💬  In this issue:

  • Dot com bubble: Four reasons for the burst.
  • The Passion of Cathie Wood: Why the ‘Wackiest Portfolio Manager on Earth’ Isn’t Losing Faith.
  • The End of Blitzscaling: Lessons for venture capital and private equity firms.

Hi there,
Olumuyiwa here again. You may remember me from the previous edition of the APS newsletter.

In recent months, the media cycle has felt like an unending stream of depressing news. I’m constantly reading about global inflation, central bankers being on edge, rate hikes and stock market declines. If the theme of 2021 was wild optimism, 2022 has been the year of the bear.

Let’s run through all of the things you’ve also likely read, so much so they feel like cliches at this point: tech valuations are taking a beating, VCs are talking about founders needing to do what they can to stay alive, and the scarcity of capital. It’s a stark contrast to the past decade, where the technology industry has been a beacon of economic hope.

What that means is this: if like me, you’ve only worked in the tech ecosystem for less than 12 years, then you’ve not really lived through a recession, and the dot com bubble of the 90s sounds like a myth to you. You’ve only known rapid growth, Facebook’s evolution into a mega-corporation that some regulators are convinced is evil and maybe a sleeping pod at your office.

In this article examining the dot-com bubble, the four reasons the bubble burst were: overvaluation of companies, lavish spending by said companies, a surplus of venture capital, and speculative encouragement by the media. It sounds eerily familiar to today’s conditions.

Last week, The Information published this fascinating feature on Cathie Wood, once widely lauded as the queen of the bull market. At the peak of her stardom, her company, Ark Invest, had taken in more investments than more established names like BlackRock; her belief in crypto, Tesla, and other growth stocks was supreme, and people hung on her every word. Today, Tesla is down more than 60%, crypto has taken a beating, and the people who called her the queen of the bull market now say she’s the “wackiest portfolio manager alive”. To put it mildly, Cathie Wood and the tech companies she’s so famously bullish on are stuffing their face with humble pie.

Throughout the piece, Cathie sounds optimistic about the future and confident that her company will ride the tide. Only time will tell if her optimism will pay off. But I couldn’t help drawing a parallel between today’s humbling of tech stocks and New York’s real estate market in the 70s.

Per this brilliant piece, “[In the 70s] New York barely needed a 60-story office building, let alone two 100-story towers. The city was struggling financially, people and businesses were leaving for the suburbs, and the office market was already oversupplied. Many at the time characterised the construction of the Twin Towers as ‘pure speculation’. As a result, office vacancies in Manhattan soared, tax revenues plummeted, and the city even flirted with bankruptcy.

“Yet, as is so often the case with New York, this short-term pain planted the seeds for future gains. The glut in office supply and rise in commodity prices caused office development to grind to a halt in the 1970s. This meant that while buildings like the Twin Towers suffered short-term leasing and cash flow issues, their future potential value increased due to the evaporation in plans for future supply.”

🏆 Identifying eventual winners:

The most obvious conclusion is that in the future, what matters is identifying who the eventual winners will be. One small problem is that there’s not much clarity on what they look like now. Which startups will initially appear to be speculative punts, only to become mainstays of the tech ecosystem in the next decade?

There’s no single way to answer questions like these which investors worldwide are constantly asking themselves. I sense that remaining optimistic about startups and the future might be a helpful way to drown out the noise and keep us all motivated to identify and back eventual winners.

💡 What I’ve been reading:

  • I love this article about why copying others is essential, but what I especially like is how it argues for who we should be imitating.
  • What kind of thinking can help us pick eventual winners in the middle of a capital dry run? This article sets a great framework.
  • Michael Taylor smuggled Carlos Ghosn out of Japan ahead of Ghosn’s financial crimes trial–then ended up in prison.

🔫  Parting shot

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That's it for now. See you next month!