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  • How Fed Rate Cuts Could Impact Tech Investing

How Fed Rate Cuts Could Impact Tech Investing

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Bloomberg Aug 21, 2024 16:56 · 20k Views

As we look ahead to Jackson Hole this week, Tusk Ventures co-founder and CEO Bradley Tusk provides his read on venture capital's view of a potential rate cut from the Fed. He joins Caroline Hyde and Ed Ludlow to discuss on "Bloomberg Technology."

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Transcript

  • 00:00 Is the macro picture all-encompassing right now?
  • 00:02 Are you factoring in rate cuts and an energized VC community?
  • 00:07 Yeah.
  • 00:07 Look, we absolutely need something to change the way the market has been the last few years.
  • 00:12 There's been a terrible lack of liquidity
  • 00:14 in the VC market really since 2021, and
  • 00:17 we're waiting for something to shake it loose.
  • 00:19 So interest rates cuts are certainly part of that equation.
  • 00:23 The less attractive fixed income is,
  • 00:25 the more the venture may liquid as an alternative.
  • 00:27 I think the election is the other big one, right?
  • 00:29 And
  • 00:30 it's not that President Biden initially been bad for venture capital,
  • 00:34 but they're really other than in his first year has just been no liquidity at all.
  • 00:38 So seeing a change in president, a change in regulators, a new SEC chair, a new FTC chair,
  • 00:44 I think can only help.
  • 00:46 It's interesting that we have had
  • 00:48 big
  • 00:49 valuation cuts from the public side when it comes
  • 00:53 to some of the losses we've seen prior to what have now been a run up in the markets.
  • 00:57 I think of who this has hurt a lot of them.
  • 00:58 The Tiger Cubs, for example, some of the hedge funds.
  • 01:01 We just had the news that one key Tiger cub goal is closing his $11 billion
  • 01:05 firm that's citing some health issues.
  • 01:08 How much turnover do you expect to see in public investment, in private investment when it comes to VC and public equities?
  • 01:15 A lot because one too many funds were raised,
  • 01:19 uh, during kind of the boom period of say 2017 to 2021,
  • 01:23 too much money was raised.
  • 01:25 The reality is, so we're early stage investors, We do seed in Series A.
  • 01:28 Our average check size is about $5,000,000.
  • 01:31 I don't need a
  • 01:32 three $400 million early stage fund.
  • 01:35 Sure.
  • 01:35 That makes me more money than money and management fees, and it transfers the risk for me to my LP's.
  • 01:41 But that's not good for them and it doesn't help us make a lot of carry.
  • 01:44 And so the reality is you don't need funds that are so big.
  • 01:47 And the reason why companies were so wildly overvalued is the C's raised funds that were way too big and they couldn't write a check for, say, $5,000,000.
  • 01:55 It had to be for 15 or $20 million.
  • 01:58 And the valuations had to then be increased commensurately.
  • 02:01 So everything was way out of whack and it would get to the public markets and they would cut the valuation by 6070%,
  • 02:07 rightfully.
  • 02:07 So.
  • 02:09 You know, a lot of private tech governments can be very valuable, but that doesn't mean that we work should be worth
  • 02:13 $40 billion, right?
  • 02:15 It was probably never more than a one or a $2 billion company.
  • 02:18 And so
  • 02:19 there's probably a return to rationality to the market.
  • 02:22 But with that said, when there's no liquidity at all, what you see is significant decline in early stage investment and then that reduces new company formation, new technology development growth.
  • 02:34 So you want more rational valuations, but you also want a lot more activity.
  • 02:39 Bradley, I'd love to help our Bloomberg Technology audience
  • 02:43 kind of understand a bit what it's like to be a venture capitalist in the context of of a liquidity crunch that you talked about.
  • 02:48 So if you're AVC and you have all these opportunities on your desk term sheets that you want to sign, why is this environment and a pending rate cut
  • 02:57 a challenge?
  • 02:57 What what changes mechanically?
  • 03:00 Yeah, Well, look, when there's no liquidity, you have a few problems.
  • 03:02 One, you can't recycle proceeds.
  • 03:04 So what happens typically for us is
  • 03:06 will have liquidity within a fund and then we'll use that money because the fund.
  • 03:11 Hasn't completed yet to reinvest back into again.
  • 03:14 So that creates more economic activity all around.
  • 03:17 2, when there's more liquidity, your LP's are seeing returns and they're re upping
  • 03:22 for new funds.
  • 03:23 So there's more activity happening there as well.
  • 03:25 Everything is moving in a much more conservative slower pace
  • 03:28 when there's no money going out the door to anybody on any side.
  • 03:32 So it just slows everything down considerably.
  • 03:35 And then the other problem is, is the temptation around AI, right?
  • 03:39 So the one place where valuations have remained
  • 03:42 really, really high is in the AI sector.
  • 03:45 And yes, is there a lot of long term, long term potential in the space?
  • 03:49 Of course.
  • 03:50 But you know, we keep seeing companies with one or $2,000,000 in revenue asking for $100 million valuations.
  • 03:56 And that's just crazy.
  • 03:58 Yes,
  • 03:59 I don't mean to cut you off with short time
  • 04:01 presidential election.
  • 04:03 Which candidate is the candidate of the entrepreneur and of the venture capitalist?
  • 04:07 I mean, ultimately I am supporting Harris.
  • 04:10 I have given Harris a considerable amount of money because I believe that having stable markets and a government that is somewhat trustworthy and functional is ultimately a lot better than the chaos of Trump.