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Living Through the Revenge of Capital

The last year has been a tough time to be a public or private tech investor or tech company CEO. We have spent a lot of time discussing the quantitative elements that have contributed to a pretty depressing environment for investors and operators – low gross margins, high burn rates, rising interest rates, high inflation, lower public market multiples, and concerns about the direction of the economy. These are all very quantitative, economic measures of our current malaise. From my vantage point, we have not spent nearly enough time talking about how feelings and emotions are impacting the current malaise.

Right now I think we are living through what I call the revenge of capital. I don’t know a better way to describe what I’m hearing in my conversations with GPs and LPs – it’s an abrupt, violent rebalancing back toward the preferences of capital providers up and down the stack. This rebalance isn’t purely rational – it’s being influenced by how people feel about the last few years and how they feel they were treated by people in the ecosystem on the way up to the peak. And how they feel about things during the current decline.

What’s the revenge of capital? It’s the release of all of the pent-up frustration, anger, angst, and anxiety that investors who invested in startup companies and LPs who invested in funds feel about the last few years. Some argue that capital allocation and investment should be a rational, dispassionate process, but that’s not how the the world works; capital is allocated by people with feelings and I think if you ignore that fact, you do so at your own peril.

Living in the era of the revenge of capital requires acknowledging that VCs and their LPs have memories and they remember how they were treated on the way up. All of today’s conversations about valuations, round sizes, and fund sizes are informed by the feelings that investors had about how they were treated on the way up; we are not starting from zero from those conversations. And now that power is tilting back toward capital providers, those folks remember how they were treated and that influences the decisions they make about who to support and why.

I bring this up because if you are a founder or a fund manager who maybe pushed the envelope in terms of valuation, terms, control provisions, economics, or other negotiated terms, the people on the other side of the table likely remember how they felt when that happened. Many of the most challenging conversations I see today are ones where people who pushed the envelope or were aggressive on the way need to come back to their existing investors or LPs without considering where those folks are and what they’re dealing with in their portfolios. Rightly or wrongly, I think many people on the capital provider side are looking for some recognition of the excesses in the past and some humility from those who are making new asks at this time.

How does the revenge of capital manifest itself? Well, I see three dominant emotions on the capital provider side of the table right now.

  • Loss: Loss is one of the dominant emotions people are feeling right now – loss of paper gains, loss of expected carried interest, and a loss of optimism about the future.
  • Anger: Anger about having agreed to terms and prices that no longer make sense and maybe never made sense.
  • Regret: Regret about M&A deals that people should have taken, secondary transactions that should have been pursued, public company shares that should have been sold or distributed.

Emotions in investing are real. And I believe that many people are bringing these feelings with them to all of the conversations they are having, both with new opportunities and people they have backed before. I am not writing this post to ask people to be kind to VCs and LPs because their feelings are hurt. But most fundraising is a form of sales and it’s really hard to sell well without some perspective on where the other party is coming from and how they’re feeling.

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