Good morning!☀
Here's your weekly roundup of the most interesting things I've read, learned, or listened to. I write about the people and funds that can create a better world for us.
Enjoying the newsletter? Share it with somebody you like. No supply chain issues here.
💩Energy-dependent fertilizer
What else can the Russian invasion do for us? A recent note from Doomberg (the tone is in the name), suggests that the invasion and related sanctions will soon cause a food shortage. Why? The cost of synthetic fertilizer is going ☝️ thanks to tightening energy markets. Synthetic fertilizer = ammonia + phosphate. And we use natural gas to produce ammonia and energy to mine for phosphate.
Synthetic fertilizer has helped feed a significant portion of the world’s population. So an increase in its price is a significant factor in global food production. Unlike other inflationary inputs whose costs get passed through to the consumer, agricultural inputs can be different. US farms operate heavily off of debt that’s incurred nearly a year before yields come through. That can mean farmers have a finite amount of purchasing power to convert into sellable crops. So, higher input prices don’t mean higher output prices, they mean less output.
What’s to be done? Regenerative agriculture provides solace for this. What makes agriculture “regenerative” is its use of things like cover crops to manage soil fertility, multi-paddock grazing to improve natural growth, and no-till cropping to improve water filtration. The principle behind regenerative agriculture is that it feeds the soil’s biological cycle to promote growth of organic (as in “living”, not Whole Foods) matter. Regenerative agriculture is not just a one-off impact either. It also improves the health of topsoil with each season, reducing the need for inputs more over time. Regenerative agriculture has been evidenced in peer-reviewed, anecdotal, and state-level projects to improve yields and reduce the need for inputs including fertilizer and water. That means regenerative farms are both more resilient and more profitable than industrial farms.
That sounds great, but it’s important to note, as an agro-economist highlights in his email below, this isn’t a light switch to just turn on.
Neaverson’s email is in response to an MP claiming Britain has enough organic fertilizer to entirely supplant its use of synthetic fertilizer. As Neaverson points out in his very British manner, “please could you advise which of your constituency villages you would prefer me to build an indoor, 30-acre, pig mega farm directly upwind of?”
Regenerative agriculture is pretty easy to implement, but difficult to finance. Transitioning a farm to regenerative agriculture is akin renovating a hotel. It will negatively impact output during the transition period before the farm and soil reaches its stride and blooms. But as my favorite Chinese import goes:
The best time to plant a tree was 20 years ago. The second best time is now.
🎢Welcome to valuation land, where everything is a roller coaster
There are many signals that start-up valuations should fall. Poor performance of public tech companies, an increasingly turbulent macroeconomic environment, interest rate hikes. My favorite one is the number of SPACs that were launched early in the pandemic that are now approaching their deadlines to acquire a company. In March, six will hit their deadlines. There are three in April, nine in May, and seven in June, per SPAC Research. So many liquidations without an acquisition might bolster the argument that there simply are not enough late-stage companies ready for life as public companies. And most recently, Instacart voluntarily slashed its valuation by nearly 40% from pandemic-infused high - going from $39 billion to $24 billion in order to better attract top talent.
It seems clear that there is or will be a late stage valuation crunch. As public companies go, so do late stage companies. Growth stage funds who invested at 50x ARR are going to get cleared out
But…
A great breakdown by Logan Bartlett of Redpoint Ventures suggests a more nuanced picture with positives and negatives. It’s the type of data-driven non-hand-wavy analysis you don’t typically get from funds. Must be his alma mater (h/t to a fellow W&L alum). A few of my favorite notes from the presentation:
Today compared to past corrections:
Negative👎: This is the 3rd correction in recent years (trade war concerns in 2018 and COVID-19 panic in 2020), and is by far the largest. Looking at the internet bubble or GFC as a proxy suggest we are still 2.5 years away from the bottom of a pullback.
Positive👍: Using the GFC as a proxy suggests the pullback will impact public markets significantly, but not have much impact on private markets.
Incoming money:
👎: Non-traditional money into start-ups (i.e., from hedge funds, PE, mutual funds) accounted for 77% of all start-up investment dollars in 2021 🤯. These are the investors who are most likely to pull back quickly, and they’re a meaningful chunk of the market now.
👍: Dry powder (the amount that VC funds have committed but not yet deployed) remains at an all-time high. So there’s plenty of committed money yet to be invested.
Public company comps:
👎: Acquirers have been paying high premiums for target companies (18x next twelve month revenue multiples compared to 8x two years ago), and we may be at the price peak.
👍: NTM revenue multiples of public companies are already 32% below the 5-year average and 7% below the 10-year average. And top decile companies today are growing far faster and more efficiently than businesses in the past (in line with Frank Rotman’s view of private company displacement that I wrote about here), so if you think about this on a growth adjusted basis, you could make the case that we're actually even further below where we've been historically for premium assets.
I’ll end with this:
My takeaway: valuations are coming down because they can and maybe they should. But the money will still be there in the near term.
This stuck with me:
We can still have nice things:
Party on Wayne
— Nico
www.nicochoksi.com | @nico_in140
Did somebody send this to you? Sign up below to get the next one in your inbox: