Ask Mario: The VC bubble, the value of specialization, and business case studies.
The first edition of our new Q&A series.
🌟 Hey there! This is a subscriber-only edition of our premium newsletter designed to make you a better investor and technologist. In addition to learning from exceptional investors and founders, members also get access to private Q&As with me. The first question in today’s Q&A is available to all subscribers (about whether or not we’re in a VC bubble). There are two bonus questions behind the paywall for premium subscribers (covering Generalists vs. Specialists and what’s lost in a business case study). I hope you enjoy it!
Friends,
Many of our most important lessons and fiercest obsessions arise from conversation. It is through discussion that we discover new ideas and fresh perspectives. It is also how we sharpen our perspectives, using articulation as a whetstone. As the poet David Whyte said, “A real conversation always contains an invitation. You are inviting another person to reveal herself or himself to you, to tell you who they are or what they want.”
I hope you will consider our new series to be exactly that: an invitation. “Ask Mario” gives members of Generalist+ an opportunity to have their questions answered by me. They may be pressing matters related to a piece of news or a recently launched product. They may be timeless, covering the infinite games of writing, investing, or building. They may be tactical or theoretical, pragmatic or personal, straightforward or perhaps rather strange.
While I cannot promise to be an expert in all of these things (heed the name of this publication), I will think deeply and give you my most thoughtful appraisal. In doing so, I hope we will have a chance to reveal something of ourselves, learn new lessons, and find fresh obsessions together.
Our first three questions come from long-time readers and supporters Sajith Pai, David Salmon, and Rohit Krishnan. Below, I tackle their queries on the venture capital bubble, generalists versus specialists, and the nature of business case studies.
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Is the VC asset class a bubble?
What’s your sense for the health of venture capital as an asset class, given projections of a higher-for-longer interest rate environment and the massive paper losses many VC firms are currently sitting on? Do you think that the explosion of venture in the past decade was a ZIRP phenomenon, or justified given the ever-expanding size and relevance of the tech sector?
– David Salmon, EVP at Tubi
An excellent question, David. I think many firms are in for significant pain in the short term. Plenty of investors deployed heavily into the last bull run and are now sitting on stakes of companies that are likely to close, or will be forced to raise at much lower valuations. Neither are likely to entice LPs to invest in a future fund, which means that less durable firms will be forced to close down. In that respect, I think we’ll see (and probably have already witnessed) a classic flight to quality in which LPs curtail their “experimental” checks and limit capital to tried-and-true managers. While much of this process may be necessary, there will be some unfortunate casualties. Young managers who might have benefitted from a little more time won’t get it; potentially gifted investors may see the market headwinds and take a different career path. (“Won’t someone think of the asset managers?” is not a rallying cry likely to elicit much sympathy.) So it goes.
While the incontinent fever dream of 2021 has hopefully taught us some lessons to carry into the coming years, it hasn’t dulled my high-level belief in the power of technology and its universal importance. It’s startling how youthful many disruptive technologies are. It was scarcely sixteen years ago, for example, that Steve Jobs strode on stage and revealed the iPhone. It helped spawn the mobile internet and has changed our lives in innumerable big and small ways. While the form factor may change, the magic of having constant access to a global, connecting, multifarious superbrain won’t. Surely, its impact has just begun. Even more cutting-edge movements deserve a mention, too. Who knows what artificial intelligence, biotech, crypto, and beyond will manifest? (For better and worse.)
That fundamental belief in the technology story contributes to my optimism about the venture capital asset class. As long as there are entrepreneurs taking risks and pushing the horizon forward, risk capital will be needed.
That is not to say there won’t be bumps in the road. I do think ZIRP contributed to unhealthy inflation over the past few years. However, over a long enough time horizon, I suspect the sector will continue to grow.
In that respect, the dotcom boom and bust offers an interesting analogy. Low-interest rates in the years leading up to the turn of the millennium were a part of that episode, too. As many will know, it fuelled a sharp spike in venture investing in 1999, followed by a gut-wrenching drop in 2000.
In the years that immediately followed, venture investing fell to 1995-era levels. However, bit by bit, the sector regained momentum and grew steadily. I suspect we’ll see something similar here – a few years of dampened activity followed by a return to continued (if irregular) growth.
Case studies and reality
What do you think you've learnt by diving deeper into individual companies and their stories that is different to learning from business cases outside-in or academic sources?
– Rohit Krishnan