Think V.C. Is Hurting? You ain't seen nuthin' yet D.F.A. #5

Plus: the man behind the new Weezer hit, and a playlist from the lead singer of the first band to perform at Live Aid!

Oct 27, 2022

In this fifth newsletter:

An interview with Hooters lead singer Eric Bazilian (who co-wrote the new single by Weezer)
The sequel to last week’s piece on Golden Age of Venture Capital, and how VC is about to go through a big transformation
A playlist hand-picked by Eric Bazilian, containing Hooters classics, some deep cuts from his solo catalog, and some of his favorite Philly tunes
If you have startup founders who are facing sales problems, we have a resource for you.

In the last 4.5 weeks, we’ve had lots of great conversations. If you’d like to have coffee with D.F.A. Capital, here are the types of folks that we like to meet with:

Have a background in SaaS, telecom, agtech and ideally functional expertise in customer relationship management or marketing/sales automation (CRM)
You love meeting with founders a few times a year
You love sales like we do (we invest in sales-focused founders)

I’m in Chicago and New York every 6 weeks and can always meet in SF or L.A. fairly often. To book a time to chat, and learn more about the founders we work with, click here.

Interview: Eric Bazilian, Lead Singer, The Hooters

Some people, and some investors ask, “Why do you interview rock stars or fashion designers about money and investing?” Well, frankly, it’s usually a lot more interesting than reading what finance people think about it. Also, I spent the first 7 or 8 years of my life laying on the floor of the public library reading rock n’ roll books, and you can see how that turned out.

Eric Bazilian is a founding member of the rock band The Hooters, and his new album, Bazilian can be found on Spotify or Apple Music. His band, the Hooters, was the opening band at Live Aid Philadelphia, 1985. I remember watching them being introduced by Chevy Chase and Joe Piscopo, when I was nearly 8 years old, thinking their 10-minute set was one of the coolest things I’d ever seen, watching the show live, from my living room, only 90 minutes away. The opening chords, and Bazilian’s ‘1-2-3-4” in “And We Danced”, at Live Aid, is truly an unforgettable moment of the 80s.

The Hooters and Weezer are two of my favorite bands from the 80s and the 90s respectively. It’s such a great combination - how did you and Rivers Cuomo end up collaborating on “What Happens After You”?

Like many songs, ‘What Happens After You’ has a long and winding road behind it. It began its life in Nashville in 2014 when Desmond Child invited me to write some songs with him and Rob Wells for Anthony DeLaTorre, an artist he was developing. We wrote and recorded the song in a day and we were all very excited about it but, as often happens, the next eight years of its life were spent strictly on hard drives.

Fast forward to September 2022. I’m about to go onstage in Germany in front of 70,000 people, and I get a call from Desmond telling me that Rivers Cuomo has written a new set of verses to our chorus, Weezer had recorded it, were going to perform it on Jimmy Kimmel the next night, and was it ok with me?

Needless to say, it was quite ok with me. Ironically, Rivers Cuomo did a version of “One Of Us” with Rainn Wilson [better known as Dwight Schrutte from The Office] on YouTube some years back.

Since this is an investing newsletter, is there anything that either you (or Hooters bandmate Rob Hyman, also known as the co-writer of Cyndi Lauper mega-hit “Time After Time”) did as investors, since the tech boom started, that you wish you’d done differently, knowing what you know now about the music industry or the tech industry?

My only regret in terms of investing is that I didn’t listen to my gut when I was in my peak earning phase, and buy every vintage guitar I could lay my hands on. The few that I did buy in the early 2000s have quadrupled in value.

[Ed: Great example of Peter Lynch's "Invest in what you know," is a professional guitarist buying and selling guitars.]

One of the very first concerts I ever remember any of my friends going to was my buddy Koby going to see you at One Step Beyond in Sunnyvale on the Zig Zag Tour in ‘89 (we were 12). Today, I can’t even walk around Philly without listening to the Hooters - the band’s an indispensable soundtrack to so much of the East coast, and I hear it popping up in so many places. Besides hearing it in songs that you wrote “One Of Us” (Joan Osborne) and all of the Hooters hits, is there one place in particular that you hear the Hooters resonate in pop or alternative rock today?

I heard it, along with the rest of the USA, during the Eagles game last week, when they played “And We Danced” out of a game-defining touchdown. Aside from our brief appearance on national TV during a recent Eagles game, some have pointed out that The Hooters are, in some way, the Founding Fathers of what is now called ‘Americana’ music. I suppose this is based on our early-adoption of using folk instruments like mandolins, accordions, recorders, and, of course, the melodica (a/k/a ‘The Hooter’), juxtaposed with loud rock guitars and drums.

Whenever someone new asks me to get them into the Hooters, I usually throw them the first album, Nervous Night and One Way Home, but Give The Music Back, the live album from just a few years ago is a really accurate picture of where everyone is at this stage of life. Where would you tell a newer fan, or a fan who just knows a few singles, to dig into the band?

I’d probably suggest checking out the videos first, “All You Zombies”, “And We Danced”, the vintage ones, as well as “I’m Alive”, the undervalued single we put out in 2008. I agree, Give The Music Back is a great picture of where we’re at, as well as the concert video from Germany in 2018 that we put up when our 2020 tour was canceled.

Think VC is Hurting? You Ain’t Seen Nothin’ Yet:

Interest Rates and Inflation, Part II

In Part I, last week, we figured out that:

20 years of crazy high interest rates gets everyone circus elephant trained to expect high investment returns from low-risk bonds, followed by another 30 years of low inflation and declining interest rates which forces individuals and institutions to take on more risk to achieve those same returns. Sure, VC works for that, so, the Golden Age of Venture Capital was born.

But, Inflation’s back. Interest rates are rising. And VC is beginning to feel the pain.

Many professional economists and officials in the Federal Reserve assumed inflation was transitory in 2021. The Fed didn’t respond at first. Interest rates remained low. Risky asset prices remained high. But as the CPI kept rising, the Fed was forced to act to avoid a repeat of the 1966-1982 high inflation era.

The Fed began raising short-term interest rates in March 2022, in conjunction with nudging up long-term interest rates via quantitative tightening. It's causing a lot of people to revisit their assumptions about inflation, like . . .

How long is inflation going to last? Is it transitory?
Why were inflation rates so low for so long?
Will interest rates need to remain higher for a really long time?
Long-term interest rates have typically ranged from 3% to 6% over the last century. If 10-year treasury rates return to this normal 3% to 6% band, what impact would that have on capital allocation towards alternative investment classes like venture capital?
So, what does this mean for venture capital?

The $64,000 question here is: “Is inflation transitory, or are inflationary forces here to stay, requiring multiple bouts of Fed intervention over the next decade?”

Many economists and professional investors believed inflation was transitory in 2021 and some still do today, because the following factors are pretty obviously transitory:

Government stimulus and easy Fed policy in response to COVID-19 shutdowns
The COVID-19 rebound
Supply-chain bottlenecks
Energy supply disruptions due to Russia’s invasion of Ukraine

But, before concluding that the transient factors are the only ones at play, it’s worth considering a little history.

Despite very low interest rates, inflation has been very low for the 3 decades ending around the middle of 2021. Why is that?

There are many reasons, but there’s likely two that matter the most:

Imported deflation due to globalization
Peace dividend from a world-wide reduction of conflict

How’s that working out for you these days?

Tariffs are making a comeback, isolationism is a growing political trend, and resistance to immigration is growing in many countries.

The war in Ukraine is the current reality and it has the potential to expand into a much larger global conflict. China continues to escalate its rhetoric around Taiwan. OPEC just cut production, with a Saudi prince reminding the U.S. that “we are products of jihad and martyrdom.”

And here in the U.S., politics have been, well, a little divisive lately, from what we’ve heard.

Where will all this lead? We’re not going to pretend we know where all these global trends are headed, but one thing’s clear:

The two main forces facilitating low inflation and low-interest rates are toast, and they might be even be working in reverse.

And even if this is less of a big deal than we think, there’s another thing we can learn from history, something called the wage-price spiral, which means regardless of how inflation starts, if it stays high for long enough, then wage-earners are going to demand higher wages to make ends meet.

The more wages go up, the more it will contribute to inflation, causing an ever-growing wage-price spiral to become entrenched.

The U.S. is very close to entering a wage-price spiral if it hasn’t already. It’s looking like the Fed got started too late, but they are rapidly using the tools at their disposal to tamp down inflation in the hopes of preventing a wage-price spiral from taking hold. While interest rate hikes and quantitative tightening are certainly going to bring down the rate of inflation somewhat, it’s unclear how all this is going to play out long-term.

With globalization working in reverse, we believe it’s more likely than not that inflationary pressures will persist for at least a few years, and possibly more than a decade. The Fed is likely to go through several rounds of tightening followed by loosening as it attempts to navigate a course between inflation and recession. In that scenario, 10-year treasuries are likely to return to their normal historical range of 3% to 6%, something the market hasn’t seen in a long, long time.

Maybe you agree. Maybe you don’t.

But assume for the moment that we’re right that 10-year treasuries are going to be 3% to 6% for most of the remainder of this decade.

What does this mean for VC?

Less capital will get allocated to alternative investments, like VC, given rising competition from returns on lower-risk investments such as treasuries or AAA bonds. (See Part I)

Stock market valuations will be lower for the same reasons. We all know lower-priced stock markets have a cascade effect on VC. Far fewer IPOs at lower valuations means much lower valuations pushed down to every round of financing. The first round of lowered private valuations is already happening.

Top-tier established VC firms will probably continue to thrive, but business as usual won’t cut it for new or lower tier me-too VC funds. To attract dwindling capital, new firms will need to do things differently.

We don’t think this is necessarily going to play out quickly. Institutions change slowly, huge public stock rallies happen, and fortunes made during the 30-year period of ultra-low interest rates will mean that capital will still be available in the short term.

For new VC firms to thrive in the more challenging environment of the next decade, they'll need to do things differently.

Which begs the obvious question:

How does D.F.A. Capital do things differently?

That will be our topic for next time . . .

But until then, what do you think? Where do you think inflation and interest rates are headed? How do you think VC is impacted? Let us know in the comments so we can all learn from each other.

Note: This two-part series was a collaboration with my buddy Joe Golton who ran a small hedge fund of socially screened, public equities from 2000 to 2006. He has also been involved with a few startups in the Food, Internet, and Sports sectors.

🎸 Bad Tunes:

Normally, I put together the playlist, but this time, we’ve got a really special treat. This is by far the coolest playlist we’ve had in a D.F.A. newsletter. This week’s playlist was put together by our interviewee, Hooters lead singer Eric Bazilian, who co-wrote Weezer’s new hit, “What Happens After You”. My faves on the playlist are definitely the 80’s mega-hit “And We Danced,” Dave Hause’s “Bury Me In Philly,” Bazilian’s “One Of Us,” which was a #4 hit for Joan Osborne in ‘95, and the really fun cover of The Hooters “Blood From A Stone,” by San Francisco’s Red Rockers, who we wrote about in D.F.A. #2. The playlist:

Founders Facing Sales Problems?

If you have founders that are facing sales problems, we have a resource for that. It’s called Sell&Raise. There are about 200 founders that have joined so far, and it contains about 70 hours of training on sales and fundraising. 2 or 3 founders join every day. No fee, no dilution. We start a new sales book club this week, and we encourage your startup founders to join us.

We’ll see you in a week or two.

Regards,

Adam and the D.F.A. gang

P.S. If you’d care to chat about working with D.F.A. Capital or the types of founders that we work with, feel free to book a time here.