Fairbridge Park Posts

Perspective on Current Macroeconomic Environment

July 1, 2022
David Tswamuno

Dear Fairbridge Park Partners,

The last few months have been challenging in the financial markets. I don’t intend to email often outside of our regular cadence, but an important part of my responsibility is to provide you with peace of mind, and I wanted to offer perspective.
               
What is happening in the economy?
In simple terms, the Fed is raising rates to rein in inflation caused by its expansionary monetary policy implemented during the pandemic. Persistent supply chain disruptions caused by the war in Ukraine, China’s Covid policies, and decrepit US port infrastructure make it difficult to gauge the true level of inflation and how aggressive the Fed must be with its corrective measures. Current turmoil is captured by two basic phenomena:

  1. Opportunity cost – As interest rates rise,  investors have become more discerning when assessing existing or new investments. Fixed income investments are increasingly attractive. Today’s public markets are unique because of (i) Large amount of levered capital invested by retail investors during the pandemic that’s being wiped out and (ii) A concentration of capital in growth technology stocks.
  2. Confidence – Inflation makes people feel less wealthy and promotes anxiety and parsimony which could shrink economic growth.

We are currently witnessing a correction of prices (opportunity cost), particularly for technology stocks that were trading on future growth. We also anticipate a challenging macroeconomic environment as phenomena that impact confidence including, rising credit defaults, consumers' fear to spend, and higher cost of capital begin to manifest in the real economy.
  
How does this impact our business?
There are three main risks to our business: (i) Companies running out of cash without finding new investors (ii) Significant dilution of our investment in down rounds (iii) Fundraising. We are prepared. Our companies have an average runway of [x] months. Additionally, companies solving important problems and with strong economic fundamentals could even be better positioned for outsized success. They will find opportunity to invest in critical resources such as key hires at more reasonable prices as layoffs begin to happen at many vulnerable startups. Startups whose revenue and/or unit economics are funded by investor capital are the most vulnerable.  

Opportunity cost is slowing down the fundraising process for many new funds, but I am confident that the robustness and uniqueness of our investment program will attract the right partners. Having sufficient capital is important to prevent dilution and to take advantage of opportunities to invest in new and existing companies at attractive valuations. As an asset class, venture capital is especially attractive in times like this: it grants the privilege of time, insulation from market volatility, and direct access to operators. Key factors positioning us for success are: 

  1. Quality  Our companies are run by highly competent resourceful teams and are addressing important/non-discretionary problems. We have avoided companies that rely on variable marketing spend. We chose companies with defensible characteristics e.g., difficult licensing processes, strong b2b customer partnerships/contracts etc.
  2. Control  There are levers we can pull to manage growth and cash burn for survival. Good economics provide cushion and lean teams mostly in low-cost regions help keep operating costs low. We have discussed scenario analyses with our CEOs to establish capacity to extend runway if there is sustained pain.
  3. Proximity – We have close relationships and influence with our companies’ CEOs. We are involved in processes to discuss budgets, opportunities, and emergencies and we often have the privilege to work with them to address.

I believe we picked the right companies and will continue to do so and lean in on winners over the long term. I was a young banker learning the ropes during the 2008 crisis, and I have been in the trenches in the last 10 years navigating challenging situations with entrepreneurs. We are working diligently with management teams on factors we can control to remain positioned for success in the long term.

 I am happy to discuss any of these topics in detail with interested readers.

Sincerely,

-David.

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