The Threat to Amazon, Google and Facebook from the VC Bubble

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Markets are buoyant on the Fed’s hints of potential rate cuts. But interest rates have been low for more than a decade already and there are downsides to persistently low interest rates: such rates have in the past caused the creation of bubbles. These are then rapidly deflated by rate hikes, recessions, or hiccups in the corporate bond market. There’s reason to worry we’re in a low-rate-fueled bubble – just look at the venture capital market.

When it comes to debt and interest repayment, there are three categories of companies. Conservative companies can make interest payments and pay off debt when it comes due from their cash flows.

Then you have speculative companies – they can pay interest from their cash flows, but they constantly have to roll over debt.

And then you have the Ponzi-like companies. They can’t cover their interest costs, never mind their debt. They are relying on the kindness of tomorrow’s capital markets. These companies are hoping to one day get to scale through growth and turn into speculative and then conservative companies

Today a significant number of Silicon Valley companies live in a hallucinatory, Ponzi-like state. They are typically not financed by debt but by equity. Their equity sugar-daddies are venture capital firms, which in turn are financed by pension funds that are sick of hedge funds’ underperformance and are looking for uncorrelated returns. I think they’re just looking for any returns.