Dry Powder and The Unequal Recovery

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When I read Fred Wilson’s very interesting blog post “The Bubble Question“ the conclusion I immediately drew was so this is what inequality looks like. Why did I think that?

As Fred indicated in his post, after the crash of 2008, financial policy makers dropped interest rates and made cash cheap, in hopes of stimulating the economy through investment and small business growth. As he describes, the results of that approach were somewhat mixed. I wondered, after watching Ray Dalio’s "How The Economic Machine Works”, whether the fact that a lot more stimulus went to financial assets and institutional investors, rather than to infrastructure building (and re-building), had an accelerative effect on the current inequality crisis. I still think that’s the case, but I’m realizing there are more implications. Here are some that come to mind:

1. Institutional capital (and family offices) is starved for risk-adjusted return (low double digits, high single digits IRR), and they are certainly not finding it in the bond market, or in other markets whose growth is predicated on a healthy national infrastructure.

As valuations and EBITDA multiples confound and concern us all in the startup space, one has to wonder if there is room for another trend — perhaps looking something like crowdfunding for non-growth companies — of liquidity pathways that allow for lower-risk, lower-return, patient capital allocation in the startup ecosystem. There are whisperings of this, but I expect to hear and see more.

2. It’s no wonder that the alternative lending universe has absolutely exploded, for small businesses and for individuals with Lending Club, Propser, and some exciting up-and-comers, many of whom are our investments. I think these are very good. Access to capital for the individual, whether they are underbanked, about to take the plunge as an entrepreneur, or a young promising person with limited credit history, will represent a stimulus package to the streets – to our recent grads, to the enterprising, and ultimately to the infrastructure. It likely won’t be nearly sufficient in the short term, and the challenges of the unequal recovery will multiply and persist — but maybe it’s a small, promising sign of the market overcoming federal regulatory failure, for once. 

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