically. I think this one is also another big unknown with very big implication. When a place like Shanghai is stopped, it has huge impacts on the world. A lot of shipping is happening in Shanghai. A lot of factories are around Shanghai.


Bertrand

It’s really a tough place to be, and we don’t know when it would stop. We don’t know when some of these will stop. I think that all of this together, it’s really a change of the century in terms of how we work, we live, going for a while as we discuss briefly. At the same time, we managed to get another crisis, but I guess it always happened like this at some point when crises are big enough to create additional ripple effects everywhere. Here, with cryptos, that’s what we got with [inaudible 00:25:15]. At some point, these currencies that was supposed to be tightly connected to the dollar one to one managed to completely disconnect because some people saw weakness in their protocols. It was not backed by one-to-one asset ratio. It was on the contrary backed by a protocol system that actually many criticized as being flawed, deeply flawed. This one, the stablecoin has burst. The question is, what is next in crypto? For sure, we have seen cryptocurrency is decreasing big time. But on this level, I think part of it is really a general realignment of risky assets, easy access to capital that has been happening, and now, all this money is just all flowing back because people need the little money left.


Bertrand

It’s a system to buy real stuff.


Nuno

The correction we’re going to see, obviously you’re talking about the crypto correction, but there’s very significant public and private market correction, as we discuss. Valuations have come down dramatically. Was warranted. It’s now become a little bit, what happens when a bubble burst? It became a blanket realignment, right? Everyone gets kicked out and/or kicked down, so to speak. Everyone’s valuations has to go down. Then there’s obviously some companies that are undervalued to a level where you’re like, “Really?” Fortunately, that actually creates another dynamic, which is it starts creating opportunities for predatory behaviors like, “This company is that low value, I’m just going to take them over”, right?


Bertrand

Totally.


Nuno

Again, like in everything in life, a time of crisis will bring opportunities. Some will be ethical, some will be unethical or borderline unethical. But definitely, the correction is happening. It’s too much of a blanket correction. I look at many companies that are not necessarily even my investments that are public equities, and I’m like, “They can’t be worth that little.” It’s the beginning of the process. Everyone gets pulled down. Now, let’s see where these guys head out in the next few months, maybe in the next year, and hopefully we gain some of that value back.


Bertrand

I think we have two phenomenons at play here. One is: the markets are overreacting or not, that’s a big question. I think the big question depends on where investors think the central bank’s rates going forward to fight inflation. Because right now, we don’t have more money to put to work. Putting money to work is what created the inflation in the first place. Let’s be absolutely clear. There is no magic formula right now to just put more money to solve the problem, as we have done in 2008, or in 2020, actually. The money is gone and should be gone as fast as possible in order to fight inflation. The big question is, how high we need to go to rate? Very clear that we go at more than 2%, 3%. Actually, some argue that the market are being valued today on the expectation of rates at 4%. The big question is, would it be enough to fight the inflation? Some argue that actually, to fight an 8% inflation, you need rates like in the ’80s that go beyond the inflation rates. You need a central bank rates at 9, 10% in order to really tame inflation.


Bertrand

I think that’s the biggest questions right now for the market, is where is this stuff going to go in order to stop these crazy levels of inflation? Of course, that will have an huge impact on where are we going in terms of level of recession? Are we already in recession, or is it a recession in Q3, Q4? Is it early next year, and how would it be? Personally, I think recession is inevitable and will come relatively quickly, and it would be probably quite bad, because nothing I’ve seen so far in public policy has given confidence. I’m very hopeful central banks are going to do their job. But from past experience, when they try to increase by 2018 and ’19, were not symbols of the capacity to do the right thing when you need to do it. So we’ll see when central banks decide to post the rate increase. The other piece of the puzzle… The first piece is this reaction in the market is based on a new estimate for where the rates are going to be. The second piece of the puzzle is that suddenly the expectations for what is a good company have changed. We move from gross companies to be very valued just based on growth to now the new star in town is the value company, the company that are growing not too fast that is generating cash.


Bertrand

To your point about some companies look undervalued, we really have these two phenomenons at once. For companies to switch one model of how they work to another one, it takes, in best of cases, a few quarters to readjust, to reposition yourself, if not, one or two years. Some of this is going to take a while for companies to readjust, and we are right now talking about public markets, but we’ll talk more about private markets, obviously. But this is from me, the other piece of the puzzle. The expectation of what is a great company has changed dramatically in a matter of weeks.


Nuno

Just to bring a crux on the macro site, and then maybe move a little bit into the more micro side of technology and what’s happening in venture funding. One is this whole notion of, are we going to have soft landings and their prolonged soft landing? Are we still going to have a really hard landing and this wasn’t it yet? I continue having my definition that we’ll see a hard landing moment. We haven’t seen it yet. That’s my hypothesis. I’ve put it at the table before. Others believe that it’s actually going to slow down, but it’s going to take really a long, long time for that to happen. So again, the slow, soft landing scenario. The effects are being noticed already. I mean, to your point on how companies behave and are they geared towards growth, or are they geared towards creating more value, extracting more cash from their business, we already started seeing it, companies that are actually doing really well, that did stupidly well through most of COVID, that then got major realignments in their market cap. Now they’re like, “You know what? We’re going to restructure, right? We’re gonna either freeze our hiring or we’re going to do layoffs.” Obviously, some companies are in real trouble, so that’s a different type of scenario.


Nuno

But you see companies that are actually doing well that are either doing hiring freezes or are doing effectively layoffs as well. They’re taking advantage of this to clean up the way they work, again, to gear themselves toward this new stage where they’re going to be valued on how much cash they generate, their guidance, et cetera. That creates the next issue, which obviously with some companies now having difficulty in raising money, some companies that maybe have raised too much money to high valuations that we’re burning through through much cash. I know you have a couple of pet peeves on that, Bertrand, that at this stage, basically they say, “We have to lay off people. We have to lay off a significant percentage of our team.” What happens is that it leads us to a slowdown on unemployment. It leads us to a point where everyone’s like, “Oh, we’re not noticing it yet, but it needs to…” What I usually say, which is I think we are going to go from great resignation where people were resigning left and right and they were doing whatever they wanted, and like, “If you don’t allow me to work remotely, I’m not doing the work for you, whatever,” to the great unemployment, which again, sadly, is going to be a tragedy , and it’s going to change again and shift the power that has been really with, in many cases, with employees for a few years now.


Nuno

Certainly in tech, we’ve seen that in a very dramatic manner. Very difficult to hire people. You have to pay ridiculous salaries in many fields. Even for that specialized type of labor, I think we’re going to go through a phase where things might not be exactly like that going forward. A lot of that powers, as I said, will move back to employers.I


Bertrand

I think that the only good news was when all of these bubble bursting started, we are at best place possible in terms of unemployment. Unemployment was at its lowest. That’s the good news. That part was started from a good place. As you say, I would definitely expect some dramatic changes in every industries. I’ve already heard people who used to get five plus job offers. Now, if they get one, they are happy. Changes are happening, there is no question. To be clear, it’s not a sign that companies are in bad shape. If you are reducing your team size by 10, 25%, it’s actually a sign that you are careful. You are good steward of your money. You are changing your investment priorities, you have acknowledged what the markets are telling you and what are the signs of a probable recession, and you are doing your work in advance of some of the worst happening. Guys who will be in bad shape are companies that are going to wait too long to do some of this and will have less cash in order to transform themselves, and won’t be as much trusted when it’s time to ask for additional investment money, because investor will say, “You know what?


Bertrand

You guys waited too much. Why should we trust you that you are going to do the right thing the next time?” That’s a tough place to be.


Nuno

It is a very tough place to be. We are thinking through a lot of these implications. My advice, and this is based a bit on my prediction that the next 3-6 months are going to change dramatically the employment markets around the world, so by the end of the year, by latest, early next year, will be in a recruiter market where recruiters are going to be having a much better time than they’ve ever had before. But in some ways, this links maybe to one other topic if we talk about private markets and private equity investing and venture capital investing. Venture funding fell the last quarter for the first time in a really long time as you were mentioning to me, Bertrand.


Bertrand

Yes.


Nuno

It’s not just the notion of hiring and firing. It’s the notion of, there’s going to be, again, like everything in life, there’s going to be opportunities. There’s going to be tremendous talent out there available to be hired. It was generally difficult to hire in many places for many companies.


Bertrand

It was near impossible.


Nuno

There will be an opportunity. Again, it’s like everything in life. We probably at this stage, if all read the several decks from Sequoia Capital, which by the way, are very good decks. If you haven’t read them, you should read them. They have the famous quote from Senna on, “you can only really pass 15 cars in the rain. You can’t do that in the dry.” I’m a race car driver, so I love quotes from Senna and others, and it’s totally true. We’re in the rain right now. This is wet tire mode. If you’re in a good position to really go to the next level, if you’re in a position that you’re generating cash, your top line is actually doing good, and you’re not really hitting the wrong end of the cycle right now, maybe you’re the guy who has the opportunity as a company to start basically hiring, and hiring amazing talent.


Bertrand

And, to be fair, to craft venture, as they were probably the first to show a deck on the downturn and what to do about it. Sequoia was two weeks late to it, but always with a great quality analysis. I think that when you talk about recruiters, for instance, their life could be easier for recruiters who won’t have been fired. Because to be frank, the first to be let go in these type of periods are recruiters, so it won’t be fun to be a recruiter right now. You better move quickly to a company that is well-positioned for growth in that situation because typically that’s really some of the first position to go when you have to recruit less people. But a very different situation, full of opportunities, for companies with really good business models. I think what we would see is that we are going to see quickly, as we say here, who were swimming naked, and I think it’s already happening. We saw some companies, I believe it was Fast that imploded, that payment company. Some others like Bolt that are in trouble. I think we’ll see some change quickly.


Bertrand

I think it’s good because some companies were getting financing for no good reason, except because they were good at getting financing, not good at running a business. This has to stop at the end of the day. It’s a good realignment. It would be good for employees as well, because people were not able to really clearly understand what was the right signal which company to join. They were just looking at the amount of fundraising and that sort of stuff, and variation, when unfortunately, given the lack of discipline from investors, this was not a good signal anymore to follow. Partisan people will have a clearer picture of what companies are doing great and are already running well, and companies that you want to join versus the ones that actually have serious trouble. Here, we’re talking about the companies that are getting staff in two, in three, or more, and that’s very tough to go back. To move forward, another piece is that some of the huge changes in behavior brought by COVID, some of them seem to have disappeared or partially disappeared. We see that in ecommerce decreasing as a percentage of all commerce. We see that in terms of less home delivery, less video games, less Netflix, students back in class.


Bertrand

Some employees, not all, are going back to the office, and people go back more to fly to meetings. But that one might change direction fast, because usually that’s another thing you cut as a business is a business travel if things are doing better.We


Nuno

We talked, when we first started doing episodes on COVID, about this notion that they’re going to be behaviors that were fundamentally going to shift through COVID, and there were going to be behaviors that would change through parts of COVID that at some point in time would go back to what they were before. Knowing the difference was very significant because that would allow you to analyze the markets and how those markets were behaving. Gaming, for example, was a great example. Would gaming stay at its all-time highs? We now know that it didn’t. But at the same time, there’s types of gaming that are done very, very well through COVID and continuing doing so. The whole notion around traveling around the world and being around the world, obviously, I think there is definitely less business traveling going on. I still stick by my gun saying business traveling has changed and it will change. It will be more thoughtful. But at the same point in time, it has come back. Leisure traveling, we know everyone’s going nuts. Everyone wants to go and travel and go to Bali and nice places and all of that. At the end of the day, the world that we have been describing, and have been talking to you about for the last almost two years since we together went on this journey of COVID is materializing, which is a world that is not really as black and white as many predicted it to be, where the whole world doesn’t go remote, the whole world doesn’t really adopt this great resignation philosophy where you just do whatever you want wherever you wanted.


Nuno

It goes back to normal. In some ways, this normal is a new normal, but it’s still a normal. I think that’s where we are going into. The whole notion, for example, around home delivering, the fact that there’s less home delivery makes obviously a lot of sense because people want to go out now. They want to go to restaurants and they want to explore and they want to do other things. I think there’s a lot of habits that will realign markets around them in a very, very significant manner. From the perspective of what startups and companies are doing right now, this is a really good time to go back to the drawing board. This is a really good time to revisit your assumptions on the market that you’re in, really understand if the things that you were betting on will manifest themselves. Realign pretty quickly, because if you don’t realign, your numbers are going to go basically into /def/null. So into an abysm of nothing. This is the time where you need to reassess markets. In particular, for startups, and that’s why I’m emphasizing the role that this would have for startups, startups tend to actually go into firefighter mode at these times and not think much about strategy.


Nuno

They don’t question some of their core assumptions on their top line, on their pricing models, on who are the second we’re really going after, on what we’re trying to simulate.


Nuno

Again, I think this is a really good time, obviously, for larger corporations as well, but certainly for startups to do that strategic exercise of going back to the drawing board and figuring out if this is going to work or not.


Bertrand

Yes, we are in agreement. In conclusion, for Episode 33, as we have discussed, a lot has happened, and it was key to try to get some sense about what happened, why it happened, so that we can focus more in the next episode about what will happen next. Talk to you next time. Thank you for listening. Thank you, Nuno.


Nuno

Thank you.


loaded