🤔 What's Going On In VC?

Total deal volume in the VC space is down... and it's bad. April 5, 2024 | Peel #682 Silver Banana goes to... [CapLinked. ]() In this issue of the Peel: - 😱 Have you heard of the “bear steepening?” It’s happening in real-time. - 🔽 It really hurts to say… but Hertz stock is falling on downgrades… - 🚨 Total deal volume in the VC space is down… and it’s bad. Market Snapshot 📸 Banana Bits 🍌 - A primer for today’s [jobs report]() - Apple ditched cars, but it’s getting in on the [home robot market]( - The most powerful earthquake in 25 years tragically rocked Taiwan in recent days, causing [concern over chip supply](=)(hopefully in addition to the obvious human tragedy) - Boomers don’t want to move—and who can blame them when they [locked in sub-4% mortgage rates]() Fine dining on Caplinked! Dine like a champion on Caplinked! For financial services pros ready to impress, it's time to explore a new data room option. Open a Caplinked data room and not only will you shine in management's eyes, but you might just secure that promotion. As a toast to your success, we're covering a lavish team dinner at the restaurant of your choice. Show your team what winning tastes like, all courtesy of Caplinked. Elevate your data management game, boost your career, and indulge in fine dining on us. [Make your next professional move a feast for success!]() Macro Monkey Says 🐒 Bulls, Bears, and Bonds Lions, tigers, and bears tend to scare most civilians pretty equally. But, we non-civilian, financial degenerates know that one of those—of course being bears—is truly the scariest animal around. Most of the time, when we talk about bears, we’re coming up with excuses to explain away the losses in our stock portfolios. But, today, we’re gonna talk about another, arguably worse, form of financial mauling. The “bear steepening,” or a bearish treasury yield curve, and the effects it may cause has become all the rage in recent days. So, let’s get into it. What’s Happening? This might be the most important chart in the world right now. So, to understand it, let’s take a brief step back. The above chart plots the yield (Y-Axis) of treasury bills, notes, and bonds across every maturity, from 1 month to 30 years (X-Axis). Each individual line represents a snapshot in time of what those yields looked like across the maturity spectrum. Easy enough, right? While it doesn’t seem like much beyond some nerd sh*t your macro teacher covers just to confuse you, the yield curve—especially changes in the slope of the line over time—can reveal a lot about the market’s macro outlook. Basically, this chart shows the yield curve is: - Higher than it was a year ago - Lower than it was 6-months ago - And higher than it was 3 months, 1 month, and 1 week ago Now, the key here is where this rise is occurring. As we can see above, the longer-dated yields today are far higher than they were relative to how much higher shorter-dated yields are now compared to where they were. And that, apes, is what we call the “Bear Steepening.” [Source]() We can see this “bear steepening” process more academically above. In general, this kind of steepening occurs when all rates are moving higher, but longer-dated yields are moving higher to a larger degree than shorter-dated yields. And, longer-dated yields experiencing a higher magnitude move is natural, as there is simply more time for them to experience changes in rates. Now, this only really becomes a problem if companies are as dumb as SVB in managing duration risk. But, this also becomes a problem when underlying economic growth is weakening. Per another chart from the homie Alf on X, this is the return profile of various asset classes in differing growth and yield curve environments: [Source]() What Does Any Of This Mean? So, to recap, we know that: - The U.S. yield curve is currently showing a bear steepening pattern - Bear steepenings can be bad for the economy when 1) companies fail to manage duration risk (shoutout SVB again) and 2) nominal growth weakens - Bear steepenings tend to coincide with weak returns for almost every asset except commodities and USD. So, the big takeaway here is that the bond market (a.k.a. the “smart money”) is currently pricing for fewer rate cuts than we expected in the periods when the yield curve was flatter. This is technical evidence that the market is finally starting to believe the “higher for longer” narrative. This is significant because, for a while, market expectations were for slower growth, thus implying a need for rate cuts. But, because growth is still expected to be strong in 2024 and 2025, the bond market thinks there is no longer a need to cut rates as much as previously expected. Basically, we can handle high rates. Now, the question becomes—do stocks need rate cuts—even despite a strong economy—to perform well? We all know my stocks need all the help they can get (and more), so fingers crossed that rate cut expectations don’t fall even further. What's Ripe 🤩 Levi Strauss (LEVI) 📈12.2% - I guess all those country songs about dirt roads, alcoholism, and, most of all, blue jeans are at least helping someone—Levi Strauss is on fire. - Q1 earnings beat across the board, with EPS of $0.26/sh on $1.56bn vs the estimated $0.21/sh on $1.55bn. - But the best part? The collapse of department stores is boosting DTC channels, with online and company-owned stores now at 50% of the revenue mix. HubSpot (HUBS) 📈5.0% - The Alphabet is growing, potentially adding four more letters of HUBS. Reports emerged that Google’s parent co is looking to buy HubSpot. - HubSpot, a $32bn CRM and other software platform, could expand Google’s AI and productivity capabilities. No offer has been submitted yet, however. - Traders bid up HubSpot on the rumors, but doubtful regulatory approval pulled shares back from the 9.2% run in the first 15 minutes of trading. What's Rotten 🤮 Lamb Weston (LW) 📉19.4% - What, we don’t like french fries anymore? We got Ozempic now, doesn’t that mean we can eat whatever we want? Apparently not, per Lamb Weston. - The large french fry producer gave weak guidance following its Q3 earnings, cutting full-year EPS estimates by 5.9% and sales by 4.7%. - Q3 numbers missed estimates, too, with net income falling 17% annually. Sales rose, but managed to still miss estimates as well. Hertz (HTZ) 📉5.0% - This one hurts. Apologies for that horrendous “joke.” Had to do it, but it’s true—Hertz is losing a lot of the love it once had from analysts. - Yesterday specifically, the rental car firm lost love from Goldman Sachs, with the bank downgrading shares to Sell and cutting their price target from $8 to $7. - GS analyst Lizzie Dove said that rental prices are expected to decline in 2024 and the road to recovery will take much longer than is priced in. Thought Banana 🤔 VCs Lack Bags & Brags The extremely non-controversial, American philosopher Kanye West once declared “no more parties in LA.” Now, in 2024, we’re ready to declare “no more investments in venture capital.” I feel bad for the team running the [VC Brags]( X account, as deal volume in the venture space continued falling off a cliff in 2024. Without deal volume, there’s just not a lot to brag about. But if the IPO and broader M&A markets are as BACK as we’ve been saying, what’s the deal? The Numbers [Source]() Q1 2024 saw just 2,882 deals sign the dotted lines, the lowest since Q3 2017. At the same time, the value of those deals at $36.6bn was the lowest since Q4 2019, excluding Q3 of last year. All told—deal volume is down 47% from its peak in Q1 2022, while deal value is off a massive 62% from its own peak in Q4 2021. We all know how much VCs like to hop on the “new, current thing” as fast as possible, so the fact that these investors aren’t pouring cash into the hype of generative AI speaks volumes about the state of the industry. There are many factors at play, but the most impactful as of now include: - Lower fund sizes, - Recoveries from the digital asset bubble, and, of course… - Interest rates. But, Why? More broadly, each of the reasons listed above stems from the same underlying cause: a comparative lack of liquidity. Back when anyone with glasses and a pretty slide deck could get funding for their “company,” interest rates were at rock bottom. [Source](=) The goal of every single investor ever is to make as much of a return as possible while taking the lowest risk possible. This balancing act manifests itself in varying ways, with U.S. treasuries generally offering the lowest, yet safest returns. Meanwhile, VC is the exact opposite of treasuries—promising the highest returns for the highest risk. With rising rates pushing up the return on treasuries, cash, and other safe assets, the hurdle rate for venture capitalists skyrockets. It’s like, “Do I really want to invest $100k with a VC firm to invest in startups of which 90% will go bust, or do I want to just take the 4.5%-5% I’ll get from Janet Yellen with literally 0 risk?” Plus, a middle ground between those two extremes could be something like blue-chip public equities. With digital assets, for example, there aren’t really any blue-chip firms that are big players in the industry. However, with the new wave of generative AI, investors can get it on the action via the biggest and best stocks out there, like Microsoft and Nvidia. = And it looks like these stocks have done pretty well for themselves. Plus, investors don’t need to resort to VCs to take chances on young AI companies. Names like C3.ai, SoundHound AI, BigBear.ai, Innodata, and plenty of others are small-cap stocks that could offer a similar return profile with much less complexity in getting in and out of the trade. Once again, we come back to liquidity. The other benefit of public stocks, including the lower risk of going bust, is that investors can get their money out instantly by selling to market makers, as opposed to being locked-up for multiple years with VCs. The Takeaway? Not every new, hot technology investment trend is created equal. Digital assets were a goldmine for VCs—in terms of bringing in AUM, not at all in terms of their returns—because they did not have public market alternatives and, at the time, the hurdle rate for VCs was much lower. Now, the game has changed, and your X feed is probably a lot less cringe as a result. 💭 The Big Question 💭: If not Gen AI, what will be the next hot industry for VCs? When will VCs start to recover and see investment dollars increase? Which VC has the cringiest tweets? Banana Brain Teaser 💡 Previous 🗓 Thabo owns exactly 140 books, and each book is either paperback fiction, paperback nonfiction, or hardcover nonfiction. If he owns 20 more paperback nonfiction books than hardcover nonfiction books, and twice as many paperback fiction books as paperback nonfiction books, how many hardcover nonfiction books does Thabo own? Answer: 20 Today 🕐 If the arithmetic mean of the four numbers 3, 15, 32, and (N+1) is 18, then N equals what? Send your guesses to vyomesh@wallstreetoasis.com Wise Investor Says 🤓 “Investing favors the dispassionate. Markets efficiently separate emotional investors from their money.” — Naval Ravikant How Would You Rate Today's Peel? 😁[All the bananas]() 😐[Meh](=) 😩[Rotten AF]() Happy Investing, David, Vyom, Jasper & Patrick [ADVERTISE]( // [WSO ALPHA]( // [ACADEMY]( // [COURSES]() // [LEGAL]( [Unsubscribe]( IB Oasis Corp. (aka "Wall Street Oasis") 20705 Saint Charles St Saratoga, California 95070 United States (617) 337-3353