All Eyes on 2024!
Market Thoughts Ahead for Venture Startups, Founders and Investors
Well if there’s one thing that can be said about 2023, it would be anything but “boring”…
At Promus Ventures, we believe that having a well-thought out thesis on the macro economy and markets is key to navigating the path ahead. Hope is not a strategy, and misplaced optimism can be disastrous for many founders who budget their next year of cash on an economic recovery (or downturn) that might never result. So we make it a point every quarter to refine our thoughts on the setup and make sure 1) our investors know our evolving thesis on macro outlook and 2) our portfolio founders also know these thoughts as well as the reality of the venture market.
Macro Market Thoughts
Heading into the homestretch of this year, the bond market’s main event is the fight between the Fed being done raising rates versus inflation’s latest moves and the out-of-control political spending by both parties. This bout isn’t over yet, with more rounds ahead. The equity market sits watching, also paying attention to the latest Fed hawk speaker on the circuit, a tepid housing market, an economy that puzzles by staying somewhat strong, earnings that show many companies enduring well, and geopolitical conflicts in the background.
Heck at least there’s no new pandemic (yet).
We have been rather resolute in stating we have felt the Fed was finished a while ago, regardless of their current blathering. We stated in August that although much at the time looked dire with most Street experts predicting the equity markets to swoon, we thought equity markets would be flat to up to the end of the year. As of today, despite a very painful October, November has held to its seasonal strength and the SPY is indeed up 1.5% from August 15 with some wind now at its back.
Shorts went screaming for cover from the latest CPI report showing core hitting a two-year low and the 10-year Treasury back to under 4.50% levels. The dollar’s sudden weakness off this print is notable. Small caps finally have a bid. Current Fed swaps are now showing a zero chance of rate hikes in December, a 4% chance of a January hike, and a 50 basis-point rate cut (!) by July 2024. We find it a bit humorous that “no more hikes!” has very quickly become consensus. Of course the core CPI is still quite above the Fed’s 2% target and chasing the equity markets after such a large quick move is treacherous, but the overall setup is now more constructive.
Tech is back in the leadership position once again. The semiconductor sector is at an all-time high. The SPY is valued at 18.5x forward earnings, which looks rich when contrasted with 5% money market yields. Apple with flat revenue growth and valued at a 30x current P/E is a discussion point. Nvidia is up 21% in 10 days adding $219B in market cap. 2024 is an election year (have you noticed?), and when incumbents run again the economy rarely sees a recession.
There is constant yapping on how the Mag 7 is propping the entire market up — but it remains true more than ever. The spread of SPY vs Equal Weight SPY is the widest since 1999 and only 40% of the SPY is trading above the 200 day moving average. Maybe the small caps have turned with this latest CPI print, but so far we are still waiting for small cap beta to consistently signal risk-on.
Thus all eyes are on the economy for 2024. Will it hold up? Grab some popcorn — 2024 will be fascinating.
The Road Ahead for Startups and Founders
We have continued to press our portfolio companies to prepare for an uneven economy in 2024. The upside to this tougher environment is that the weak will fall and the strong will get stronger. Good news for those of you in the “strong” camp…. :)
We have been working with our terrific founders and teams in our portfolio stressing four focused areas for 2024:
- Visibility on pipeline is paramount as both corporate and government contracts continue will continue to take longer to close. A bigger piper cushions the blows of pushed or canceled pilots and contracts.
- Proper cash forecasting will either save or break some startups in the new year. Strong financial internal talent combined with detailed financial controls must be in place for startups, and the earlier in cycle the better. When the burn goes up because the top line has been missed, things can get ugly.
- The fundraising market has changed. Venture capital firms are now raising funds much slower, thus are putting capital out much slower than in past years. Great teams will always raise capital no matter what market flavor. We’re not sure the majority of founders in the market today have adjusted to this truth but they will reorient quickly once they hit the fundraising trail.
- Overall cost management maintains a priority status for 2024. Staying lean always pays dividends, but this mentality must be forefront next year. We continue to advise our companies to not be afraid to continue to cut costs if needed, even if prior RIFs have been made. Cash is the oxygen for startups and in this environment it is more crucial than ever.
Price discovery in today’s markets is still poor. We believe it will remain suboptimal in 2024. We tend to be the wet noodle in the room as the optimists hope for rainbows and unicorns just around the corner. We will be happy to be wrong on timing but on the positive side there are green shoots today that lead us to believe 2025 will be a better transactional year.
Despite the tough current macro, we believe it is a unique time to separate the wheat from the chaff. Tough macro environments focus teams unlike anything else, and the resulting muscle memory can catapult startups in unique ways.
Although it has been sometime since we’ve seen a market environment such as the current one, we have funded in past decades incredible founders and startups that ended up rising quickly above the rest. The difficult market in which they started ended up being a key reason for their future growth and success. Embrace the challenge and what 2024 has in store!
Promus Ventures invests in early-stage deep tech startups solving complex problems to advance everyday lives across the world. Some of Promus Ventures’ other leading portfolio investments include Rocket Lab (Nasdaq: RKLB), Whoop, Spire (NYSE: SPIR), Mapbox, ICEYE, Bellabeat, Swift Navigation, AngelList, Behavox, Gauss Surgical, Halter, Cobalt Robotics, The Exploration Company and numerous others.
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