Why we are not investing in startups till at least March of 2025

In our case, investment is driven by a balance between possible gains and losses over a defined time frame. Understanding this balance depends on the ability to reasonably bound anticipated futures. Risk is uncertainty about the future, and investment in our case is driven by the level of uncertainty.

We normally do incremental risk management over time. That's because we've come to understand risks associated with our investments over many years based on our understandings of elements in the market, studies done by third parties, our own analytics and metrics, and various other factors that we see in the environment as it changes with time.

This year things are different. Because of the dramatic changes promised by the political shifts both in the United States and globally, we have done a more comprehensive review than we typically do. This is similar to the sorts of risks reviews that we do for client companies as the starting point, after which we do incremental changes with time. We use the number of frameworks to do these reviews, including our own internal frameworks, our metrics program, ISO standards-based reviews, the Cambridge Risk Framework, and due diligence frameworks used for investments in small and early stage companies.

At this point, we have come to the conclusion that the uncertainty regarding the future is so dramatic and wide-ranging that we don't believe our metrics can reasonably accurately predict the range of future outcomes, and that our analytical frameworks for putting metrics on things like sales sieves, and the historical statistics that we have, are unlikely to reasonably bound the outcomes from above and below.

Some of the specifics below describe some aspects of our concerns with regard to specific areas, but our overall view is that the changes coming could be so dramatic in such a short time frame, that even short-term investments are potentially problematic.

We have adopted several tactics to manage these issues. One of them has to do with our expectations about inflation, dramatic short-term shifts in the value of money from a borrowing standpoint, interest rates from financial institutions we deal with, and valuations. Based on these assessments, we have decided that things like land holdings without substantial loans against them, or with fixed rate loans that are relatively low historically, will remain solid over the period of 3 to 5 years, at least in the areas where we have those investments. On the other hand, things like variable interest rate loans, lines of credit, and similar sorts of instruments that we use to control cash flows and enable smoothing of operating expenses have become too uncertain to rely on. For that reason, we have decided to draw down the amounts in these sorts of accounts to minimal levels in order to assure against dramatic changes that might occur.

In doing so, we are also taking available cash out of the pool of available resources for investments and other short-term expense areas. This provides increased certainty that we will not get into a situation that's unmanageable during what we perceive to be a transition. That situation likely to last from 3 to 9 months. As that transition progresses, we believe we will get a better sense of the realities that limit the range of potential future outcomes.

This will then enable us to move away from highly risk averse positions back into normal risk taking based on the new normal that is likely to emerge. Or alternatively, if things continue to be highly unpredictable and dramatic in nature, we can move towards longer term lower variability investments by reentering the market in different ways.

We do not advise others to make decisions based on the methodologies, approaches, and conclusions that we come to, as we are not financial advisors, just as we are not lawyers and don't wish others to follow our decisions in the legal realm.

Having said that, we recognize that others might seriously consider the decisions we make and making their own decisions, and we do not want to create false expectations for people seeking investment through, by, or with us. Thus the transparency of this article.

Risks resulting from the US election have vastly increased

To be clear, we are talking about uncertainty. We are not notioning things will be far better for any given investment or far worse. We only assess that things are far less certain because of the potential for radical governmental change. Here are some examples from the areas where we have recently considered investments:

• Medical treatments: Trump has asserted and seems to be following through on putting RFK Jr. in charge of the regulatory and Federal funding environment. The other pending appointees seem likely to have dramatic effects on things like drug approvals and usage patterns for approved treatments. They have a declared policy against vaccines and favoring medically counter-indicated treatments. How can we tell what is likely to get funded and approved by the government given the dramatic difference from the previous decades? Whether these approvals are prevented, slowed, or removed as requirements, are all within the range of possibilities. As such, uncertainty is very high.
• Artificial intelligence: This is an area we have been skeptical on for along time, but the radical claims and massive investments seem to indicate that these methods will be forced down the throats of the public by the big players regardless of the quality of their outcomes for the 'user' (as opposed to the cost savings by the vendors). The irrationality of this approach from an investment standpoint lies in the notion that the big players will pick who they decide to pick regardless of any predictable properties we can identify other than insider connections. We believe we have a good handle on sensible investments in this arena, but then sensibility is not the hallmark of highly irrational markets driven by personalities and connections rather than merit or actual utility. In this arena, we have invested in patents and related intellectual property, notioning that it is worth the bet that these areas will continue to drive some elements of usage and provide, at a minimum, forced licensing over the long term. In any case, the investment in advancement of the field over ridiculous short-term applications seems sound over the long term.
• Operational technology: You would think that these sorts of advances would be great candidates for investment today, and I think if I were going to continue in one of these areas, this one would the my selection. This is an area where we have some substantial technological focus and expertise, and we believe that critical infrastructures and manufacturing areas will continue to prosper regardless of government form or power structures. Of course the investment in knowledge and technology may translate into monetisable benefits, but the investment in specific winners and losers is another matter. Again, this is an area where basic technology and know-how are medium-term investments we see as worthwhile.
• Cyber security: We know there will be a dramatic increase in threats and attacks, but it is unclear how anybody in government will fund this given the strong favoring of disinformation over integrity and time to transparency. There seems to be no interest in countering crime, and with the proposed selection of the head of the Department of Justice and the convicted felon as President, there is a wide range of possible approaches and outcomes related to criminal exploitation. None of this favors serious cyber security investment, and the private sector has increasingly refused investment as the problem has gotten worse. The ultra-wealthy can afford custom solutions and everyone else is likely to be exploited to the maximum extent possible. The one area where this seems to remain sensible is in the area of operational technology where there is likely an alignment of interest for basic science and engineering regardless of specific changes to the world. Orderly basic capabilities are needed by both autocratic and democratic governments, and tend to thrive as the limited certainty they bring to highly uncertain situations is similar to the need for basics like water and food.

Conclusions

Opportunity is always present, and in periods of high uncertainty, anything that can bring certainty is usually welcomed, especially by those in power and with resources, before, during, and after large-scale change. We are not investing in startups for the next several months, but we are investing in basics, services to ensure trustworthy decision-making, technologies and capabilities that will enable certainty over the next several years, and opportunities aligned with them. And as always, we are investing in strong relationships with clients and allies who want to ride out the storm with us.

More information?

If you want more details, join us on our monthly free advisory call, usually at 0900 Pacific time on the 1st Thursday of the month:

and we will be happy to answer any of your questions.

In summary

Hold on to your horses - it is likely to be a wild ride...