In the natural resource industry, they have a saying: “When the ducks quack, feed ’em.”
Demand for natural resources — precious and base metals, energy, timber, and so on — tends to be highly cyclical. There are boom periods and bust periods. After the boom, the inevitable bust comes. And then, over a period of years, the pendulum swings back again.
“When the ducks quack, feed ’em” refers to the appetite of the public for speculative natural resource ventures. Like the boom-bust cycle, this appetite waxes and wanes.
When the public is hungry for risk, it means the ducks are quacking. To “feed them” is to give them what they want in the form of aggressive new projects they can put their money into.
The same mentality applies in private equity and venture capital. The time to raise huge amounts of money is not when conditions are optimal for making new investments. It’s when the ducks are quacking loudest.
If the quacking is high volume, you raise as much money as you can as a general rule — even if you have no idea what to do with it. This is standard industry practice, in part because of what comes next.
The “ducks” are hungriest at the top of the market. This is not a coincidence; it is more like an iron law of mathematics.
Public demand drives the valuations in a space higher and higher, until finally the pull of gravity is too strong and the boom has gone as far as it can go. At this point, though, the public is still behind the curve. So their “quacking” tends to be loudest as the boom is topping out.
The players who raise money from the public are well aware of this phenomenon. They also know what comes next in the cycle — the “bust” — and they know that the bust part of the cycle can make for some lean and harsh years.
So they raise as much capital as they can, in a kind of last blast of money gathering, knowing the funds they raise will have to get them through the tough times that are coming.
Needless to say, the ducks (that is to say, the public) fare terribly in this equation. But that is the way these industries work.
Given that dynamic, it’s interesting to note what is happening in Silicon Valley right now. The brand name venture capital funds are all racing to “feed the ducks.” That is to say, they are raising new money as fast they can.
“Venture capital groups are trying to raise larger sums at an even faster pace to plough into technology startups,” the Financial Times reports.
Kleiner Perkins, which did a big capital raise about a year ago, is trying to bring in another $700 million. General Catalyst and Khosla Ventures, two other blue chip VC funds, are trying to raise a billion each.
Even SoftBank, home of the $100 billion Vision Fund and the epic WeWork disaster, is trying to raise more money for a second Vision Fund, and has already pledged $38 billion in new capital.
Even as these giant funds raise money, conditions on the ground are dire. Many tech company founders are in a mild state of freak-out, and high-profile startups are taking a chainsaw to their payroll.
“Over the past decade, technology startups grew so quickly that they couldn’t hire people fast enough,” the New York Times reports. “Now the layoffs have started coming in droves.” According to a New York Times tally, more than 30 startups have slashed more than 8,000 jobs in the last four months.
For most of the ride upward, profits didn’t matter to hot startups. Losing money hand-over-fist was almost an imperative: If you weren’t creating cash burn, it meant you weren’t growing fast enough.
This mentality also created a lot of “unicorns” with no working business model. They had figured out the “grow fast and scale” part, but not the “how will we make money” part.
Now those same unicorns are on a death watch. If they don’t turn a profitability corner soon — in some cases very soon — the funding will dry up as the cash burn persists, and they will then become dead unicorns walking.
“At some point, one rock after another will fall away from the cliff and we’ll realize we’re not standing on anything in many, many companies,” says San Francisco-based venture investor Roy Bahat.
This is the backdrop now. WeWork was the flaming comet portending doom from the heavens, and VCs now walk in the valley of the shadow of death.
And so, of course, the premier venture capital firms are raising money as fast as they possibly can. It’s a rational calculus on their part: If asset gathering is a core aspect of your business, that is what you do at “the end.”
Because, truly, for Silicon Valley’s incredible run that lasted from 2009 to 2019, “the end” is what this is.