The Summer of our Discontent
It looks like we are in for a long hot summer in pretty much every aspect of the phrase.
Macroeconomics. The macroeconomic signals are the worst in decades. Inflation is soaring, and that seems locked in for some time. Certainly, the disruptions in food and fertilizer that derive from the situation in Ukraine and corresponding sanctions on Russia (together they are around 20% of the world wheat crop and a major source of fertilizer; Russia is a huge source of energy, especially for Europe) drive this. But other factors apply too: supply chain disruptions spawned by Covid, lack of key materials for electronic goods because of environmental issues, and others.
While inflation is high, signals also point toward economic slowing and potentially recession. This creates the environment for the dread state of “stagflation.” We haven’t seen major stagflation since I was a teenager and Jimmy Carter was President. It wasn’t any fun. In stagflation, the public markets stagnate and high inflation makes it actually smart for folks to hang on to cash. So, investment flattens or goes down, innovation slows, and job creation goes sideways. It is, economically, literally the worst of times.
We may be able to avoid this and get inflation back under control, but it won’t be easy and probably isn’t likely.
World Affairs. The reality of a shooting war in Europe in the 21st Century beggars belief, but there it is. If the Russian war in Ukraine drags on or Russia does something really stupid with tactical nukes or chemical weapons, this situation could destabilize world affairs for years. It could, in plain fact, dump the world order that has held since the end of WW II with no clear alternative in sight. World instability is a temptation for all kinds of bad behavior among demagogues, including in the US. It feels to me like a weird lurch back toward tribalism worldwide. That’s dangerous.
Biblical Events. Against this backdrop, we can imagine another summer of flagrant fires, weekly “storms of the century,” water shortages, tornadoes where they didn’t use to happen; the distressing litany of biblical events decreed by global warming. These could, obviously, make a bad situation worse. Plus the economic infarction and world instability negatively impact the ability of governments to respond to these challenges. We may be breathing bad air, underwater, in much of this world this summer.
Venture Capital. Turning to our parochial issues as venture investors, the Q1 trend is clear: Everything is down. Deals. Exits. Distributions. Money raised. In some areas, like bioscience investing, the market has essentially collapsed. Existing later-stage companies can’t IPO because the public markets are fibrillating. Buyers are pulling back. So, they are stuck as private companies, often unprofitable, sucking up capital from their later-stage backers. Behind them, Series A and B companies are seeing down rounds of stiff terms. And so this depresses early-stage investment, since it becomes hard to see how those risks can produce downstream rewards. Other areas, while not so drastically hit, are also slowing down. Digital health venture investment is down 36% from Q4 2021 to Q1 2022.
Alas, this isn’t a pretty picture. We are likely to face a summer to be endured rather than enjoyed. The only upside is that we have been through worse and are still here.
As the Good Book says: This, too, shall pass.
By Managing Partner Mike Edelhart