Day by Jay #1: Markets Are Chaos

🎨 Chicago 📊 Public markets are chaos, private markets too? 🧘‍♀️ The space between stimulus and response

Welcome to the first “Day by Jay!” A combination of topics I find interesting and enjoyable, I hope you enjoy! Please let me know what you think @jaydimonte


My 2020 new year’s resolution is creating a new drawing or painting each week. Sharing here for accountability!

For those of you that don’t know, I moved to Austin in early February. The last time I was in Chicago, there was snow on the ground and the sky was a similar chilly white. I assumed I would be back in the city this week. (The plan was to be in HPVP’s Chicago office at least once or twice a month.) Obviously, that didn’t happen with travel limits, social distancing, and now shelter-in-place. I suppose it’s fitting that I finished this drawing when I was to be back in Chicago; it’s based on a photo I snapped the last time I was home.

📊VC & etc.

Quick takes on anything related to frameworks, startups, and VC.

“Markets are Chaos”

Last weekend, Jason Zweig wrote about our ability to mentally and emotionally withstand today's market volatility. He introduced a framework by Daniel Kahneman; the key to investing is having “a well-calibrated sense of your future regret.” In essence, you should ask yourself if you will be more upset if

(A) you buy into the market and your position goes down 50%, or

(B) you sit this one out and the market goes up 50%.

Then, act accordingly.

Full article can be found at wsj, excerpt below:

This framework applies to the private markets in many ways too.

If you were to ask the above question to early-stage investors, they'd often reply (A). Growth investors skew to answer (B). Of course, everyone wants to make knock-out investments, but only early-stage investors are willing to repeatedly take chances on opportunities that have a weighty chance of going to 0... its a much bigger risk to miss out on the opportunity that breaks out. Growth investors think about things with a much tighter aperture. Since they’re investing in more mature startups, their expected return is lower and they need to minimize loss ratios. Simply, this is an increased risk aversion.

Today, COVID-19 has shocked the venture ecosystem, impacting investors’ risk appetite:

  • Deployment cadence - If a VC is currently raising or approaching a raise, they may slow down investing out of their current fund. The “denominator effect” and the ability to meet potential LPs in person, will slow the process.

  • Portfolio cash positions - Every investor maintains a portfolio model. It includes capital deployed, reserved for existing investments, and reserved for new investments. Some capital allocated for new investments may shift to existing portfolio companies. They must prepare to bridge some companies or protect their position in others

  • Underlying company valuations - The public markets have lost 30-40% over the last few weeks

  • Company trajectories - For businesses selling to enterprises, sales cycles will slow. Prospects are distracted, preserving cash, or not as persuaded by video as face-to-face. Startups that sell to SMBs may find some of their customers going out of business, in cash crunches, or similarly distracted

  • En vogue - Some industries may fall out of favor in the days of social distancing and possible recession (can you say, co-working!) while others may take off (telemedicine?). In these cases, investors will be slower to move as it is early to predict how lasting these head- and tailwinds. It will be difficult to handicap recent trends.

  • Process adjustments - This is the first time many VCs are working remotely. How do investment committees change? Are you comfortable wiring to a team you’ve never met in person? Smoothing out the kinks will take some time here

These phenomena introduce friction to the VC-Entrepreneur market which has been extremely liquid. This friction will lead to risk aversion in the short term causing some early-stage investors to more frequently choose (A). Some investments may not be made, some at lower prices.

We have seen a lot of “open for business” signs on VC’s front doors. Today’s business might be different than yesterday’s.

🧘‍♀️Deep Breath

Like yoga ends with savasana, we end here with a sense of well-being.

“Between stimulus and response there is a space. In that space is our power to chooose our response. In our response lies our growth and our freedom.”

- Victor E. Frankl

My yoga teacher shared a version of this quote, just before studios closed in response to COVID-19. It resonates - I can be reactionary at work and at home and it rarely serves me well. A deep breath, a pause between taking in, processing, and reacting to inputs can make a world of difference. Especially in this unique and unprecedented time, we need time to process. Then, take swift action.

Thanks for reading #1. Let me know what you think. Stay safe and healthy. Ciao! 👋