Searching For Money

Searching For Money

The hardest part of writing these editorials is the title. Every week, I look through the stories and try to pick a title and an editorial direction that fits the content and allows me to say what I am thinking about that week.

So this week, "Searching for Money" seems to be the unifying theme. In Essays of the Week, we've got "Searching for Unicorn Funds, a look at fund DPI," (which stands for distributed capital to paid-in capital). In other words, funds are looking to make liquid on their investments by selling them. Why? Because they need to return money to their limited partners who invested in the funds. So limited partners are looking for money, and funds are looking for money.

We have an article from The Information, "Venture Funds Hang Up the For Sale Sign," on portfolios, which really says everything. There are quite a number of funds just looking to sell. Sell, sell, sell, as they say. And we also have a look at Y Combinator's latest batch this week, who are all looking to raise money from investors. So LPs are trying to raise money, funds are trying to raise money, and startups are trying to raise money, which tells you that we're not living in a very liquid venture capital environment. We're living in a highly illiquid environment'

The average amount companies raise at each round is declining, and the complete number of rounds done at each stage is mostly declining. But the number of companies seeking funding is really not declining.

Garry Tan has a great review of the Y Combinator 2023 summer batch, where he focuses in on all the opportunities that there are. Meanwhile, TechCrunch has an article saying that investors are not attending the demo day event because they feel the startups are overpriced.

So, we are in this interesting world where alignment is unavailable. Everyone has their own self-interest, and everybody's pursuing their self-interest, and they don't really coalesce around a common set of steps or end games. LPs, Investors and Companies cannot all get what they want.

So that's what That Was The Week is about this week. Searching for Money.

This quote sums it up:

Pressure to raise cash to return to LPs, known as distributions to paid-in capital, has started to overturn venture investors' resistance to selling their stakes early.

"That desire to stick with a company all the way to exit in terms of loyalty to the founder is not really best practice at this point," said Adam Struck, founder of seed-stage venture firm Struck Capital. The firm is planning to raise its next fund next year, and it's eager to show LPs it can produce more than just paper gains, Struck said.

"Especially in this environment, DPI is king, so showing that distributed paid-in capital will mean a lot for subsequent funds."

But my essay of the week this week has nothing to do with that.

It's my first time featuring Professor Scott Galloway from his podcast. And he's got one this week called Least Bad, which is a discussion of de-dollarization. It's actually a really interesting article because it argues that the US is still strong and that any proclivity to project its future demise is uncalled for. And he goes to great lengths to say that the US is in pretty decent shape, mainly because there are no really good rivals.

He does that by looking at things like the share of global currency reserves, where the US dominates the next biggest chunk: the euro, the Japanese currency, and then the British pound. And the Chinese currency is nowhere to be seen.

The hidden polemic is against the Chinese in this story and those who predict it will replace the US on the World stage. He claims that the sense that the US will be eclipsed is fantastical or crazy.

Now, I don't actually disagree with him regarding timing, but it is fair to say that empires don't survive. This is mainly due to their economic demise relative to newcomers.

That really only matters if the newcomer is of a size and scale where their success in innovation, in new technologies, and their better productivity addresses a very, very large market, and especially a large home economy where they can sell the things they produce to a domestic audience without needing to export.

That was the advantage the US had against the UK in most of the 20th century, a big home economy.

It's the same for China today, despite the declining population trends in China and the aging population. The home market is very much larger than the US market. The middle class is growing rapidly. People can buy cars; people can buy homes. And the headline news, which is about overbuilding, really disguises the fact that it is a very large, scalable economy that will be important on a world scale.

The BRIC alliance we discussed last week now has six new members and represents more than half of world GDP measured by prices. PPP is a measure of GDP that factors in cost of living and quality of life.

So clearly, Professor Galloway is right, but he's also wrong to make the case that the US is okay because it really isn't in any long-term view. And its eclipse is kind of inevitable economically. That doesn't mean it will happen soon.

Britain was significantly smaller and less productive than both the US and Germany as early as the 1870s. And it took till the 1950s for the world order to change to the world order we're all familiar with, with the dollar as the reserve currency. So, these things don't happen fast, but they do happen.

The second thing to say is when they happen, it isn't that scary. The UK is clearly no longer number one in the world. In fact, it's barely in the top five by most measures, but it's not as if you can't live there or that it's hard to live there, or people are struggling. It's still a very modern, very wealthy economy. So, not being first is not the end of the world.

Other articles we looked at this week complemented that a little bit. One of them is by Fareed Zakaria, and one of his co-writers is Heman Taneja, and they talk about AI and the new digital cold war.

They focus on competition between the US and China but not at the macro level, but specifically in artificial intelligence. And they call it the digital cold war. It posits that globalization is dead, which I think Professor Galloway would kind of agree with. And that AI will become the key measure of who succeeds in a now atomized world order.

It points out that capital requirements to even compete in AI are huge. And the US and China are the only players with the scale and the ability to invest. However, he mentions India, Singapore, Japan, and South Korea as smaller players in the game.

That context - that AI is part of a global competition also comes up in the video of the week. This week has two videos, one by Andrew Keen & Ludwig Ensthaler, describing the state of AI. The other is Fareed Zakaria speaking about the "dangers" of AI.

Now, I tend to disagree on both the end of globalization and the dangers of AI.

I think that, firstly, AI isn't scary. AI is super liberating. It allows skilled workers, especially information workers, to have a highly skilled coworker known as chatGPT that can make them more productive and probably better at what they do.

I certainly find that with my coding at SignalRank.

So, firstly, I don't think AI is scary. Secondly, I don't think it's possible for us to de-globalize. Of course, nation-states can certainly try, but the factors that drive globalization are not really political factors. They're mainly economic factors. The two have to converge for friction-free globalization, but globalization happens nonetheless. And if you look at things like flows of money across borders, travel, almost any measure of humanity's global characteristics, they're all growing still and very rapidly. Even Chinese money flowing outside of China is growing now that the COVID lockdown has ended.

So, de-globalization is more of a political label. It really isn't an economic reality to any great extent. And so I really don't agree that we're in this de-globalized world. Because of that, I don't really agree that AI will be a weapon of war between nations. And if that were to happen, it would be really bad for the human race.

AI is more likely to be a tool for good worldwide. And, of course, that's what we have to want it to be. And as human beings, that's what we have to make it.

Steven Levy has a great Wired piece from his Backchannel section called What Open AI Really Wants that shines a light on the end game for AI being humanistic, not being confrontational, and certainly not national in character.

So some big issues in this week's That Was The Week.

I hope you enjoy it and enjoy the video that we make after I've written this editorial.

Essays of the Week