Investment Thesis v2.1 : The Great Acceleration
UPDATE
Many of the overarching trends and themes we talked about in our official Investment Thesis 2.0 have been greatly accelerated due to the circumstances of the COVID-19 pandemic. We are writing this supplementary update in regards to the current state of the world and where we see markets and technology headed over the next few years and beyond.
The magnitude and haste with which global monetary policy shifted, along with the quickening of various technological and societal trends, due to the widespread lockdowns caused by COVID-19 is unprecedented. This has caused a mass unemployment and gridlock situation around the world, but it has also accelerated many existing trends into new territory.
“We saw 2 years of digital transformation in 2 months”
— Satya Nadella, CEO of Microsoft
The digital economy has now become a necessity for much of the world and internet infrastructure is more critical than ever. Millions are adjusting to online communication, Zoom meetings, and remote work, which is an area we are increasingly investing in. More companies than ever are allowing employees to indefinitely work remotely, which will allow talent to become distributed outside of major finance and tech hubs. FinTech companies providing loan platforms, checkout software, and other services for eCommerce are seeing higher engagement and revenue than ever. App delivery services have grown by many multiples. We’re also seeing an increased demand for things like telemedicine for healthcare and education products around homeschooling. It’s important to note these were all previously growing digital trends that have been further validated. There will be an upheaval across many institutions, universities, and even major cities in the coming years. When things go “back to normal,” most of this digital transformation will remain embedded in society.
From an economic standpoint, the largest impact and perhaps the real eventual black swan event is the trillions of dollars being printed as a reaction to lockdown effects. In the near-term, this has created an asymmetry in the stock market with stimulus money being injected across various assets. A V-shaped recovery is currently occurring on the surface of indexes, but in many ways this is a mirage. Large caps, namely FANG, big technology and cloud companies, are carrying much of the weight back to near all-time highs. Smaller businesses and companies that fully operate in the physical world are a different story, however. Millions around the world are struggling and unemployed. Although we don't foresee another major selling event in the near future similar to March (which priced most of this in), the markets have not yet convened on the longer term impact of these economic realities.
The digital dollar has been thrust back into the spotlight and suddenly appeared in COVID-19-related stimulus policies in the U.S. House and Senate. We believe it’s only a matter of time before there are new issuance and settlement layers built using a digital dollar. Various countries in Europe and Asia are also testing digital currencies. These are presumed to be positive developments, but only if privacy is prioritized and respected in the architecture, unlike China’s impending Central Bank Digital Currency (CBDC) that is primarily built for control and surveillance. The Office of the Comptroller of the Currency (OCC) also tapped Brian Brooks, who was the Chief Legal Officer at Coinbase. You can see the dominoes for CBDC integrations lining up one by one around the world. We still remain skeptical on how well these initiatives will actually play out and it will be interesting and revealing to see how different countries approach this.
We are generally more bullish on the adoption of Facebook’s Libra project, which is being accelerated by not only an increasing demand for simple value transfer over the internet, but also from a global competition perspective. They just hired a new CEO, the previous Chief Legal Officer at HSBC. You can see a trend where legal heavyweights are being recruited as executives to navigate the major regulatory hurdles that exist in financial markets in order to get digital currencies implemented. It will take a lot of lobbying, but we generally foresee more innovation emerging from Libra than government-made digital currencies due better talent and incentives, as well as open-source facets of Libra, which will have unique network effects. We believe private competition is essential for the best outcomes in issuing digital currencies and these initiatives should not be monopolized.
Over the next couple of decades, the largest GDP per capita growth is going to come out of Africa. Other than mountains of debt, we see the “digital currency race” as a way for China to gain more hegemony over Africa by offering the digital renminbi on mobile devices. Africa will be also be a major target for Libra adoption, which will be pegged to the U.S. dollar and offer people exposure to the world’s reserve currency. The ~150M+ Facebook users per month in Africa will have a relatively easy bridge into Libra adoption, not to mention their total ~1.7B users around the world. China now considers Libra a threat to their aspirations of expansion. There is the space race, the AI race, and the digital currency race, which are some of the key areas of infrastructure that will define which countries prosper over the next generation. This is why it’s important for the U.S. to allow private companies to innovate in this space and in some ways, Libra could actually be serving as a proof of concept and test case for the Fed’s digital dollar project. We certainly have our issues with Facebook but we should also be grateful they are pursuing this initiative.
On another note, we have seen substantial parts of the economy, namely healthcare and medicine, being massively deregulated to prevent bureaucratic inertia in this critical time. Although regulation will always ebb and flow, it seems we are perhaps beginning to realize which areas of bureaucracy are needed and which were simply created to fill back-office chairs and collect tax revenue. We believe some of this will carry over to the financial markets and other sectors as well. Accelerated changes in regulation this decade was part of our original thesis and will occur on both sides of the spectrum. It's not so much about pure deregulation either, it's also about creating pragmatic regulations built for new technology and infrastructure that maximize innovation, with proper guardrails.
The greatest innovations have historically blossomed from dire situations like this and foundational change happens most when urgency and purpose are present. There is also a lot of dry powder and cash on the sidelines across many different types of funds. Entrepreneurs and leaders are looking to build more than ever in this time of change (not to mention, very low interest rates). Many investors are looking at this situation as an almost Darwinian equalizing event for startups, where the strongest teams and leaders will emerge. There will be many great companies founded out of the COVID-19 event that will improve the way society operates in more ways than we can imagine today.
Our investment thesis remains unchanged despite the horrendous circumstances of the pandemic and if anything, has been validated and accelerated. The digital economy and digital transformation are more normalized than ever. The need for better infrastructure, transparency, and trust will become greater than ever as the digital economy grows. Existing social and political tensions will also worsen and trust across society will further wane before improving. Specifically drawing back to our thesis, an even fiercer flavor of populism and revolt are likely to emerge as various political issues like wealth inequality, race, and immigration become more and more polarized on each end. As calls for socialism, central planning, and money printing increase, the Cantillon Effect will inevitably worsen over time, along with growing social unrest.
There are some answers to these problems, however.
THE BITCOIN REFORMATION
In March, we saw widespread selloffs across all markets with mass liquidations and panic-selling into cash before central banks injected trillions into the economy. In that time period, Bitcoin dropped ~50% down to ~$3,800 and we saw what could have been a final bottoming in price before recovering all the way back to the ~$9,000 range as of writing this. Price is still likely to fluctuate but this was a very promising recovery off the lows.
It’s important to add that when analyzing the UTXO data, the majority of March selling was done by people holding coins for less than a year. These were mostly traders and weak hands, not the core believers and holders who are the real defensive moat of Bitcoin. The majority of dip buying was done on U.S. spot exchanges (not leverage-driven), which is a healthy sign of organic demand. Paul Tudor Jones came out publicly as a Bitcoin bull and the legendary Renaissance Technologies’ Medallion fund has filed to opt into Bitcoin futures. The broader “herd” of institutions will continue to enter the space as infrastructure matures and we believe it will soon be considered irresponsible to not have some level of exposure into the digital asset class.
After the March selloff, we saw Bitcoin and all cryptocurrencies become extremely correlated with stocks, which is not the case on a longer historical scale. It seems the global rush to the dollar correlated most assets together. Entering May, that has begun to subside slightly, with Bitcoin making some uncorrelated moves. Although this doesn't prove decoupling is yet a reality, it is something important to look at as Bitcoin matures. We expect there to be snapshot time periods that have either positive or negative correlations but generally the coefficient will average out to being uncorrelated over time.
In an almost prophetic way, the Bitcoin halving event perfectly coincided with the massive monetary stimulus, further perpetuating the narrative as a possible inflationary hedge and insurance policy against central bank overreach. We sometimes joke there is something almost time travel-related to the timing of Bitcoin cycles, as if Satoshi Nakamoto knew how history would unfold. After the halving, Bitcoin is now an even harder asset, in a world where “easy money” is increasingly becoming the norm (and where Modern Monetary Theory zealots are landing political advisor positions and major book deals).
We believe there could be more near term volatility and moderate pullbacks, as there historically has been post-halving, along with other risk factors in global markets impacting inflows and demand. However, the fundamental long term thesis remains more intact than ever. We have been accumulating positions for over 2 years since the January 2018 lows and on substantial selloff events, including the most recent (primarily into Bitcoin, Ethereum, and a few DeFi experiments). Institutional investors and Wall Street are capitulating to the Bitcoin narrative more as the days go by because it simply makes sense in this macro environment. It was built for this. And if it fails under these circumstances, then perhaps it was never meant to be.
OUTLOOK
Most of Visary Capital’s investment areas have so far been less impacted, if not greatly accelerated by these events, whether by chance, or simply by investing in the right aspects in the world of bits vs atoms. We have a number of portfolio companies reporting their best performing months and growth ever this year. Over the next 6-12 months, we will see how this translates into subsequent rounds and valuations.
To summarize our macro outlook, we believe an overall roaring recovery is plausible over the next 12-18 months (sooner for established tech/cloud companies) but also that valuations have room to generally pull back and slow down as data emerges over the next few quarters. We are already seeing the Nasdaq approach new highs due to large tech companies carrying much of the weight. A deeper, sustained recovery depends on success of re-openings, employment growth, second wave risk, U.S. election, level of socioeconomic unrest, demand, etc.
This will be a new era of capital markets in a way however, one where corporations become addicted to the Fed's capital injections and where the concept of free and independent markets continues to vanish.
In the private markets, flat or down raises may become more common over the next 6-12 months across the typical venture and private equity round (though we are still anecdotally seeing many hot up rounds). There may be a surge of new capital and dry powder optimism continuing into the summer, mimicking the stock market, but that is likely to cool off before fully returning. Some funds will prioritize follow-on capital or pursue more specialized vehicles or distressed investments over taking on brand new risk. However, this doesn't mean there won't be many prime opportunities for early stage investing or even a surge in M&A activity.
We believe the U.S. dollar will maintain global reserve currency status for the foreseeable future. There will be major initiatives and policies to manufacture more things in the U.S. (e.g. "Buy American") and generally hedge away from dependence on China. Tensions with China will grow to new levels and the Chinese Communist Party (CCP) is likely in major existential trouble from a leadership and national trust perspective. Large scale turmoil and potential revolution in China will have massive repercussions for the world’s economy. Capital flight will increase from Hong Kong, which will create further tensions in the region, including between China and Taiwan. The Eurozone will not look the same by the end of this decade and the Euro itself is in a substantially bad position moving forward. In the longer run, this type of monetary policy will negatively impact the U.S. dollar. Depending on demand, a deflationary period is more likely to come before anything on the surface (although perhaps the inflation will be "hiding" in other assets). But the combination of the macro pandemic event, a growing addiction to easy money printing/QE, along with the imminent narrative of MMT emerging in mainstream politics, will usher in a new era of inflation.
The focus of the fund has not changed other than prioritizing more follow-on investment rounds and reducing the number of new portfolio additions for the year of 2020. We are still always looking out for net new investments and have been very pleased to see so many driven entrepreneurs emerging from this situation that want to build a better future. The primary goal for our partners is to have strong balance sheets to get through the current economic fog. We are grateful for all our partners weathering through this situation with strength and grace.
5/28/20 EDIT NOTE: Added a few relevant links
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