RTC #9: Inflation explained and how it impacts investor decisions

Why today’s issue is valuable to you 💎

1. Headlines: Sam Altman planning to raise USD 7.0 trillion (yes, not billions!), a new dating app for Valentine’s Day, OpenAI joins Google and Meta, Adam Neumann is back and has new investors, and more!

2. Today’s Deep Dive: Inflation explained - understand what it is and how it impacts the decisions of investors when investing and allocating capital. And learn why Warren Buffet is called the “King of Inflation”

3. Top podcasts: My selected favorites from last week

Headlines 📢

• Score - there is a new dating app just in time for Valentine’s Day, but there’s a catch (hint: 675) 💘

• Sam Altman (1): OpenAI joins Google and Meta as one of the fastest-growing tech companies ever (on track to hit USD 2.0bn revenues)

• Adam Neumann seeks to buy WeWork: We forgive? WeWork collapsed but investors are once again embracing Neumann

• Sam Altman (2): eying semiconductor industry and plans to raise nearly USD 7.0 trillion (yes trillion not billion!)

• AI Funding (1): “We tell our companies to stay the hell away from corporates because there’s a litany of reasons not to take corporate venture capital”
  Kirby Winfield (Pre-Seed Investor Ascend) following the latest tech giants AI investments

• AI Funding (2): GenAI was the dominant investment theme during 2023 - Funding is Up 271%. Everything Else? Down -36%

• Venture Capital Super Bowl: These are the football players looking to score touchdowns in the venture and investing world too

🤿 Deep Dive: Inflation explained and how it impacts investor decisions

In my first issue (“Capital financing is a journey and connect the dots”) we had defined three dimensions defining the capital raising journey of a startup/company

• Company life cycle vs external factors

• Equity vs Debt

• Private vs Public Markets

👉 Today we will have a deep dive into the external factors (and on the topic of inflation with a particular focus).

I am very happy to have Wolfgang with us on this topic!

He is one of the leading inflation experts and I could not imagine anyone better for us today to dive into the following topics:

• Overview of the main external factors in the current environment

• Inflation explained and how it impacts raising capital now (and in the future)

• How inflation drives the investment decisions of Venture Capital and Private Equity investors

• Future outlook and adaptation strategies

Curtain up for exclusive expert insights you don't find in any textbook 💥💥💥

👉 Overview of the main external factors in the current environment

RTC: “What are the primary external factors currently shaping the capital raising landscape across different company stages?”

Wolfgang: “We are in a dangerous time for financial markets in general and capital raising in particular. There is a huge gap between the actual riskiness of the current situation (the long list of issues we are facing from over-indebtedness, much higher refinancing costs, low quality of economic growth to an inflation crisis that is just at the beginning and not at the end) and the perception of market participants and investors.

This huge perception gap between actual risks and perceived risks led to a situation of massive collective unpreparedness for what is ahead of us. In risk management history it is always the situation of collective unpreparedness that turns a severe crisis into a catastrophe.”

👉 Inflation explained and how it impacts raising capital now (and in the future)

RTC: “How would you explain “inflation” to a five-year-old in one sentence?”

Wolfgang: “In my 2016 book "The Return of High Inflation" I described it the following way: "Inflation is a nice-sounding word for a process that is actually quite nasty, grossly unfair, and dangerously destructive: The decay of money."

The decay of money means that you need more and more money for the same package of gummy bears.”

RTC: “What are the key considerations for companies trying/being required to raise capital in the current high-inflation environment?”

Wolfgang: “I anticipate inflation (and with it interest rates) to follow the same "escalating roller coaster pattern" as they did during the 1970s inflation crisis. As a consequence, capital and bank loans may suddenly become unavailable or highly expensive depending on the stage of the roller-coaster we are in. As during the last financial crisis, funding markets may just close without prior warning.

I also anticipate a new banking crisis, which may escalate the situation dramatically. During the 2007/8 crisis, we saw the first banks last year that failed or got into major trouble. This was in response to the first inflation shock and the subsequent interest rate hike. Keep in mind, that the second inflation shock that is ahead of us will be much more severe. The last one should be considered as a warm-up practice of what we face in the future.”

👉 How inflation drives the investment decisions of Venture Capital and Private Equity investors

RTC: “Can (and if so how) a high-inflation environment impact the investment decisions of Private Equity and Venture Capital investors?”

Wolfgang: “It is absolutely important for any type of investor to fully understand both inflation mechanics and dynamics. Each industry is differently impacted by inflation. Each industry has a "Maximum Point of Pain" due to inflation and a "Maximum Point of Gain" due to inflation. This sounds difficult and confusing, but these concepts are extremely helpful when planning acquisitions and investments.

For example, there was a reason why Warren Buffett waited until 1976 with his investment into GEICO (even though inflation had come down already). Insurance companies have a late "Maximum Point of Pain" and that is when they were super cheap. Insurance companies also recover quickly from high inflation. They re-price their policies and add an inflation premium on top. In other words, shortly after reaching their "Maximum Point of Pain" insurance companies enter the "Maximum Point of Gain" due to inflation. Buffett's timing due to his understanding of inflation mechanics and dynamics was impeccable. 

A true case study on how to make investments during inflationary times.”

👉 Future outlook and adaptation strategies

RTC: “Looking ahead, which external factors do you believe will have the most significant impact on capital raising over the next few years?”

Wolfgang: "The inflation management competence of central bankers and that of politicians will greatly determine how bad the inflation crisis will get.

Thus far, both showed very poor performance:

• Federal Reserve hiked interest rates at record speed by 500 bps

• At the same time, the US government implemented a major economic stimulus program and a gigantic fiscal deficit (about USD 1.7 trillion)

• It does not take rocket science to understand that the two actions cancel each other out.

RTC: “How can companies and investors adapt their strategies today to better prepare for these future challenges?”

Wolfgang: 

• “Prepare ahead of time and study in detail practical (not theoretical) inflation mechanics and dynamics

• Inflation requires you to invert anything that you learned in business school. It turns headwinds into tailwinds and vice versa.

And learn from Warren Buffett…

…and his superb inflation management performance during the 1970s. No one did it better. Berkshire Hathaway's performance was about 900 % at a time when the S+P 500 over a decade failed to even match accumulated inflation.

By the way, why do you think Warren Buffett's Berkshire Hathaway holds record cash levels when stock markets are trading at new all-time highs? He is - in my view - preparing for a rerun of the 1970s inflation crisis. His inflation management strategies are so brilliant that I summarized them in a course that I will release soon.”

Further in-depth reads and insights on inflation from Wolfgang Hammes

• The Return of High Inflation (2016): Risks, Myths, and Opportunities

• Beat Inflation Now (2023): Turn Inflation Risks into Inflation Opportunities

• Advanced Inflation Management: Prepare for the World of Tomorrow (Online Class)

(Top) podcasts I listened to last week

• 20VC: Does price matter? When to pay up and when to stay disciplined (w/ Doug Leone, Bill Ackman, Bill Gurley, and Orlando Bravo)

• How do VCs measure success? (Venture Capital Podcast)

• The changing investment landscape (Starwatcher podcast w/ Rob Kniaz from H Tree Capital and Hoxton Ventures)

• OMR Podcast with Stripe Founder John Collison (youngest self-made billionaire)

This was it for today!

If you found it valuable, let a friend know (and receive one or more of the exclusive Road-To-Capital perks!)

See you next Tuesday,
Stephan 👋

Issue #9 | 13 February 2024