Looking Over Horizons

It's been nearly a year since I left Extra, and in that time, I've spent a lot of time trying to make sense of what I'm seeing from the macro data, the anecdotes shared by friends, and my personal experience.

The tdlr: the macro data looks really skewed and the individual stories all point to it bring "rough" out there.

White-collar workers are in for a lot of pain--and I think it's worst for tech workers. As far as I can tell, the past 15 years have been the result of a massive Ponzi scheme, and that Ponzi scheme is in its death throes.

What I describe here may offend some people, but at this point, worrying about self-censorship leads me to say nothing at all, and I'm sure I'm missing more by not speaking and connecting with like-minded people than I'd lose by offending. So here goes!

The History

1. The government response to the GFC was to force everyone out of bonds and out on the risk curve using Quantitative Easing to destroy bond yields.
2. The world was in a deflationary spiral that was barely being held at bay by government action. The deflationary spiral naturally dropped long-term rates, and QE made it worse by restricting the supply of "safe" assets that were already in high demand.
3. Zero-interest rates at the front-end of the curve made it so you couldn't get a yield anywhere

These weird financial conditions, known as "There Is No Alternative" or TINA, created two booms in tech worker jobs and salaries, one in private companies and another in public companies. I'll discuss private companies today and come back around to public companies another time.

The Private Company Side

TINA has sucked for individual investors, but it was an outright disaster for large real-money investors (especially pension funds). Pension funds work by demanding companies, cities, etc. pay in based on a model that makes a lot of assumptions about things like retirement age, expected lifetimes, payout benefits, and most importantly the return on assets over time (the target rate).

The target rate has historically been 7%. When treasury bonds yielded 4% or 5%, hitting a 7% target was no big deal. With post-GFC rates being near zero, though, it was a whole other game. Pension funds were faced with some tough choices:

1. Reduce benefits
2. Increase pay-ins demanded from company/city
3. Figure out how to close the gap (somehow)

In typical boomer fashion, they picked #3, since it was the only option that didn't require immediate pain. How were they going to pull this off? By rushing into venture capital (VC) and private equity (PE) investments that promised to cover the gap (and largely appear like they have , yay!).

But don't look too closely.

They covered the gap by entering into illiquid investments with no active market. Transactions were few and far between, and mostly those transactions were with their "competitors". I'll focus on VC, but the principals are largely the same for PE.

In short, these companies raise funds with 10-year lifecycles (forever). Each fund has a specific "lifecycle niche": early stage (seed/A), early growth (B/C), mid-stage growth (C/D), late-stage growth (D and beyond). Each lifecycle stage is administered by a different team to create a sense of "independence".

Each VC's early stage fund leads investments in a bunch of companies, with others "following". The ones that generate enough growth (with economics that aren't too bad)–then find a new VC to lead the next round, usually via a fund focusing on the next stage.

This separation between VC's and lifecycle stages allows VCs to create a narrative around "value creation" that seems credible because the new price was set by a different set of people. As long as public company comps allow enough headroom, all VCs are incentivized to keep this game of round-robin going.

Each post-seed transaction marks up a company, allowing VCs to report huge fund returns to their limited partners (LPs). Real exits that actually returned cash to the funds happened, but they were much more rare compared to the paper gains shown on eternally marked up startups. The LPs were almost always pension funds and other real-money investors who were trying to hit their 7% target, and their investment committees were happy to believe the story.

Here Comes the Problem

2022 really screwed things up in two ways.

1. Public company valuations (especially in tech) got crushed.

In June 2021, Affirm (a leading buy-now-pay-later company that was used as a benchmark for many private financial technology companies) was valued at $18.5B. One year later, in June 2022, it's market cap was only $5.2B.

As a private company, if you raised money in 2021 at $100M or $500M valuation (when Affirm was worth $18.5B), you sure aren't going to be able to raise your next round at a higher valuation after Affirm's value just got cut by 72%. You're locked out of new funding.

2. Pensions could get 5% from bonds again

If you're an LP trying to hit a 7% target rate, the game just got a lot easier. That's awesome for you. But if you're a VC trying to raise money from that LP, it's a lot harder to sell the investment committee on risking billions of dollars with you when they could just buy a bond instead.

VCs aren't totally locked out--but the river of money has slowed to a trickle.

Back to the Job Market

A lot of people have pointed out how the shift to remote work means that white collar workers are now facing global competition, thinking that's why it's harder to find tech jobs now.

I think the primary driver, though, is that there just isn't enough money to go around. The entire tech/VC world was unprofitable, only being able to pay salaries by raising new money.

Now that LPs have a real risk-free option and the public company comps have collapsed, VCs and startups are just not receiving the flow of dollars that they did before 2022. With fewer dollars flowing in, the tech ecosystem has a lower carrying capacity for employees than it did before.

Of course, no one wants to look like they're losing and HR departments have to look busy, so there's a lot of "hiring theater" out there still.

All of this means that, while there is still some hiring going on, most companies are focused on surviving in a world where they can't expect any new capital. That requires efficiency and cost reductions, not adding headcount. Recent layoffs leave thousands of qualified applicants scrambling for the shrinking number of "real" jobs, while the continuing HR theater makes it hard to tell which of the postings are for the increasing rare real position.

Unless the river of LP dollars starts flowing again, the tech ecosystem will just need to keep shrinking and forcing laid off workers to move elsewhere until a new balance is achieved.

It's not going to be fun.