The paradox of investing in a slow economy is that it forces investors to invest in slow growth. Now, where does one find slow growth?
Before we run our analysis on investors and investing, let’s set the stage. We received two significant signs this quarter: Salesforce growth slows, while DocuSign beats analysts. What happened? Software as a Service (SaaS) growth has peaked, but not all SaaS companies will suffer. Salesforce was a wild ride and a model for modern profitable businesses. What model is next? Stick around for the answer at the end.
In Bora Bora & The Bahamas..
Sam Bankman-Fried is arrested in the Bahamas after losing $17 Billion. Elizabeth Holmes defrauded investors out of $945 million and will serve 11 years in jail. Meanwhile, Adam Neumann received the biggest-ever check for a new startup. This after SoftBank lost $17 Billion on his previous one called WeWork. Collectively, those three misplaced about $35 billion of other people’s money. How? Now, we weren’t in the room when they pitched, so I won’t speculate on the state of mind of investors. Yet, investors should be taking smart, calculated risks. Clearly, there was no calculation, so it wasn’t smart.
Sequoia Capital issued a rare apology for losing $150 million on FTX. This is an epic firm that made big returns on Google, Youtube, WhatsApp, and LinkedIn. Yet they aren’t a household name like Shark Tank’s Mark Cuban. While many in my circle love the show, I remind them that it is mostly fake. When asked, Mark Cuban admitted to losing massively on Shark Tank investments. The worst was seen partying on Bora Bora.
So Yes, if you fit a certain profile, you can get (away with) smart people’s money.
..A Billion A Day..
Dude! It’s a recession, where is the money? Since January 3rd of 2022, we registered 574 announcements of new funds raised. This totaled $324 Billion in capital commitments. Basically, a billion dollars a day is set aside to pay founders. Let’s pause for a minute and take in the breeze of the Bahamas…
We can’t explain how this is even possible. I suspect the answer will be surprisingly simple. Perhaps committing cash to this cause somehow preserves it. Maybe prevents people’s savings from getting lost. Again, we aren’t smart enough to calculate how people commit capital. Here’s what we do know. In the announcements, we looked for the following:
- Amount raised;
- Type of fund e.g. Venture or Private Equity;
- Who they Target, e.g. young or mature companies.
Especially that last point is of interest. Target tells us who’s likely lucky enough to get money. This is pretty straightforward: funds pick either a sector or a stage. For example, some funds will only invest in Blockchain or Biotech. Others aim for early or late-stage companies. Case in point: as a founder, you’ve probably got a call from someone asking for your revenue. If you answer none, they hang up. Those are Private Equity people. Nice and polite people, if you have at least $200k revenue annually.
Hence, Yes. If you have income, you have a shot at a cash injection.
..Keeps Legal Away
Out of this massive mountain of money, there is just a particle of investors with capital focused on legal. Worse, if you read our last post, you’ll realize that they aren’t all nice and polite. Don’t despair and remember the first chapter: It’s not you, it’s them. Better yet, here is our final bit of data. And this is historic.
For a brief moment, in the 3rd Quarter of 2022 something unique occurred. The number of seed-stage deals in legal surpassed that of later-stage companies. Take a deep breath and let that sink in. Nobody we know anticipated that this could ever happen. Especially now when access to capital feels impossible. Actually, now only long-term capital commitments are feasible.
Why? There is little to no growth in this economy. Our last post analyzed those quick paydays, and these aren’t in abundance. That is why funds are forced to accept longer horizons. We calculated a while back, we know one sector which has a stable growth curve. Albeit slow, so less sexy. How? Long sales cycles are repaid with slow churn. Customers of legal tend to stick around. They are calculated.
In closing: Yes, legal will still get money even if we aren’t sexy. We can still rock in the Bahamas.
Disclaimer: this post wasn’t written by ChatGPT. Better yet, ChatGPT can not ever replicate this outcome. You need our model running on top of our uniquely labeled dataset. So ChatGPT can copy this text but can never deduce this model.
Therefore the answer is models. They are the new model.