| Editor’s Note: For the past few days, we’ve been looking at how the Russian invasion of Ukraine is affecting the stock market. But that’s not the only market we cover at InvestorPlace. So in today’s Digest, InvestorPlace Deputy Editor in Chief Christopher Skokna notes that while the market seems to be shaking off the crisis, investors shouldn’t discount the conflict… because it could kick-start another market. | Global Storms Can Cause Pockets of Positivity
There was no social distancing at that moment. A light rain had turned to a downpour in a moment, and the two dozen or so of us waiting for a table outside a suburban Maryland Carrabba’s Italian Grill crowded under the restaurant’s small awning (the waiting area was already full). The rain kept getting harder, so pretty quickly the restaurant hostess let us in and figured out somewhere to put us. A crisis of barely minor proportions. Little did we know, but less than three miles away – an easy walk on a nice day – historic downtown Ellicott City was getting walloped by flash floods. They inundated streets and stores, sent vehicles surfing down Main Street, and killed two people. Local meteorologists called the July 30, 2016, rainfall a “1,000-year storm.” So after that, downtown Ellicott City business owners and residents thought they could sleep easy for, well, another 1,000 years. Not so much. On May 27, 2018, a second “1,000-year storm” devastated the charming downtown full of antique stores, boutiques, second-floor apartments, and bars and restaurants. That usually doesn’t happen. Normally, we see some breathing room between natural disasters. But at the same time, there’s a “law” that goes into effect following every natural disaster. If a spot has experienced a wildfire, earthquake, hurricane, or tornado in the past, it’s likely that the same spot will be hit with the same disaster again in the future. The longer that area goes without being hit by a disaster that has happened in the past, the more likely it will happen as time goes by. If you live on the Gulf Coast, in California, or in Tornado Alley, you know what I’m talking about. How many times have you thought to yourself, after a nice stretch of calm, “We’re about due…”? The same is true of geopolitical “storms,” like the one we’re seeing now in Ukraine. The longer we go between wars or market crashes or pandemics, the more likely another one becomes. Such storms are devastating for those directly in the way. My heart goes out to those in Ukraine and others affected by the invasion. But they can also cause reverberations throughout the global financial system – and end up a positive for those who know where to look. The Nature of Things InvestorPlace venture capital expert Cody Shirk talked about just that in a recent column: Human nature is just like, well, nature. We repeat our mistakes, especially when we forget about our past mistakes. In times of prosperity, we become more liberal with our personal finances, we’re tolerant of our neighbors, and we’re more likely to take risks. The opposite is true in times of difficulty. We become much more conservative with our personal wealth, we become less tolerant of others’ objectionable actions, and we take fewer risks. It’s the classic boom-bust cycle… which we haven’t really experienced in a while. Cody is the editor of our still pretty new free Venture Capital Digest e-letter. (If you haven’t already, you can sign up for Cody’s twice-weekly free newsletter by clicking here.) He notes that the fact that we have not seen a significant financial crisis in over a decade nor have we have experienced a global conflict in an entire generation has made the area he watches – privately held startups – a bit fat and happy. Consider that 50 new fintech companies entered the “unicorn” club in 2021. That means venture capital firms valued dozens of brand-new fintech companies (many of which are barely generating revenue) at over $1 billion. Cody has repeatedly said that such outlandish valuations are unsustainable. In fact, he predicts that we’ll see a correction that will take down dozens of the nearly 1,000 private company unicorns that have popped up in the past couple of years. That’s not to say Cody is bearish on the private startup sector – which finally opened up to non-wealthy investors less than half a decade ago – as a whole. Just “the late-stage unicorn private markets have gotten out of control,” he says. He’s still bullish on certain areas of early-stage biotech, space tech, transportation/logistics, and Web3. But, Cody says, things could be turning toward VC investors’ favor in even the “late stage” areas – and the current global crisis could be a factor. When Reality Hits Unicorns I’m going to let Cody explain… When I first started investing in private deals, I had much more ability to negotiate terms. Investing in a private company 10 years ago was more about how to make a deal – one that made sense for everyone. There was a long negotiation process to get the terms right. Today, in early 2022, it feels as if entrepreneurs have all the power. It has become a competition among investors to see who will get the opportunity to invest in a particular company. This situation drives up valuations in companies and forces private investors to commit to deals faster (often bypassing much-needed due diligence). That said, Cody now thinks we are entering an environment that is much more favorable for private investors. That’s because those billion-dollar valued startups – those 1,000+ unicorns – are going to need to start facing reality. A reality, Cody points out, that includes: - Increased volatility in the investing world, which not only will disrupt many industries, but also will create massive opportunities for investors in all markets.
- Increased inflation, which may artificially raise some companies’ valuations but simultaneously decrease investors’ buying/investing power.
- Increased conflict among international trade partners.
- Increased caution among investors, who are tightening their belts in preparation for all the above points. This will result in startups having more difficulty in raising capital, which will favor those investors who are searching for attractive deals.
That’s a lot. And it’s all good for VC investors searching for value. That’s why, right now, Cody is searching for privately held startups with breakthrough products, fair valuations, and great teams behind them. The kind of companies that offer investors the chance to 10X or better their money. You can join Cody on that hunt by signing up for his free newsletter – Venture Capital Investor – by clicking here. In fact, Cody tells me, he’s in Los Angeles as I write this (Friday) to attend an exclusive space/rocket investing event with some of the top VCs in the industry. He’ll be sharing news from that event… and hopefully a deal he can recommend… in VC Investor as soon as next week. Take care, Christopher Skokna
Deputy Editor in Chief, InvestorPlace | 
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