Supply and demand

I’m watching Tiger at the Master’s today and it’s amazing to watch him out there. Just over a year removed from a devastating car accident that left his leg almost amputated. Now he’s competing on the largest stage. Meanwhile, I can’t hit a ball straight to save my life and I am a healthy 32 year old. One day….

I’ve been speaking to quite a few people in the media on private market valuations recently. While there’s a lot of reasons for what’s happening right now in the private markets/VC backed startup, I like to simplify things.

There’s more demand than supply in the private market space right now. In this case, I’m referring to startup founders selling stock as suppliers. And investors as the consumer in buying these stocks.

Capital was and is still is cheap. With the Fed printing money, there is more money in the markets than ever before. This started during the pandemic in 2020 and continued into 2021. With cheaper capital, means more investors looking to deploy capital and “buy shares”.

Right now, there are more investors with capital than there are quality entrepreneurs meaning more demand.. This drives the valuation of priced rounds up as we saw in 2021. Investors compete for the relatively little supply and drive the price up.

With the imbalance in supply and demand, the supply will come. And often that comes with lower quality companies/ideas/entrepreneurs initially. Of course, the hope is that this will correct itself and we’ll see more innovation and quality entrepreneurs starting. This could also be corrected by lowering the demand, i.e. making capital more expensive for investors.