Weekly Update: Move Over Inflation, Let's Worry About Recession
Highlights from SaaS & VC & Markets from the week of 12/12
The WCLD cloud index ticked up 2% this week to $25.75. This was markedly better than the major indices, which were down 2-3%.
The major inflation data on the week was positive as the CPI rose less than expected. Yet the market reacted negatively. Why? There is concern that the Fed’s hawkish stance on inflation will lead to a nasty recession. From the WSJ on Friday:
Investors who had been growing optimistic because of moderating inflation now find themselves worried about a slowdown in economic growth.
Up until very recently, the nightmare market scenario seemed to be out-of-control inflation. Now, it seems that the worst case inflation scenario is quite unlikely.
Phew.
Except we’re not yet out of the macro woods. The market has found a new cause for distress: a Fed-induced recession.
Of course, the best founders & investors are long-term oriented and can largely tune out these short-term market concerns, right? Intellectually, yes. Emotionally, this is hard to do!
After the wild gyrations of the market this year, we are all market timers:
On that note, SaaS VC Jason Lemkin offered his market timing guidance for the venture capital market:
Lemkin’s prognostication is logical. Historically, the venture capital market lags the public markets for tech. The NASDAQ hit a low on Nov 3 (it’s up ~5% since then). If that Nov 3 low holds, then Q1 of next year seems about right for a bottom for VC. That would set up a recovery to start in Q2 and be well underway by year-end.
What are the chances that the Nov 3 low holds? If Larry Summers’ newfound optimism is an indication, there is a decent chance:
I expect the VC market to slowly pick up over the course of next year. While the career trauma in tech has been devastating for many, it also creates extra room for disruptors. For startups who have solid funding to get through 2023, there is immense opportunity to make progress towards building the next generation of iconic tech startups.
Reading Recommendation of the Week I:
I couldn’t find a podcast that merits a strong recommendation (except this one if you want to indulge in the tech podcast equivalent of The McLaughlin Group), so this week I have two reading recs.
First, Index Ventures VC Bryan Offutt has an incisive post on the inevitable wave of ML adoption. It’s aptly titled The Adoption of Machine Learning Will Resemble the Adoption of Databases.
Offut provides a brief history of modern databases, describing their early days in the 1960s and their progression to today where:
…no company would ever think about building their own database—it would not be even remotely cost efficient to do so.
ML technology has been progressing through a similar path as database tech albeit at an accelerated pace. Both databases and ML benefit dramatically from reductions in the cost of compute. Offut posits that:
Before we know it, saying a product “uses AI” will seem as silly and obvious as saying a product “uses a database.”
I strongly agree.
Reading Recommendation of the Week II:
Morgan Housell’s recent post titled Ideas That Changed My Life has earned a spot on my long-term re-read list. One of his life-changing ideas:
Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works. People believe what they’ve seen happen exponentially more than what they read about has happened to other people, if they read about other people at all. We’re all biased to our own personal history. Everyone.
I love this frame! The typical human (including yours truly) bases most of one’s worldview on “.00000001% of what’s happened in the world” ie our brain’s own personal training data. In other words, the ML algorithms residing in our heads is rather biased! While I’m not sure there is an alternative approach to being a human, I find this frame provides a very healthy does of epistemic humility.