The Impact of Government Changes on Venture Capital and the Economy

Welcome to the Venture Capital Podcast. This is Peter Harris with the University Growth Fund. I'm John Bradshaw with Codebase. Peter covers the VC side, I cover the founder side. And today we are talking about the effects of government changes on the VC landscape, particularly doge, the Department of Government Efficiency. And you've got some economic theories you would like to share?

Well, first of all, what are your thoughts on doge? Are you seeing the impact on it on your business or businesses that you work with, like your clients or other founders?

I mean, I think everyone's affecting is filling the effects of the tariffs. Yeah. And. Or will feel. Or they're terrified.

Yeah.

Or their 401ks are being affected.

Yeah. Because the market's collapsing.

I see smart people on both of the sides of the aisle talking about different things. When I see the moves, I wonder how much of them are true. Moves versus smoke screens. I believe there's a lot of smoke screens with the current, current administration.

Yeah.

Let's create some distractions and like flood the media and then we're going to go hit these other areas that are more important and these other things will just kind of settle down and disappear.

Yeah.

I think my general thought when it comes to the VC landscape is anytime there's volatility, funding, funding decreases.

Yeah. Uncertainty, uncertainty. Time, there's uncertainty.

If you're, if you're slows like Andrew, that you resell to the government that, I mean, I mean they sell war stuff, but, you know, who knows? I think, I think war spending is going to be up across the globe, so that's good for them, but I think a lot of them is going to hurt.

Yeah.

I was talking with one VC today in preparation for this.

Yeah.

And he says, he, they, they know a fund that believes governments will just throw, throw out all their existing contractors and look for newer, fresher companies. And so that's the thesis they're going after, is who can build the next generation of software tech or crypto or what are blockchain stuff that the government may need as these behemoths get thrown out that are written in cobalt.

Yep, yep. Interesting. Yeah. No, I think, I think those are some, some good points.

Yeah.

I've heard Talking to different VCs and founders, a lot of fear around the tariffs. Like there's one company we're in, in the consumer product space, they, they think like it's going to have a 10 to 20% impact on their EBITDA. So like very material and they're, you know, kind of stressing out of like you know, is this going to hit? When's it going to hit, how is it going to hit and should we, how do we react? I've also know a lot of companies that are in the NVCs that back companies in the like hard tech space that rely a lot on DARPA grants that like, and government contracts that like everything is just frozen. And the challenge there is like these companies, they only have so much Runway. So if they can't get that huge contract close with the government or they don't get that additional grant from darpa, like they eventually burn through their cash and go out of business. So there are a lot of VCs kind of stressing about that. And like we had a deal in my predecessor fund, University Venture Fund, where you know, it was an amazing company that was a pioneer in the weight loss space. And the FDA just like unilaterally decided that they weren't going to approve anything bariatric for at least 12 months. Right. @ the same time that the company needed money. And everybody was like, I, is it 12 months or 24 months or 36 months? We don't know. And so they didn't fund it. And the company like sold in a fire sale despite having like amazing tech. And so I think there's going to be a bunch of those. Like, well, there's risk of that happening with a bunch of companies. Yeah. And I think, I don't know, I think it's really challenging environment for a lot of people because on the one hand we need to make cuts to government. Like we're now spending two and a half trillion dollars than we did like four years ago. And we can, we've been able to do that and still be okay as an economy. One, because our technology keeps improving and we have, you know, better productivity rates. So that helps. But the other much bigger factor is that a lot of countries are willing to buy our currency, our debt, effectively. And that's because as bad as it is in the US it's worse everywhere else for the most part. And so, you know, the US is viewed as this incredibly large market, incredibly stable, even if it has some bumps, like generally will perform well. The problem though is that as our debt gets so big enough so big and the interest payments get so big that, you know, our entire tax base starts going to just pay interest rates. Like we get to a point where we're not as productive, we have to increase taxes. We either do that through inflationary methods where the government just prints more money to pay down the debt. Uh, in which case we all pay for it with. Through inflation, or they actually increase taxes. And both of those things have a negative impact on productivity, which then becomes a vicious cycle where productivity drops, tax revenue drops, therefore, and then they have to increase tax rates. And, you know, I've seen this play out in where I grew up in upstate New York. So everybody talks about New York City, but upstate New York has been in a recession for the last 30 years. And the reason for that is because they increase the property taxes so high that people just leave. And the only people that stay are the people that either aren't paying property taxes or they're. They live in, you know, homes that they bought for, like, 20 grand. And so they can afford the, like, $2,000, $3,000 a year in property taxes. But the houses that the. Anywhere else would sell for, you know, millions of dollars in upstate New York sell for, like, a few hundred thousand, and people are selling out, like, 10, 20, $30,000 in property taxes annually. And so people leave, and then when they leave, there's no jobs. And the jobs that do exist aren't great. And it just is this, like, vicious cycle that's really hard to get out of. And so going back to this, like, we have to cut spending. We got to figure that out. I get that there's, like, a of lot. A lot of pain going on, and I appreciate that, like, how challenging that is. I also wish that, like, there was another way to do this. And maybe there is. But I also think about, you know, Jeremy Andrus here locally. He's a great entrepreneur. So he write. He wrote about this in Harvard's magazine about when he bought Traeger Grills. And he talks about change and change management, and he was just kind of like, so he bought Traeger, the smoking. This smoking grill company, because customers were so passionate about the grills. And he was like, this is amazing. We're going to buy this company, and we're going to expose more people to the beautiful thing that is Traeger, right? And he's like, I'm going to take everything I learned from Skullcandy to help this company really grow. So he shows up, and the employees totally, like, backlash against him. They're like, we don't want this change. All these things. Like, literally. Like, he shows up, and one of the delivery chucks is, like, on fire in the parking lot, right? They lit on fire, huh?

They lit it on fire.

They lit it on fire.

Literally.

Literally. And so he was like, like, look, like, at that point, I. I do how to basically just start over. So he laid off like nine, I think he kept six people in the company, laid everybody else off, moved the headquarters from Oregon to Salt Lake City and then built the business and took it public at like north of a 2 billion dollar valuation. So like, you look at situations like that and it's like maybe the answer is, if you want to affect real change is you kind of have to burn the house down and start over again. I don't know, like other people would argue, like, no, there's like different ways you can do it that are just as effective, that are, you know, more humane. But I don't know. And, and so anyways, all this being said, like it's going to be painful, I think, I don't know if this is the best way, but some way of cutting spending is necessary in my opinion. And the benefit is hopefully if we can cut spending, we can reduce taxes and then there's more people with more money that can spend to invest, buy things and drive more growth in the economy. So I don't know, we'll see. What, what do you think? Am I off base here?

Oh, uh, no, I, I agree with your points. Well, I don't think cuts will, I think, I don't think cuts will be meaningful enough to drive real change.

Okay.

And I don't think they'll last long enough. And I think it's just going to create short term turmoil, but we'll see.

And a lot of frustration because people have lost their jobs. So why don't you think that they'll, I mean they haven't been able to cut very much so far. Right, right.

I mean right now they're talking about.

And it's like billions of dollars, but it's not, you know, but it's like, it's almost inconsequent spending, like trillions.

Yeah, I mean, I think they, I, I, I don't like the approach. I think a hacksaw needs to come.

Yeah.

But I think when it comes from the top down, I think it's, there's a few obvious points, but I think each budget. So you also don't want to create a recession by cutting back too hard.

Sure.

I think it's, you know, maybe kind.

Of headed that direction. Right, right.

But I think you cut 7% the first year, 5% year two.

Yeah.

Then like 3% and you don't raise the budget at all. And that way people can slowly know how to adjust. States can know how to adjust, other areas can adjust.

That's fair.

I do like the hatchet approach, approach on some and I think there will be unfortunate screaming, but hopefully those people can get relocated quickly.

Yeah. Also it kind of blows my mind how antiquated like our government tech is. So, I mean, there's also an element of like, it's time to upgrade.

I think you could burn everything to the ground and I don't know if it missed much.

Right.

I think most should be burnt to the ground, most should be returned to the States.

Right.

And we should no longer police the world. And so the military budget should. Could cut by 50%.

Yeah.

But then again, I think if you reimagine the, the US military complex from the ground up.

Yeah.

With tech like, you don't need all the individuals, you don't need all the military bases, you've got longer range.

Well, and that's the whole story of Android. Right? They're like, stop, stop building, you know, $100 million fighter jets when a $2,000 drone can destroy one of those. Right. So, yeah, no, I think it's, I think it's interesting. That is an interesting point that your, your friend brought up. That, that one VC is like, we think they're just going to. Can all of their current contractors and swap out to new, more efficient ones. I could potentially see that happening. I mean, Elon is very good at just cutting back everything, so.

But we'll see how long he cuts for if Tesla's value continues to drop. SpaceX continues.

I could be wrong. I don't think he cares about the valuation, only to the extent in which it starts to impede his ability to do other things. Right. But I don't know, I could be wrong, could be wrong on that. But like, you look at his life and look, I, I get a lot of people are super frustrated and don't like him, but like, he doesn't spend like his other billionaires in his class. Right. He has. I don't even know if he owns a home anymore. I think he sold them all, maybe. I think he has a private jet, he's got the.

A room in the White House. What else do you need?

Yeah, that's true. That's true. So I don't know. I don't know that he's like, driven by like material wells, but maybe he is. I don't know. It's hard to know. He's kind of, he's kind of a. He's kind of crazy for sure. Well, what is your prediction for this year? Are we going to end up in a recession? We at the beginning of the year. I, I mean, I and lots of people were like, so optimistic. We're like, 2025 is our year. We're going to get some exits out of the portfolio. Yeah. IPO market's going to reopen. M and A market's going to reopen. And now everyone's like, it's the tariffs. 2025 is another last year. It's going to suck. Hunker down.

I don't know. I think tariffs will be short, a short term play.

Yeah. I think it's a negotiating tactic.

I think it's negotiating tactic across the board and I think, I think because we're probably still in a better financial space than Canada and others.

Yeah. They'll cave, they'll capitulate eventually. Also, it doesn't seem like we're asking like a whole lot. Right.

I think the ask is fair.

Yeah. I do think it's interesting. Like the ask of like we're going to just match all of the tariffs. Right. The economist in me is like, tariffs are so terrible. Like, why are we doing tariffs?

But would you rather trade tariffs for income taxes?

Yeah. Well, so here's the thing. There's not a developed country in the world that lives off of tariffs that I can think of. There are a lot of underdeveloped countries around the world that live off of tariffs. And the reason they live off of tariffs is because it's too costly and hard to collect income tax. Right. So if you're in Kenya and 90 of the economy is informal, how do you collect, how do you collect income tax on that? You can't. And so you have to charge tariffs. Right. And so like, but every country, like they try, as soon as they can start collecting income tax, they do. And they get rid of tariffs because by lowering tariffs, it increases the amount of goods that they can ship out and the amount of goods they can bring in and the cost of all their goods come down and they end up being able to produce more and have a better and stronger economy. So I don't know. I hate taxes across the board. Income and tariff. So there's the selfish individual part of me that's like, oh yeah, it's great, let's tax somebody else. Not me. But then the other part of me is, is like that feels like we're regressing and would ultimately end up being more harmful to our economy than helpful.

So do you think we're better off with his strategy or no?

Well, I think there might be some merit. I mean, it's tbd, but I Think there might be some merit in using taxes or tariffs as a bargaining chip to get other things, including the removal of tariffs on our goods.

And that would open up the VC market more potentially. Yeah, I mean, I look at. I like the quid quo pro status. So China, for example, tick. I mean, I guess tech talk technically isn't a Chinese app, but like Facebook.

Yeah.

WhatsApp was not allowed to go into China and they created clones there.

Yep.

And I feel like it's unfair to an extent if, you know, Facebook couldn't. Couldn't go there.

Yeah. It's like China can open their app here, but we can't open ours there.

So I think as a general rule, I'm in favor of open borders, but I think you have to draw a line somewhere. And I like the idea of matching. Yeah, to an extent. So, I don't know.

It's tough. There's like super hard problems because. Yeah, I mean, something's got to give on a lot of this, but it's going to be super painful, I think, no matter how you do it. So. I don't know, but I'm. I'm kind of thinking that 2025 is a little bit of a lost year. Unfortunately. At the beginning of the year, I was really like.

And the markets won't open.

Cited that. No, I don't think so. Maybe at the tail end of this year. Maybe. Okay. But I think it's going to be a brutal year because I just think it's going to be too much uncertainty, too many cuts, tariffs, all this, you know, brinksmanship. And, and because of that, people are going to be reluctant to invest, to buy, to do any of those kinds of things. I could be wrong, but I don't know. That's. That's the way it's feeling right now, unfortunately.

I noticed Trent Mono from Conway Ventures reposted a tweet today.

Yeah.

They said number of new emerging funds for the year, and I think there's only 14. And I think their predictions there'd be less than 40.

Yeah.

So he was retweeting a tweet.

Yeah.

But I think his point is, I mean, normally it's probably. I don't know what the number is. Significantly, significantly higher.

Yeah. Yeah, I think that's. That's probably right. Yeah. Because it's just uncertainty and there hasn't been liquidity for like four years. Right. Not the liquidity that investors need in order to re up into something else. Right. I do think in general, like, 2024 was a pretty solid year with good growth across the board, and then we just kind of hit a bit of a wall in 25, but, yeah.

All right, well, that's the end of this podcast. Let us know what you think about the. The moves in the Doge complex and how you. You think it will or won't affect your startup and, or fun and fundraising, and we'd love to hear your perspective. So go hit us on Instagram, Twitter, all the places, and we'd love to hear from you.

Thanks.