Happy Saturday,
The markets ended Q1 on a positive note. AI continues to stir up excitement, although there are still tough moments for many startups.
In this edition of the Weekly Update, we’ll cover:
Market Update
AI Update
Deal of the Week
Podcast Recommendation of the Week
Reading Recommendation of the Week
Tweet of the Week
If you haven’t already, please make sure to subscribe below.
I. Market Update: Markets Have Short Memories
The markets had a strong week to close out a strong quarter, with the WCLD cloud index up 7%, closing at $29.70. The NASDAQ ended up a remarkable 16% on the quarter.
Friday’s mild inflation data spurred a “risk-on” move that drove up asset prices across the board. What banking crisis?
With inflation data mild, market expectations are that the Fed will not continue hiking much longer. The key benchmark of the 10 Year Treasury yield ended the month at 3.49% — a sharp drop from touching 4.0% on March 1. If the market’s baseline expectation is that we are entering a declining interest rate environment, we could have a bullish second quarter as well.
The market’s rise is a strong vote that we’ve seen the worst of the banking crisis. But should we so confident? Larry Summers, former Secretary of the Treasury, is dubiou:
The SVB crisis happened so fast, we can be excused for having some lingering paranoia. Is there another crisis lurking around the corner?
Ben Miller, CEO of real estate crowdfunding platform Fundrise, is one of the few who can say he saw the banking crisis coming. He expressed deep concerns about banking in December. He continues to be quite pessimistic, worrying that:
the U.S. economy [is] headed for a potentially catastrophic bank liquidity crisis, saying [banks] could not continue making real estate loans and still cover rapidly rising interest rates.
Should we worry as well?
Perhaps. But I don’t think it’s likely that we’ll see another major banking crisis any time soon. We all can see that there are outstanding issues in banking such as the troubles in commercial real estate in downtowns like SF & NY. There are still major unrealized losses in “hold-to-maturity” securities. These are real risks, but since they are out in the open I don’t think they carry the risk of becoming major negative surprises.
There’s plenty of time to prepare for worst-case scenarios. Meanwhile, the Fed’s newly dovish stance will provide balm. Not to be too harsh, but extreme pessimism here reminds me of the classic scene from Austin Powers - if there’s a steamroller still out there in banking, we have plenty of time to get out the way.
Despite the stock market’s strong finish to the quarter, it’s a harsher operating environment for many tech companies. As the quarter closed, many in SaaS were under tremendous pressure to hit quotas. Under the gun, sales reps can get quite aggressive. It might help hit a quota in the short-term, but it’s lousy for the long-term SaaS VC & SaaStr founder Jason Lemkin shared a telling anecdote:
There’s also tremendous pressure in the VC market as the hangover from 2021 persists. Growth VCs remain cautious. Startups that were once raising at elevated valuations with ease are now struggling to hit fundraising goals.
A case in point: Substack. I’m a big fan of the product, but they are encumbered by their last round’s frothy valuation. Their recent crowd-funding initiative means it’s a safe bet that VC's are not jumping to provide capital on favorable terms. Fintech VC Sheel Mohnot has some skepticism about their approach:
Fortunately, the tech scene is not without its bright spots. Excitement around AI is only growing stronger. This warrants a new dedicated section in the Weekly Update - on to the debut of “AI News of the Week.”
II. AI News of the Week: Slowly Starting to Boost Biotech
It was another busy week in AI, full of impressive product launches, emerging use cases, and exuberant fundraising announcements.
One application for AI that hasn’t been in the news recently is accelerating R&D for biotech. On Wednesday, Dr. Feng Zhang, a pioneer in gene editing, announced a major breakthrough. Industry publication Endpoints described how Zhang’s lab created:
Syringes made by bacteria to deliver potential therapies like toxins that kill cancer cells and gene editors. With the help of an AI program, they developed syringes that can load proteins of their choice and selectively target human cells.
Today, there is a massive bottleneck in medicine due to the inability to target proteins to particular cells in the body. This newly engineered “syringe” represents a potentially game-changing therapeutic innovation. Critically, researchers working on this project were stumped - until they used AlphaFold, the AI from Google’s DeepMind that can predict a protein’s structure from its sequence.
Biomedical R&D has barely begun to enter the modern age of tech, but it’s arguably the area that holds the most promise for AI to change our lives for the better.
Exciting times!
III. Deal(s) of the Week: Google & Replit
The M&A market continues to be slow, but AI-driven partnership deals are being consummated at a rapid pace. Microsoft has raced ahead with its partnership with OpenAI. Google is in catch up mode. Last month, it made a massive $300m investment in would-be OpenAI competitor Anthropic.
This week, Google announced a partnership with Replit, the browser-based coding environment with 20m users. While GitHub has a far more dominant share of software developer mindshare, Replit is on the rise. It’s already launched Ghostwriter, a coding assistant inspired by GitHub’s wildly popular Co-Pilot.
On the face of it, this deal might not appear to be particularly noteworthy, Yet Microsoft’s GitHub acquisition - which is looking like one of the best tech M&A deals of its generation - didn’t immediately look groundbreaking, either. Ben Thompson had excellent analysis of the Google-Replit deal in his newsletter this week:
To that end, I wouldn’t be surprised if this Google-Replit deal is itself a precursor to an acquisition: if GitHub went from a nice brand-building acquisition for Microsoft to an essential part of their strategy going forward, then how can Google not respond, particularly given IDEs are not simply a competition in their own right but also the battleground for AI models generally, and the single most important place to acquire developers going forward?
For Replit, which has yet to make significant penetration in enterprises, this also stands to be a very important alliance. As Bloomberg reported:
The startup will also expand its use of Google’s cloud services and hopes the relationship with the tech giant will help it win over larger corporate customers — right now Replit’s clients are largely individual developers and startups. Google also will distribute Replit’s software as part of the partnership.
There’s a good chance that Replit could become a household name over the next few years. Google is still very far behind Microsoft in AI, but it could use any help it can get.
IV. Podcast Rec of the Week: David Einhorn and Jelly Donuts
The Invest Like The Best podcast had a fascinating interview David Einhorn, the value-oriented hedge fund manager who was one of a handful of investors who accurately forecasted many of the problems that led up to the GFC.
One of the most surprising recent macroeconomic phenomena is how the massive jump in interest rates of 2022 did little to cool down the economy. Einhorn has a thought-provoking theory to explain this, what he calls “the jelly donut” theory of interest rates. The basic idea is that the 10th jelly donut you eat does a lot less to quell hunger than the first one. So it turned out with the Fed’s series of interest hikes and economic demand.
V. Reading Rec of the Week: Is OpenAI the New Aggregator?
Over the past decade, Ben Thompson has established himself as one of the most insightful voices in tech. The recent AI developments have allowed him to show off his remarkable strategic faculties. This past week, he had a wonderful analysis of OpenAI’s emergence as “the Accidental Consumer Tech Company.”
Thompson points out that OpenAI had previously been focused on being an API company that would build a b2b business model. The explosive growth of ChatGPT has changed that. Even thought ChatGPT still has bugs and product gaps, it has incredibly tight product-market fit:
ChatGPT is so good people find a way to use it. There isn’t even an app! And yet there is now, a mere four months in, a platform.
Thompson views ChatGPT as potentially a major new “aggregator,” arguably the most valuable strategic position in tech.:
an Aggregator is a company that controls demand; a company controls demand by building a compelling product that customers choose to use of their own volition; a massive customer base drives the creation of a platform; a platform gives the company power over supply. ChatGPT, needless to say, is an Aggregator, and plug-ins are perfectly aligned with this reality: they both make the product significantly better and make for an obvious business model, above and beyond ChatGPT’s subscription offering.
The whole piece is worth reading.
VI. Tweet of the Week: Triggering Elon
First, if you don’t follow me yet on Twitter, please go here and make it happen.
Second, look who felt the need to insult Bill Gates in response to my tweet last Sunday.
Third, my blue checkmark is still missing.