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When you're investing in early-stage startups and hoping to fund the next unicorn, the goal is an 100x exit. 7 percent inflation, even over a decade time scale,

When you're investing in early-stage startups and hoping to fund the next unicorn, the goal is an 100x exit. 7 percent inflation, even over a decade time scale, is so minute compared to those exits that it really doesn't come into anything beyond passing consideration.

ttunguz 5y ago
I ran a regression of the CPI / inflation rate and its impact on the venture capital ecosystem both in terms of median round size and also total dollars invested and it's very highly correlated at north of 0.7
- selectodude 5y ago
  CPI hasn't been above 7 percent since 1980... How could you even run that regression?
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jbay808 5y ago
7 percent inflation over a decade is one doubling, so it cuts your 100x return down to 50x. That seems like it might move some needles on valuations. Meanwhile, the money you invest will also not create quite as much runway for the companies you invest in, so the fraction of successful exits may also decline. If interest rates appreciate to keep up with inflation, time horizons compress -- future revenue is worth less, and today's revenue is worth more. This drops risk appetite for investors, who move from tech IPO darlings like Rivian to boring stable earners like utilities, so that will also decrease likely valuations your startups get when they IPO, potentially by another order of magnitude, dropping your 50x down to 5x.
- selectodude 5y ago
  2 percent inflation over a decade cuts your 100x return to 80x. That would seem like it would move some needles on valuations and yet it doesn't. You need to compare the 7 percent inflation to previous levels, but also to bond yields, equity yields, etc. I wouldn't be surprised if there was less money flowing into seed funds, but all that means is that your web3 app to see where the closest set of exposed nipples are might not get funded whereas in a lower yield environment, somebody may have taken a flyer. I'd be surprised if it caused a wholesale pivot away from unicorn hunting.

ttunguz 5y ago

I ran a regression of the CPI / inflation rate and its impact on the venture capital ecosystem both in terms of median round size and also total dollars invested and it's very highly correlated at north of 0.7

selectodude 5y ago
CPI hasn't been above 7 percent since 1980... How could you even run that regression?
- deleted 5y ago
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- deleted 5y ago
  [deleted]

jbay808 5y ago

7 percent inflation over a decade is one doubling, so it cuts your 100x return down to 50x. That seems like it might move some needles on valuations. Meanwhile, the money you invest will also not create quite as much runway for the companies you invest in, so the fraction of successful exits may also decline. If interest rates appreciate to keep up with inflation, time horizons compress -- future revenue is worth less, and today's revenue is worth more. This drops risk appetite for investors, who move from tech IPO darlings like Rivian to boring stable earners like utilities, so that will also decrease likely valuations your startups get when they IPO, potentially by another order of magnitude, dropping your 50x down to 5x.

selectodude 5y ago
2 percent inflation over a decade cuts your 100x return to 80x. That would seem like it would move some needles on valuations and yet it doesn't. You need to compare the 7 percent inflation to previous levels, but also to bond yields, equity yields, etc. I wouldn't be surprised if there was less money flowing into seed funds, but all that means is that your web3 app to see where the closest set of exposed nipples are might not get funded whereas in a lower yield environment, somebody may have taken a flyer. I'd be surprised if it caused a wholesale pivot away from unicorn hunting.