💸 CHECKING IN ON VENTURE CAPITAL

Some thoughts on a topic we don’t often discuss in these writings — venture capital and early stage/startup investing.

If you’re a long-time reader of our Insider Newsletter, you’ll be familiar with our stance on venture capital.

We often talked about how the entire VC industry is merely a derivative of the “growth” bubble, which itself has been caused by central bankers pressuring bond yields lower and lower (the zero or even negative rate phenomenon), forcing more and more capital further and further down the risk curve.

It’s no coincidence that — with rates in an uptrend — VC as an asset class is not as hot as it was a few years ago.

We were reminded of an old Insider Newsletter issue from back in 2023, where Chris wrote on this very topic and said…

The coming implosion (give it 12 months or less) as the venture capitalists books are going to begin to be forced to mark-to-market their positions is going to be epic. I say they’re going to be forced to do this because most VC funded firms have 12 months of runway, and pray tell, who’s going to keep lending money to mostly (not all mind) cash incinerating Silicon Valley startups? So start your stopwatches and let’s clock back in 12 months from now or so (probably less).

More than 12 months has passed since then, but the reason we bring this up today is because we came across an insightful Twitter X thread on the state of venture capital and thought you might find it insightful.

🍀 POSITION YOURSELF TO GET LUCKY

You might remember how a few weeks ago, we discussed China and made a case for owning Chinese tech stocks.

Among other things, we noted there’s something that most investors don’t appreciate enough. The fact that China has an edge when it comes to AI — purely on the basis that yuuuge amounts of energy are required to power AI applications… and China’s electricity costs are a fraction of those in the US.

Here’s how we wrapped it up:

We don’t think it would take a lot for Chinese tech stocks to go much higher than where they are today. Certainly, stranger things have happened in the markets.

Then, just days later, DeepSeek turned the tech world upside down…

In short, over in China, a group of geeks came up with an AI that beats the pants off ChatGPT (and most other competitors)… for a fraction of the cost.

Did we know all this was coming? No. After all, we’re just a small team of hedgies sitting in their underpants.

But we did see that, purely from a valuation perspective, Chinese tech stocks were dirt cheap (sporting earnings multiples that would be more appropriate for stodgy, low growth industries) while delivering record earnings.

Then, suddenly, more and more folks started waking up to this reality, too.

After years of being left for dead, Chinese tech stocks caught a bid and are now beating the pants off their US counterparts so far this year.

Of course, we don’t want to be patting ourselves on the back too soon. What we want to highlight here is something that has served us very well in the markets, time and again — and it’s this…

When you do your homework and buy what’s cheap, the market gods tend to smile upon you.

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