Investment

Unprecedented demand for startups, inflation…and brace for the future

By all accounts, the amount of money flooding into venture capital is so great that startups are charging investors to view presentations and listen to pitches.

The terms on offer are also demanding. Along with concocting stratospheric revenue forecasts, 43% of founders are out to keep control of tech-driven companies through dual-voting shares, according to the University of Florida. 

The factors, like value and small-cap investing, which used to drive stocks, have become irrelevant

Founder Tim Chen wants to go one better by retaining 93% control of IPO candidate Nerdwallet through ten for one share voting rights. 

And still the money floods in. US fundraising is set to break the $100 billion barrier in 2021. Exit values are twice the level achieved in 2020. Europe is setting new records.

With demand way higher than the supply of good opportunities, Workspace group WeWork, under new management, has raised $9 billion through a SPAC despite ongoing losses and the collapse of its IPO two years ago.

On one level, this represents a massive vote of confidence in venture capital. Family offices, often enriched by prior VC exits, are helping to keep the wheels spinning.

But it is only fair to add there is massive demand for everything these days due to a pandemic-driven liquidity glut created by the central banks

The NYSE’s Fang-plus index has just hit another record, despite the sector’s growing unpopularity with policymakers. The S&P 500 is close to an all-time high. 

Goldman Sachs recently crunched some data to find that equity allocations by US investors are now beyond the levels struck at the peak of the dot.com bubble. 

Bitcoin has surged following the launch of a $570 million bitcoin-related ETF by ProShares. 

Earnings multiples and dividend yields don’t matter much to retail investors any more. Meme stocks are a bigger game, when they are mentioned by media pundits and investors pile on board.

The factors, like value and small-cap investing, which used to drive stocks, have become irrelevant. In aggregate, according to Factor Research, they have been beaten by the liquidity-driven index for nearly five years. 

Before getting too excited, however, it is worth reflecting on the strains being inflicted on suppliers by an excessive demand

We have started to experience supply shocks, as China struggles to import energy for manufacturing, on which the West relies. 

China currently consumes 29% of global energy. It has been experiencing blackouts. It has been forced to buy gas and coal to keep going. It is scaling back energy-intensive products like steel and nitrogen fertiliser.

People often forget just how much we rely on imports from China. The rising cost of manufacture and energy is quite likely to cause a shock similar to the oil shocks of the 1970s which led to stagflation. The costs of fighting climate change could add to the inflationary trend.

In the meantime, capital flowing into the economy is continuing to increase demand, with scant regard for the supply of raw materials and labour. 

We are seeing a shortage of labour, in areas like trucking and hospitality, largely because people can now find less demanding work elsewhere. And one problem leads to another. A shortage of drivers means goods are stacking up in ports causing more supply bottlenecks. It all leads to further supply problems, rising prices and higher wage demands. 

The steady rise in the price of non-fiat cryptocurrencies and falling allocations to bonds illustrate how investors are hedging their bets. 

Central banks will, no doubt, raise interest rates to restrict rising inflation.  Fed chairman Jerome Powell recently said: “Supply constraints and elevated inflation are likely to last longer than previously expected and well into next year, and the same is true for pressure on wages. If we were to see a risk of inflation moving persistently higher, we would certainly use our tools.”

But the political will to support a tough monetary stance will stay low for years. It took six years after the 1974 oil shock for the Federal Reserve to start dealing with the problem.

Family offices need to brace themselves for a challenging future. 

 

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