👀 Big Tech vs VCs

What’s going on here?

Big Tech has broken into the private market, leaving venture capital (VC) firms stuck outside.

What does this mean?

Microsoft, Amazon, Alphabet, and Nvidia have enough cash to fill more than a few super-powered data centers – and they’re using it to play VC. In writing checks for private AI startups like OpenAI, Anthropic, Scale AI, and CoreWeave, Big Tech is lining the little guys’ coffers so well that they have no reason to even think about a stock market listing. That’s a problem for the real VCs out there. See, they make “exit money” by cashing out when the startups they’ve invested in go public. Without those listings, VC firms are left holding company stakes instead of cold, hard cash.

Why should I care?

For markets: Dolly Parton’s “Jolene”, but for VCs.

With private companies staying private, the venture-backed initial public offering market is headed for its worst year since 2016. That exit money is whittling down in a big way: the total count across the industry is expected to be 86% lower this year than in 2021. And it’s not like VCs will be able to knock Big Tech out of the game: besides a ton of cash, tech firms are offering startups perks like cloud credits and partnerships. So VCs might need to explore new pastures, like younger and riskier startups or ultra-niche market pockets.

The bigger picture: The exception, not the rule.

The AI hype is hiding the fact that most of the tech sector is still stuck in a slump. Many companies – especially ones that don’t specialize in AI – are struggling to get their books back on track. After all, their corporate clients have been watching the pennies, wary of worsening economic outlooks. And of course, the ones that are splashing the cash are punting for alluring AI offerings. That explains why most major tech companies are growing slower than before, while smaller ones are actively shrinking.

What’s going on here?

China’s inflation reading came in lower than expected this week, suggesting that the country’s teetering on the edge of economy-sinking deflation.

What does this mean?

Consumer prices in China were just 0.6% higher this August than last. That’s lower than economists expected, even though food prices were pushed up by the effects of bad weather. And when you strip out food and other especially volatile prices like energy, the remaining “core inflation” was 0.3% – the lowest reading in over three years. But remember, while the US and Europe would celebrate smaller price tags, China seems to be heading into a prolonged period of deflation, or falling prices. In fact, by one measure, it’s already there. The so-called “GDP deflator”, which tracks price changes for all goods and services produced in an economy, has shrunk for five quarters. That’s the longest streak in over two decades.

Why should I care?

The bigger picture: Brace yourself, China.

Deflation could pile more pressure on China’s straining economy. See, when prices keep falling lower, shoppers hold off on non-essentials, anticipating cheaper prices with every passing month. That dries up sales for a host of companies, which can force them to scrimp on everything from production to the number of employees on their payrolls. To add insult to injury, deflation makes it harder to keep up with loan repayments, as wages fall while debt stays the same.

Zooming in: China’s problem is an expensive one.

Economists believe that China’s government will need to push around $1.4 trillion into the economy over two years to force it forward. Plus, they say that financial first aid – more than double the “bazooka” package unleashed after the global financial crisis in 2008 – should target households, not the industrial sector. Otherwise, the newly bolstered industry could start pumping out more products without any new shoppers to buy them, which would push prices down even lower.