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when are you coming to miami are you there already i'm here i just got here oh cool come tomorrow have a good weekend i mean you get a ride on someone
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else's plane mine's been repossessed you can give me a ride i'll have mine
00:00:13
for at least another couple weeks i love i love flying commercial you know i left fine commercial
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every fan of all in and this week in store up stops me and takes a selfie i cannot tell you the love in miami i sat
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down to have a meal outside were you by yourself or yourself i'm myself it's 11 30. i was like hey everything's closed
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there was this one little place that's open i kid you not i sit down two guys come over we love the pot and i'm trying to
00:00:39
eat my meal and they're asking me questions and they want to know where's friedberg's introduction
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and i'm like it's so bad well i showed them the video and they were in stitches i was like
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guys there's only like five people have seen this video and now it's youth two so there's seven people they were so
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over the moon we should never have cut that well we could play it now it was good thank you it was incredible i said
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we just we just throw to it right now is that a good uh plan maybe and here we go
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in three two this is like the nerd olympics for freeburg he's like nerd stretching he's
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having a nerd uh freak out right now you know what i'm most excited about that i don't have to listen to jason's intros
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oh my god you're on like nerd brawl that's like nerd adderall take it easy dungeon master
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this guy hasn't been so happy since he rolled a 30 on the 30-sided die jesus oh my god i've got a plus seven
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bro where does that come from oh from dungeon i've never played oh really you were playing league of legends okay
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okay i'm gonna just apologize in advance to the audience okay here we go no interruptions please thank you in the
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voice of j cal hold on
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is there a frog in your throat what's going on there oh god he's super loud and has nothing to say
00:01:59
but we keep him around because he has a producer we don't have to pay one good investment in his 30-year
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career but he wrote a book about it and tells all the vcs to kiss his rear he's
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one of a kind will always come to your rescue when you're in a bind he calls himself mr calacanis but we all just
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call him an anus jason calacanis everyone jason welcome to the show great to be here great to be here thanks for
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the uh kind intro good to have you his words are incendiary and divisive but only if you identify as a gender
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fluid progressive otherwise to you he's a scholarly god fighting the great war against the rise
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of the woke mob hey pal it's the 17th most important guy from paypal he's back
00:02:39
with the same political speaking tracks the one and only mr david sacks david welcome to the show thank you thank you
00:02:45
i think we need to work on some of your rhymes but yeah we might need to tighten that up a workshop but yeah
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keep going maybe it gets better he contradicts himself twice a week but we're still enraptured because his mixed
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sweaters are so sleek his monologues last most of the show but he never talks any more about ipo 2.0
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as he'll tell you over and over he drinks the world's greatest wine but commenting on other topics is a bit below his line he's silicon valley's
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most renowned dictator our friend the verbal masturbator paulie hot potato chimoth welcome to the
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show great to have you here wow that was brutal god oh i'm not done
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we're an increasingly notorious whack pack litigated by david sacks emceed by an investor hack and soon to be
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cancelled because of the performance of chamoth's latest back we are the all in pod and you'll never get this 90 minutes
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back i'm the sultan of science with an iq of 103 i'm taking the throne as this
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podcast's new mc thank you everyone i'm gonna have to oh man i don't want to read the youtube
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comments on this one all right we'll scrap it no no no he's going no no no no no no you can't spike this sex
00:03:55
commentary well i mean uh it felt a little bit scorched earth to me yeah um
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i thought mine was fine but uh i think these other guys are a little bit shell-shocked right now i went a little hard
00:04:08
i actually wrote this for your uh for your birthday and then i decided to throw it in okay well i guess maybe we save it for your
00:04:15
birthday yeah you may want to do something funnier for my birthday i'll be back next week with some
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actually funny intro material apologies to the audience
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[Music]
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[Music] all right listen stocks and crypto have
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plummeted tiger coinbase shopify employee rsus meme stocks it's all gone everybody
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uh the world's over uh so uh where do we start you guys want to start
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with crypto stocks where do we even begin should we talk
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about what happened when rates went to zero and how financial assets inflated and i
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think we talked about this during the pandemic right when the pandemic was starting i remember an early show we did where
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you and i talked about how it felt like we were going into like the roaring rapids riot at like magic mountain or
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disneyland i kind of described it like that like it feels like you're going to a rushing river and there was just all this capital
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flowing so fast like overnight there were it would like all of a sudden we went from this like coveted standstill
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to oh my god this rush of capital and you could feel it right all the businesses we're all involved in started
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getting term sheets and doing deals and there was specs and transactions it was an incredible
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rush of capital and so when you know the central bank made interest rates zero and then banks could lend out money at
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close to zero and still make money and then people could lever up assets and then those asset values inflated and
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they could borrow more and keep you know investing in more and buying more ultimately you know we had bubble
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after bubble and we saw a lot of things that um you know may not have
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necessarily been valued based on a historical set of multiples or comparables or cash
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flow but really it was just about hey if i invest x dollars and someone else is willing to pay y dollars for this asset
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tomorrow i'm gonna make money and you know suddenly the friggin vacuum came out which was
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like let's take all that money back and so when interest rates got hiked it was like all that money's coming back out of the system and it was like this
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whooshing sound like the airlock got opened and all the cash came back out and as a result the bubbles just all
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deflated and it happened so quickly that it's what was crazy to me was that for so long
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everyone's been talking about how everything feels so overvalued so everyone was just waiting for the
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moment when the whooshing sound began and then everyone laid off all the risk and it happened so fast and it's still
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happening people are still trying to unwind the things where they're you know in huge positions but uh you know it i
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think it really is just uh it really is this uh this kind of incredible moment where
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you see all the money get pumped in it all gets rushed out just as fast um and i think we're all kind of like you know
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in odd how quickly the the response has been so maybe some context is helpful
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from 2018 up until the beginning or not really the beginning of this year but probably q4
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of last year you could have calculated
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an incredibly tight correlation between the stock market
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and the fed money printer so the fed is in control of how they can introduce dollars into the economy how
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do they do that they literally manifest money they don't actually technically print it
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but let's just assume for these purposes that they actually do print it and they literally take that money and
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they enter the market and they buy things with it and they're giving you this newly created money that they just created out of thin air
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from 19 or from 2018 up until about q4 of last year there was a 0.92
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correlation between that and the s p 500 going up what does that mean so
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if you look at a negative one correlation that means that if something goes up this thing goes down
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dollar for dollar that would be perfectly negatively correlated if you look at something that has a zero
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correlation that means it's just random whether whether one thing goes up and down has no influence on the other but a
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point nine two percent correlation effectively means that for every dollar the fed created the stock market was
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going up by that same dollar and that is literally what we had up until november of uh 2021.
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since the beginning of this year till about yesterday so i think the number is still going up probably by at
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least by a trillion dollars we have destroyed collectively as a society
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um 35 trillion dollars in global market value now to give you a sense of that that's
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14 of all global wealth that has been destroyed in basically
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five months and for reference in 2008 when we went through you know a cataclysmic shock to the system that
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threatened the banking infrastructure of america and a potential contagion to the world that destroyed 19 of the world's
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global wealth at that point so you know we're uh approaching some really
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crazy heady moments in time where in terms of the market correction and the value destruction
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the difference here is that the last time around it was really about a handful of financial
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institutions and some very specific assets right mortgage-backed securities um you know
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some parts of the of the credit market and then a bunch of financial stocks and that was largely it
00:10:00
this time around as you just said free burke it's literally everything that's getting smoked there is not a place that
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you can effectively hide that has been safe crypto smoked the credit markets
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totally frozen the equity markets nasdaq is in a bear market the s p is basically
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flirting with the bear market now and i don't really see any end in sight meanwhile
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we're waiting for cpi to downtick inflation hasn't really done that it looks like
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consumer price index how much stuff cost so that's taking a lot longer than we thought to sort of
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roll over separately jobless claims are now starting to tick up which means that companies are beginning to affect
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layoffs because they feel this pressure so now you're going to see an unemployment rate that starts to go up
00:10:46
and then meanwhile we're fighting a proxy war in the ukraine against russia to the tune of about you know 40 billion
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dollars every sort of month or so when we open the paper and decide to read about it so you put all these things together
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it's not clear that there is the momentum to create a market bottom real estate chamath if you look at it
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was a major uh compression in 2008 real estate held up is holding up seems to be
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holding a little bit i don't know how long that's going to last with mortgages going up so when you were talking about all the different categories i was like
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that's the one category that i guess hasn't fallen yet saks what's your take on the list yeah i mean look we're in a
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stock market crash that i think over the last week sort of became a panic i mean i think now there's panic selling going
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on that's not to say that it's all oversold but certainly there are names now that are starting to become screaming buys but nobody has the
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capital to to buy i mean it's easy to say you know in theory that you should be
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greedy when others are fearful and fearful when others are greedy the problem is that everyone's already fully
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deployed and then when the stock market crashes they got no cash enough to buy up new names and you know that's one of the things that you've noticed in this
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downturn and i'd say especially with crypto is with all the other crypto downturns there were always
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you know the crypto accounts saying hotel or buy the dip or the you know they had the laser eyes going i don't
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see any of that right now pure capitulation fear exactly yeah exactly so this is just a route across
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the board i agree it's every asset class i think home prices that's coming jason because
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like you said mortgages are going up inventory is going up so that's a leading indicator people
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can't afford uh the same mortgage they did before because rates are going up very fast so
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you know sellers are going to have to drop prices and until they're willing to do that yeah the inventories go up that's a
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little dance that happens in real estate is the sellers don't want to accept reality and they don't have to sell because they're living in it as opposed
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to their crypto holdings which they're not living in and they're not getting value from and frankly i think the
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consumer in general that's the next shoe to drop here because right now it's been
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you had this sort of financial correction you had this massive asset inflation and now that the sort of the
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the air has come out of the balloon but the consumer has generally been holding up pretty well um obviously we had
00:13:03
unemployment you know near three percent very low although the labor participation wasn't great but the consumer was doing fine it
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was sort of holding up the economy now i think you've got a bunch of different factors that are going to really hurt the consumer over the next
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several months like you said interest rates going up means that home loans become more expensive car loans any
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other uh you know uh personal consumption loans go up credit card debt now has all of a
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sudden uh skyrocketed so uh there's an article on axios on this that the amount
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of consumer debt is uh surging and uh to this highest level of increase
00:13:40
in over a decade so consumers are turning to plastic to cover the soaring cost of everything and then because of inflation that wages
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in real terms fell 2.6 percent over the past year so another point of inflation when you
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say inflation so if you're to look at wages in real terms people are actually making less money you give somebody a 10
00:14:01
raise eight percent inflation it nets out to two well no you're giving them a six percent
00:14:06
raise oh i'm sorry yeah or or like like a 5.6 percent raise or something like that against eight
00:14:12
percent inflation and net net they're down 2.6 percent got it they're down to not up yeah in purchasing power
00:14:18
exactly spending power sax's point is like i mean the number was 60 billion of new
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consumer credit last month which is like something we haven't seen in a very long time as consumers try and bridge this gap to afford the things
00:14:31
that they've gotten used to spending money on to jump up like that just indicates that we may be in the beginning of a consumer credit bubble
00:14:37
now which is scary right this is this is the question is what are the next shoes to drop so so you think about like
00:14:43
what's happened in the market so so far it's mainly been multi multiple compression like earnings
00:14:48
season was pretty good i mean it was hitting for some folks yeah for some folks so the stocks that got hammered were
00:14:54
generally the kovitz stocks it was the pelotons the netflix zoom you know you could like coinbase and um robinhood
00:15:01
with the day traders because that was people are laying off that stuff so but so basically the covet stocks have been
00:15:06
hammered but the b2b stocks actually had really good results and yet you know the sas index is down
00:15:14
like 80 you know the average sas multiple it was over 15 times you
00:15:20
know last year in the on the public comps and now it's down to 5.6 so the sas companies have
00:15:27
been hammered despite having great earnings so we don't know they're b2b they don't they're a little bit insulated from the
00:15:32
consumer but what we don't know is what happens over the next six months if we go into a deep recession then do
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even the b2b companies start being impacted that would look like sex just to be clear you know people uh maybe
00:15:46
start canceling their netflix or they don't take that vacation that's the consumer getting hit first a business that's laying off 10 or 25 percent of
00:15:52
their employees which are starting to see that contagion they might also pull out their sas bill and say here's 12 sas
00:15:58
products we're playing for let's consolidate down to eight right i've got a sas startup that sells you know six
00:16:03
and seven figure deals into enterprises and they closed their deal with uber the
00:16:08
day before dara's memo came out saying we got to be really focused on cost cutting what wall street wants now is free cash flow yep we got to really
00:16:14
sharpen our pencils they were like shoot good thing we got this across the finish line if it had been like two days later
00:16:20
it just would have been a much tougher process so first you're right the companies that impact are the ones with exposure to the
00:16:25
consumer but then those companies start sharpening their pencils and buying less so the question is how much are earnings
00:16:31
now going to be impacted in the b2b space and what sort of recession do we have i think like
00:16:38
recession now is this inevitable you to jamaa's point you can't have 14 of global wealth wiped out practically
00:16:45
overnight and not have that translated into a big recession monetary velocity is going to slow dramatically the money
00:16:51
circulating around is you can feel the brakes happening you can feel the the the the type of people are just way
00:16:57
poorer than they were six months ago guys just to be clear we actually haven't started to remove the money in
00:17:02
the system so the process of quantitative tightening which is the fed's mechanism of removing liquidity
00:17:10
is going to start now to the tune of about 90 billion dollars a month but to run off all the money that they printed
00:17:17
will still take three years right so we have to take about three trillion dollars of excess capital out
00:17:22
of the economy and so if you add that three trillion as well that's just going to disappear to
00:17:28
the 14 trillion we've already you know or the 14 the 35 trillion sorry
00:17:34
you know you're you're starting to touch numbers that are you know as bad as the gfc in terms of global wealth
00:17:39
destruction and again you're referring to the great financial crisis when you say gfc 2008 unlike the gfc this wealth
00:17:46
destruction is touching a lot of normal everyday folks in very broad-based ways
00:17:52
and that wasn't necessarily the case there were a lot of people that unfortunately lost their home but even
00:17:57
that was still relatively contained to the hundreds of thousands here we're talking about tens of millions of people
00:18:03
owning every kind of imaginable asset class who's seen wealth destruction you
00:18:08
know somewhere between 25 to 90 and that's very okay
00:18:14
yeah but i just want to make the case like people keep using this term wealth destruction and it was only wealth that
00:18:20
was accumulated in the last few quarters since we had covid and we released all
00:18:25
this capital and made interest rates zero and flooded the market with money so everyone kind of gets the money and
00:18:30
then they're like hey i'm worth a lot more and then all of a sudden the free money's taken back and you're like oh my
00:18:36
gosh i'm worth less i've been destroyed it's you know it's it's crazy the reality is this was meant to stimulate
00:18:42
the economy money was released and the idea when you release capital from a central bank is that that capital flows
00:18:49
its way into productive assets meaning businesses that can employ people that can create products that people want to
00:18:55
consume and ultimately it's very hard to manage that when your only mechanism is to
00:19:01
raise or lower interest rates and make capital available or buy bonds at the end of the day a lot of that
00:19:06
capital flowed into financial assets and inflated the value of those assets the
00:19:12
value of stocks the value of crypto the value of bonds that we own the value of startups that we all own and all of
00:19:18
those assets the value of the stock went up but the capital didn't necessarily flow into creating new jobs
00:19:24
creating new businesses and creating new products i want to finish this one because i think it's really important and at the end of the day
00:19:30
if that capital didn't really go in to create value and it comes back out and all that happened was we had this kind
00:19:36
of inflationary moment in terms of asset prices and we didn't actually create new jobs and didn't actually stimulate the
00:19:42
real productive economy that's where we have a problem with stagflation and where we are inevitably going to run
00:19:48
into a recession and i think the biggest concern i have let's be honest we're in a recession right now this is the second
00:19:53
question the biggest concern i have as i mentioned earlier is this consumer credit problem a lot of consumers got
00:20:00
used to the free money over the past two years and people took that money and they went and bought new cars or they bought uh crypto or they bought thing or
00:20:08
another nfts and a lot of people got used to living a lifestyle that allowed them to spend in a way that they
00:20:13
otherwise would not have been able to spend and then all of a sudden the rug got pulled out and now
00:20:19
everyone's like well i want to keep living this lifestyle i want to keep spending this money i want to i had all this stuff taken away from me shoot what
00:20:26
am i going to do and then they take on credit and the credit markets haven't tightened enough yet on the consumer side that we
00:20:32
may find ourselves in a really ugly consumer credit bubble here's a crazy statistic for you guys in the 2008
00:20:38
financial crisis the median home price to median income in the united states was 5x today it's
00:20:45
7x so people today own homes that are
00:20:50
significantly more expensive relative to their income and earnings than was the case during the financial crisis that
00:20:56
caused a massive housing bubble you're missing a bunch of important data points here the most important thing that happened was we changed the way that we
00:21:02
are allowed to capitalize mortgages and the borrower rates so that fundamentally is what drove that okay so for example
00:21:09
you were not allowed for example to have a qualifying mortgage be over a million dollars at the end of last year we
00:21:14
changed those rules so if you x out those effects that allow the fdic and all of these you know fannie mae and
00:21:20
freddie mac and all of this financial gobbledygook acronym infrastructure that props up the us economy if you factor in
00:21:28
those rules i don't think it's as extreme as you're describing what do you mean consumers have more debt per relative to the value of their home uh
00:21:35
sorry debt uh relative to their income than they did during the 2008 financial crisis that's a fact has nothing to do with the structural
00:21:41
way the market works but like what i'm saying is the market allows you to be that levered without actually getting foreclosed on or you know you're allowed
00:21:48
to get the borrower rates that allow you to do that all i'm saying is it's not like um excess credit is being built up in the
00:21:54
system abnormally by consumers it's just that these products again are being structured in a way that that gets
00:22:01
people down and real estate is a very unique category because you have eye buyers taking stuff off the market you
00:22:06
have regulation not letting people build more so i would be very reticent to extrapolate what's happening in real
00:22:12
estate i don't think we have like a a a an issue in real estate to be completely
00:22:17
honest with you i i think that we may have a looming credit crisis
00:22:22
but the practical issue today is i think asset wealth destruction in the financial markets whenever that happens
00:22:28
generally tends to lead to what sac said which is belt tightening by companies
00:22:33
focus on maximizing short-term free cash flow which unfortunately the way to cut
00:22:38
that is by cutting opex and the way that you cut opex is by unfortunately
00:22:44
spending less on goods and services which affects other companies and firing employees and i think what you're going
00:22:50
to start to see are a bunch of those things where these companies make these short-term
00:22:55
optimizations then how that unfortunately impacts the consumer is what friedberg said which is
00:23:01
that if the consumer was already living you know sort of at the knife's edge and using a lot of credit to basically allow
00:23:08
them to live a lifestyle that wasn't sustainable whether that meant not having a job or whether that
00:23:15
meant you know vacationing and staying in airbnbs all of that will come to an end now you
00:23:21
can say what is the canary in the coal mine and let me just give you one thing that hit
00:23:26
the wire this morning which will show you how bad the credit market is
00:23:32
so there was a article in bloomberg that came out that said instead of elon taking margin
00:23:39
loans to fund his acquisition of twitter there is an idea being floated by morgan
00:23:45
stanley to use convertible debt now i love this idea because i think
00:23:50
it's an excellent mechanism this was the you know when elon had convertible debt
00:23:55
on tesla that was you know of one big escape velocity moment for me in my
00:24:01
career in 2016 so i believe in these products i believe that they work but the reason i'm bringing this up is
00:24:07
that the what it said is i'll just read this to you the preferred equity may have a 20-year maturity and include
00:24:13
a feature allowing interest to be paid in kind at a rate of 14 percent a year if the single greatest investor's cost
00:24:20
of capital for debt in today's market is 14 i think you have to really start to
00:24:26
question what the credit markets really look like for market clearing prices because if that's the price for a
00:24:32
risk-bearing asset run by the greatest entrepreneur of our generation there's a bunch of stuff rebirth to your
00:24:38
point that's pretty mispriced i i think one thing where that's a silver lining here
00:24:44
is we did build up 11 million job openings labor participation is really
00:24:49
low right now even post pandemic people if you ask this question i think chamoth of like
00:24:56
how are people going to get out of to free burke's point the lifestyle issue like they want to live lifestyle it's a pretty easy solution
00:25:02
go back to work get a second job start working again we we peaked you know in
00:25:07
the 90s with something around 67 percent uh labor uh forced participation and then we're now
00:25:15
you know just right around 62 this is a large number of people who could go back
00:25:20
to work now you mentioned that slight tick up ever so slight in unemployment claims we'll see if that goes up
00:25:28
but i think the potential way out here is is that it's boden meaning like if you look now the last three or four
00:25:35
right unemployment claims readings in a row have largely showed that it's floored and it looks like in the last couple of
00:25:41
readings that it's starting to tick up well with three percent unemployment we're kind of on a floor you can't possibly have
00:25:48
less unemployment unemployment's going up i think employment has peaked unemployment's
00:25:53
going up and it's exactly what jamas said look all of us in our board meets the last several months really since the beginning of the year have been warning
00:25:59
founders that the environment is changing don't assume that we're always going to have a boom and the cash is
00:26:04
always going to be there however nobody's taking the advice well because there's been resistance
00:26:09
because people don't want to believe it and then in addition it's always like well how do you know it's not going to bounce back right
00:26:16
and now i think after what's happened really since april and really in the
00:26:21
last week or two i think no one's really saying that anymore everyone understands that we're in a new environment and they just don't
00:26:27
they either have experience with how bad it's going to be or they don't but everyone understands things have changed so every every company that's that's
00:26:34
acting sensibly is freezing their hiring putting a break on the growth um
00:26:40
you know slowing down their plans and that will absolutely translate into um
00:26:45
you know less job creation yeah we've we've really um pushed that exact plan i used to sit down with
00:26:53
our founders and in these board meetings what we would talk about is the base case
00:26:58
and then we would always talk about a blue sky case and a really bold case right so three flavors of kind of like
00:27:04
kind of go and do what you're doing actually put a little bit more gas on it and you know press the gas and then
00:27:11
really go for it i've stopped all of that you know these last five months have been me and my
00:27:16
founders basically saying okay guys what's the extreme bear case what's the bare case
00:27:22
and then what's the base case what's not yeah and what we are trying to figure out is how do we make sure that we can
00:27:30
optimize for a contribution margin for profitability for cash flow and when that's not possible how do we
00:27:37
minimize burn so that we can extend our runway as long as possible and show technical validation so that we can
00:27:42
raise money on reasonable terms not even great terms and if the boards of these private
00:27:47
companies haven't been doing that for the last five or six months and the and the burn hasn't dramatically
00:27:53
changed i think that they are they've been a little derelict in their duty it's a it's a it's you're not doing
00:27:59
a very good job as a board member or investor if you have enforced these conversations with your ceo and you
00:28:04
shouldn't expect the ceo to bring this to you in many ways because it's very hard for them with the with the focus that they
00:28:11
have every day to put this front of mind but as sac said you have to do it as a director if you're
00:28:17
worth the salt at all you have to do it right it's been quite the opposite we saw with fast.com co was the opposite
00:28:24
right people were just not even considering it as no survival risk is on the table you really have to act
00:28:30
differently it's kind of like the difference between a poker tournament and a cash game
00:28:35
you know like players behave very differently in a poker tournament the players are much more conservative why because once you're out you're out so if
00:28:42
you lose the wrong hand you're busted out of the tournament whereas in a cash game you can just rebuy well we've gone from basically being in a cash game
00:28:48
where people can just rebuy maybe they won't you know they could go out and raise more money maybe it's not the valuation they want maybe it's not as
00:28:54
much they want but you know in a boom you can always just go raise more money now if there's no more money available
00:29:00
to keep funding your plan if it's not working you really have to think about survival and you have to be more
00:29:05
conservative you can't let yourself bust out of the tournament by the way i'll say two things on that one
00:29:10
what you're describing is exactly the condition that is now led to the fact that roughly one-third of
00:29:16
public biotech stocks are trading below cash so they're uh they're yeah so their entity value
00:29:24
um the biotech industry as a whole syn bio in particular but really biotech
00:29:29
um about a third of companies now trade below their cash balance i'll send you guys some some links on the snake i'll
00:29:35
add it to the show notes afterwards and uh the reason is yeah 40 of them
00:29:41
have less than um uh 20 months of cash um
00:29:47
60 of them have less than two and a half years worth of cash and historically biotech companies they kind of run an r
00:29:52
d cycle to prove that their biotech product will work and if it works there'll be a pharma company that'll
00:29:58
swoop in and give them some money to go through the next phase of clinical trials or they'll do a secondary offering and raise more money to get
00:30:03
through the next phase but because the capital markets are gone now for them or the assumption is hey there's not going
00:30:09
to be any capital left they're still burning whatever it is 20 30 40 80 100 million dollars a quarter they've only
00:30:15
got a few million dollars in the bank and everyone's like hey look the odds of you guys actually even if your technology works even if your product
00:30:21
works the odds of you being able to get the funding to get through the next phase of clinical trials is much lower
00:30:27
therefore the the ascribed value of your business is negative and we're seeing that across the board i started working
00:30:33
in silicon valley in 2001 that's when i graduated from cal and i worked at an investment
00:30:38
bank doing tech m a and that was right after the dot-com implosion most of what i worked on was public companies that
00:30:44
were selling for less than cash today you know we don't talk about that over the last 20 years because it just never seems to happen well it's a phenomenal
00:30:51
thing to happen right i mean you could basically what that means is you could shut the company down and make a profit
00:30:56
and still own the ip and that is what happened in the dot com area yes we sold a bunch of companies i was on the
00:31:02
banking side uh representing the sellers uh the private the public companies because there was no business they were
00:31:08
just burning money and there was no line of sight to making money or line of sight to raising money so the board said you know what we just got to get shut
00:31:14
this thing up shut it down and then you know hey what's cheaper shutting it down or it's going to make us more money shutting it down and distributing the
00:31:20
cash or letting a private equity firm come in and shut it down for us and in a lot of cases they sold these public
00:31:25
companies to private equity firms let's say the company's got 100 million of cash they sold it for 60 million private
00:31:30
equity firm comes in and they're like boom boom boom everyone's fired this thing shut down and they liquidated it and they took you know made a 20 million
00:31:37
spread on that thing i will say on the on the flip side for prime for private markets and i think this is a really important
00:31:42
maybe point for us to have a conversation about over the past decade as you guys know
00:31:48
there have been a more venture money raised than any time in history the numbers have been going up every year
00:31:53
the number of funds total capital raised but at the end of 2021 if you look at the total funds raised in the total
00:31:59
capital deployed by venture funds we have a 230 billion dollar capital dry powder hangover so there's a quarter
00:32:06
there's a quarter trillion dollars of cash sitting in venture coffers that they can call and write and checks into
00:32:12
so i think it provides a really interesting contrast that sets us up for a dynamic over the next few years on
00:32:18
what's going to happen in private markets because you're going to have the haves and the have-nots the haves are
00:32:23
going to have a lot of freaking money available to them because these venture funds need to be deployed over the next few years the have-nots are the ones
00:32:29
that don't have proof points to a viable outcome in the in their business but the haves are going to have a lot of capital
00:32:35
available to them with one capital capital
00:32:40
so what do you guys think will happen there's two caveats in the contrast of everyone's saying hey there's no capital available there's no capital available
00:32:46
that's not true there's more capital than has ever been available so how does it get allocated so the first thing um
00:32:51
is to jamaat's point at what valuation and so there's gonna need to be discipline and they're gonna you're
00:32:57
right the that money will go to the winners other thing to remember is during the great financial crisis
00:33:03
for about a year maybe even two many venture firms did not want to call capital from lps whose portfolios were
00:33:10
crushed and lp said i know we're on the hook for this but i would appreciate it if you don't make a ton of investments
00:33:15
right now because we don't want to clear our already you know demolished portfolios to then fund your venture
00:33:22
funds so those are commitments it's not cash in the bank and those commitments only come from
00:33:28
harvard yale calpers ford foundation whoever more or less on climate catering if the gps can ask the lps for that and
00:33:36
the last time this happened and i don't know if it will happen this time but i think you remember it too much the lps
00:33:41
specifically said hey pump the brakes yeah let me build on what you say in 2000 the more extreme measure happened
00:33:47
with which is that most of these venture investors returned the money and just canceled and tore up the lpa now why
00:33:54
would they do that why would you tear up commitments for a quarter trillion dollars it's because your portfolio is trash
00:34:02
meaning if you have made a bunch of horrible investments that you know are now totally upside down you have a
00:34:08
responsibility to manage those investments to a reasonable outcome and ideally even try to get some salvage
00:34:14
value and so you know it's very hard for you to look at an lp in the eye and all of a sudden say you know what i'm going to
00:34:20
deploy this fresh capital and i'm in a psychologically good state of mind to do that well
00:34:26
and i think that what history shows is that when you have these drawdowns the money is made by new entrants
00:34:33
or fresh capital which doesn't have the legacy of a bad portfolio the returns are not captured by the same people and
00:34:40
the reason is because they have the psychological baggage of a horrible portfolio or
00:34:45
horrible marks so for example there was a tweet and i'll send this to you guys this is from a guy named matt
00:34:51
turk he said to put the depth of the reset in context
00:34:56
to justify a one billion dollar value valuation one billion dollar valuation a
00:35:02
cloud unicorn today would need to plan on doing 178 million dollars in revenue
00:35:10
in the next 12 months if you apply the current median cloud software multiple of 5.6 times
00:35:17
forward revenue now let's put it in a different way if you're a company that's worth 10
00:35:22
billion that means that you have to come up with 1.78 billion dollars of annual recurring
00:35:29
revenue for the market to give you a median multiple how many sas companies in sas would sacks you'll know this how
00:35:36
many sas companies even get close to 2 billion of ar probably a lot less than the number of
00:35:42
sas companies that are worth 10 billion on paper so you know by the way we should also talk
00:35:47
about who's the bag holder in that transaction it's the employees and we should we should explain why that is in a second but just to build on what you
00:35:54
know jason is saying and free broke what you're saying is in moments like this i would ignore all of the dry powder and
00:36:01
all of that stuff i think that there are a lot of venture investors today who've deployed way too
00:36:06
quickly and if they want to have any reputation over the next 10 years will have to
00:36:11
rehabilitate their portfolio and try to return money let me just say one thing i saw um an analysis from one of the
00:36:17
biggest venture firms in the valley over a 14 fund cycle so they looked at
00:36:23
data from 14 funds and they showed that 40 of their capital
00:36:28
was deployed in businesses that they were chasing valuation meaning like the business wasn't performing well and they
00:36:34
needed to bridge the company or support it through a down round or you know some other sort of situation where at the
00:36:40
time it was let's support our portfolio 40 of their capital on that 40 they made
00:36:46
like 50 losses so they deployed money in a situation that was not kind of an
00:36:52
accelerating successful you know up around kind of business it was declining business and in that support they lost
00:36:58
half their money the other 60 they make like 3x right so it kind of averages out that they make kind of whatever it is
00:37:04
two two and a half x on the whole portfolio but i think it really speaks to the condition that a lot of venture firms
00:37:10
may make the mistake around doing over the next couple of years which is i've got all of these businesses that are
00:37:16
suffering through down rounds or need supportive capital and i know it can get there but that belief ultimately costs
00:37:22
the lps and costs the fund more and it's why we saw such negative return cycles happen after the dot-com crash
00:37:28
how about this since 1994 okay just guess
00:37:34
how many funds private equity growth venture funds even existed
00:37:40
that are greater than a billion dollars so this is over you know 30 years how many how many funds do you think even
00:37:46
existed over a billion dollars since 1994 to today how many funds like how many funds have been raised that are
00:37:52
over individual funds or the brand names yeah since 1994 how many do you think there are
00:37:57
450 1276 oh you're including private equity and
00:38:03
stuff oh there was venturi okay sorry okay so now of those 1276
00:38:09
private equity funds or growth funds or crossover funds or got up your funds
00:38:14
how many do you think have actually managed to return more than two point three times the
00:38:19
money two point three times uh ten percent ten percent five percent ten percent twenty two of them it's like
00:38:25
under two percent under two percent wow so here's the point that i'm trying to make yeah investing is very hard in an
00:38:32
up market everybody looks like a genius all of these funds come up with all of their nonsensical ways of showing irrs
00:38:40
and all of these fake gymnastics but the truth is in the data and what the data says is that in the last 30
00:38:47
years the minute you get over your ski tips at a billion dollars very few people know what they're doing very few
00:38:54
it's hard it's hard these multiples compress as you get to bigger deals and
00:38:59
you can't say where the value is not deny this numerical truth yeah so again
00:39:04
i go back to you know the person that's always been talking about this and who again may be proven
00:39:11
right yet again is bill gurley you know everybody would make fun why is benchmark only raising 450 million
00:39:17
dollars why would they only raise 500 million dollars and they always were consistent because
00:39:22
over the last 30 or 40 years over multiple cycles we have seen that this is the best way to optimize
00:39:28
both for return instrumental clarity and for making our lp's happy
00:39:34
every variable was optimized at around 550 focus and then you see 5 billion 6
00:39:39
billion 10 billion funds funding 5 billion 6 billion 10 billion 20 billion
00:39:45
dollar private companies and i think what we have to do is put two and two together and realize that
00:39:50
it's going to be very difficult sledding from here for a lot of folks and when the venture or crossover investor
00:39:58
has this mental baggage that they're dealing with they're not going to be able to provide fundamentally sound advice to the ceo
00:40:05
they're going to optimize for making that portfolio ternicating the bleeding in the portfolio the ceos will make a
00:40:10
bunch of suboptimal decisions it'll probably lead to a bunch of layoffs bad technology decisions things
00:40:16
slow down and the cycle is reflexive in that sense and so you know we're going to go through a few years of sorting out
00:40:22
down rounds liquidation preferences nonsense sacks will be yeah so so look i
00:40:27
i agree with that point that these mega funds are very hard to repay because they require you to have multiple
00:40:33
winners not just winners but mega winners so you know we've always kept our funds in that five to six hundred million dollar range where you really
00:40:39
only need one winner per fund to basically return the fund but let me let me go back to this point about you
00:40:45
explain the math explain the math of that you typically own fifteen twenty percent of a winner so just yeah maybe
00:40:50
even less by the time it reaches an exit yep right exactly so you know if you own 10
00:40:56
percent of one deca corn that's a billion dollars and if it's a 500 million fund you've doubled your fund
00:41:03
but if it's a one or two billion dollar fund you haven't even paid back the fund yet so
00:41:08
that's i mean how hard is it to hit a deca corn hard it's hard right it's hard
00:41:14
really really hard really i hit two i hit two i've had two in a decade yeah i fed to
00:41:19
an exact same time period we go back to this point about dry powder i think it's actually important so
00:41:24
this would be a little bit more of a of a bright spot so in a weird way so there's a
00:41:30
i think stunning article in techcrunch just two days ago that said that tiger
00:41:35
global you know which the hedge fund as of the end of april the hedge fund had lost about 45
00:41:40
and then may the first weeks of may have been even worse so who knows what they're at now but they had a separate
00:41:46
venture vehicle and their the history of their venture vehicles is that they raised
00:41:52
3.75 for a fund in 2020 then 6.65 billion in 2021
00:41:59
and then just this year they closed a 12.7 billion dollar fund in march now i think that fund was raised as early as
00:42:06
september last year but maybe there was some money that still trickled in and they finally closed it in march but
00:42:13
basically what this article said is that this 12.7 billion fund that they just
00:42:18
raised is already nearly depleted it's something like two-thirds of the fund has already been deployed
00:42:24
so this idea that they've got like a lot of dry powder sitting on the sidelines i don't think they do and then meanwhile
00:42:30
you know the other big crossover funds d1 co2 they are completely risk off i don't think they were ever as aggressive
00:42:37
as tigers so they're not in as bad shape as tiger but they're just basically sitting on the sidelines till this thing
00:42:43
sorts itself out so basically all of this capital that flooded the venture markets this growth capital that came in
00:42:49
over the last couple of years it's gone i mean that's basically driving so fast what was their thinking because you and
00:42:56
i met with these folks we saw them marking up our companies because you and i you typically do a series a that's
00:43:01
your sweet spot i typically do see it into series a you do a and to b they were coming in and marking up our in the b and c rounds what was their thinking
00:43:08
what was their mistake here i think the thinking was that we can create an index fund
00:43:14
for pre-ipo tech companies for sort of late stage private tech companies
00:43:19
the only problem was and by the way they did a if you could i think they did a good job sort of prioritizing that
00:43:25
solution i mean if you send them your numbers in a certain format and do a meeting they were like a term sheet generator i mean they speak out to
00:43:31
machines wasn't that your original idea you had you had funding as a surface at one point
00:43:36
i did this thing called capital as a service where you would send us you would send us but uh you would send us
00:43:42
your data or we would plug in to whatever you use say it was stripe or shopify we would suck out the data we
00:43:47
would run it against a bunch of models we would do a few simple regressions and then we would just index you and then
00:43:53
send you a trim sheet so we did do that all around the world but we did it on very small dollars you know we did a 500
00:43:59
000 checks 250k checks it was called capital as a service it's still a phenomenally good idea
00:44:05
but you would want to cure that business for probably 10 years i would wanted to do that on 10 years on my own money you
00:44:11
know 10 15 20 30 50 million bucks before i would even dare raise lp money around that idea because it's
00:44:17
i mean at that point it's the machines doing the work and you have to really be sure your models are right she asked the question sort of what was wrong with it
00:44:23
um i think that the the the thing that was wrong with it actually was just that the public comps were all wrong right so
00:44:30
they were modeling got it to the public valuations these are guys right wrong
00:44:35
yeah well no it's look they're hedge fund guys so they're looking at they're looking at the public valuations they're
00:44:40
looking at the last private rounds and they see a spread a large spread and they're like we can arb this so they go
00:44:47
in with a massive amount of money create a term sheet generator and they are the spread the problem is that all the
00:44:52
public valuations we now know were inflated i actually think they did a reasonably good job in creating
00:44:58
a a great approach for founders who want late stage capital if the valuations
00:45:03
have been correct i think it would have worked here's the problem right now peloton and coinbase are both
00:45:09
their market caps are trading at lower than their last private market
00:45:14
valuation so let that sink in like if you we did that last private round you're under water big time in those
00:45:20
names or i don't know they were taking their signals from the public markets this is the problem with
00:45:26
the fed and the administration and congress basically flooding the zone with all this fake money is that it
00:45:32
distorts all the signals in the economy and then people start making investment decisions that don't work and then you
00:45:39
have this massive correction how long have we been doing this to month how long have we been over feeding the
00:45:44
market it was obviously happened under biden and trump does it go back to obama or no
00:45:50
yeah it started in 2008 nine without troubled asset relief program which is
00:45:56
basically a fund you know to create market um liquidity essentially but
00:46:03
what it also did on the heels of the great financial crisis was um we introduced
00:46:11
comfort around this idea of quantitative easing or you know having what's called the fed put you may hear that a lot what
00:46:17
does that mean which is that when market conditions get too you know
00:46:23
stiff or rigid or inflexible the fed will generally step in with
00:46:28
liquidity typically into the credit market never into the equity market but what that does is it that also still
00:46:33
flows into the equity market so everybody behaves like there's a downside price at which the fed is guaranteed to act and that
00:46:40
really started to be a bailout that really started to be in people's psychology after the great financial
00:46:45
crisis and then through the you know 2010s we had several instances
00:46:50
where we had that where we had moments of sort of like market volatility and all along the way what we also had
00:46:57
were academics that started to you know promote things like modern monetary theory this idea that you know money
00:47:03
printing was a good idea and so we had this again very reflexive loop where you
00:47:09
know anointed experts you know you know did talk pieces and thought pieces and
00:47:14
books and then pseudo intellectuals would parrot this stuff and then you know the government infrastructure would
00:47:20
behave like this was a reasonable thing to do and it built on itself for a decade so we've been doing this for 13 or 14 years now
00:47:26
and now we're trying to undo it and put the genie back in the bottle and it's proving much much harder than we thought because people have unfortunately got
00:47:32
addicted to the crack they're addicted to the drug they you're trying to take the oxy away and that's a and people are going to go
00:47:39
through what's wrong with really really bad withdrawal
00:47:44
yeah if you have a quarter trillion dollars of dry powder let's assume no one gives their money back and they don't do
00:47:50
stupid stuff like chase losing companies in their portfolio and they allocated in a smart way to
00:47:55
winning companies does that not mean that we end up seeing a significantly kind of outsized amount of capital going
00:48:03
to a few highly successful businesses that we'll end up seeing this kind of supercharging of a small
00:48:09
set of businesses as opposed to this rise of the unicorn which is what we saw over the past call it you know eight
00:48:16
seven eight years um and that you have this big bifurcation in the market the vc market
00:48:21
starts to kind of say hey you're not making money you don't have a line of sight to making money you're off the table but the you know top decile get
00:48:29
over funded and they become you know kind of the next the next mega caps no yeah i mean
00:48:35
it does not happen in this moment well so look if we look ahead two or three years all right can i just tell
00:48:41
you why let's take let's take the perfect company which is stripe okay so now 50 billion dollars well
00:48:47
they've been funded to a mega cap right i mean 50 billion dollars of horrible vcs who've made horrible decisions here
00:48:53
to fore knocking on the collision store saying can you please take my 50 billion dollars because i'm trying to be money
00:49:00
good why do the collisons want to take on this headache why do they want to flutter you know
00:49:06
mess set their cap table up with all these folks and then at what price so if
00:49:12
you're sitting at the board of any really good well-run company of course you'll take some bite-size you know
00:49:17
amounts of very decisive capital in these moments if you think you can market consolidate or whatever
00:49:22
but i think the point that all of these companies are going through is largely the same if if the best companies
00:49:28
aren't doing what we just talked about i would be shocked as well the best companies are thinking let's batten down
00:49:34
the hatches and let's not distract ourselves and so i'm not sure this is the moment where a really horrible vc
00:49:41
who's had a terrible track record who've just blundered through five billion dollars is going to be able to put in a
00:49:47
billion dollars to strike what do you think sex let me speak to kind of the environment that i think is
00:49:53
going to happen over the next few years and and what founders will succeed i think you're right freeberg that the vcs are
00:50:00
going to become much more discriminating and there's going to be a much more polarized outcome here for companies
00:50:06
i had a tweet storm that elon actually gave a nice boost to by saying he agreed with it where i basically said look
00:50:12
startups with high growth and moderate burn will get funded through this downturn starts with moderate growth and
00:50:18
high burn will not get funded so what's gonna happen is that the sort of mediocre ones
00:50:23
are gonna we're gonna get to a very polarized outcome very quickly where you know i think a lot of founders think
00:50:29
that if their numbers are just okay and not great then they'll be able to raise but at a lower valuation or they'll be
00:50:35
able to raise something but maybe not as much as they wanted and what will happen is the middle cases kind of go away in
00:50:41
an environment like this and everyone just wants to fund the best companies so certain things will become
00:50:47
absolutely fatal for startups in this environment one is obviously if they're just not growing they're not gonna be able to raise and
00:50:53
good growth really starts in the early stages in terms of doubling year over year second negative or low gross
00:50:59
margins are absolutely fatal nobody wants to fund businesses that may not even be real businesses and i would say
00:51:05
acceptable gross margins really start at 50 at third um cac payback people want to
00:51:11
know that you can pay back your customer acquisition costs in a year or less and then like i mentioned the burn you know
00:51:17
a burn multiple of one is really ideal where you're burning not more than your your net new arr but
00:51:26
certainly not more than two i think burn multiples over two where you're spending you're burning two dollars to add one
00:51:32
dollar of growth that's where i think you know companies start becoming unfundable so i think
00:51:37
founders are going to have to pay a lot more attention to these um disqualifiers yep but i think
00:51:44
that for companies who meet the criteria who have good growth
00:51:50
low burn um good business fundamentals they will be able to raise and look here's what's going to happen the crossover investors
00:51:57
are washed out of the system they're gone i mean tigers already deployed all of its capital and i don't know when they're going to be back so the
00:52:03
so-called tourist money the the basically the big investors who weren't in the system a few years ago they're
00:52:10
basically going to leave the system however there will be the big traditional venture funds will have large funds but they're going to deploy
00:52:15
them much more slowly these one-year pace of deployments they're gonna stop so the funds
00:52:21
they'll be back to three exactly so just think about that even if you had the same amount of money being raised and
00:52:27
deployed but it was happening over three years instead of one that would be a two-thirds reduction in the availability
00:52:32
of capital in the system so which was that's going to go through you're not seeing that to the best companies that i'm talking about you're
00:52:38
not going to go to somebody who's going to blow through it in nine months who's playing every hand like you cannot play
00:52:43
that way anymore exactly so what we're telling our our founders is number one you got to lengthen your runway like the days of raising a new round every 12
00:52:50
months are over you've got to plan on not raising for two to three years if you can help it
00:52:55
and then you really have to sharpen your pencil and work on these business fundamentals and you know one thing you need to do is you need to have a
00:53:01
realistic conversation about am i really able to raise another round in this environment with the metrics i
00:53:07
currently have and if the answer is no you need to cut your burn to give yourself the time to fix the business
00:53:14
and that fixing a business normally takes two to three years so you know if you got less than two
00:53:19
years or even two and a half years of burn and you have one of those disqualifiers i talked about you better
00:53:24
like cut your burn quickly to give yourself the time to fix those disqualifiers yeah i mean i wish people we've been
00:53:31
talking about this for a year folks and you know some founders just are not accepting the reality of the situation and i i if
00:53:38
you look at what happened we have a generation that's never experienced a down market and these down markets
00:53:43
happen so violently that they think like people are panicking you know somebody made a joke
00:53:49
like bill gurley's called five of the last three recessions you know and it's like well i mean we have scar tissue and
00:53:56
it's that the the velocity of the downturn all those kids dunking on girly well
00:54:01
guess who's going to have the last laugh i think precisely i i i texted gurley last night he's had the last law before
00:54:07
i literally dm'd him last night i said listen the water is great right now i am doing deals back at six to 12 million dollars in the
00:54:14
seed space um with you know 200k in revenue and real founders and discipline
00:54:19
start investing again it's great now because the deals are now taking i don't know if your experience in the sacks but
00:54:26
the deals went from taking two three days now they're back up to four to six weeks and we're having very thoughtful
00:54:32
discussions we're meeting a third time with founders we're talking about their go-to market strategy we're getting to
00:54:38
talk to three or four customers i had founders who said you can't be in this deal if you want to talk to my customers and
00:54:44
that wasn't one founder multiple founders said if you want to talk to our customers um then you don't get an
00:54:49
allocation and i said okay the thing to keep in mind i won't do the deal but that was how dysfunctional this was
00:54:56
jamaa the thing to keep in mind is that all these late stage companies are mispriced doesn't matter whether you're the bottom decile or the top decile
00:55:03
you are massively mispriced and there needs to be some correction between 30 and 70 percent on valuation
00:55:10
how do you solve it i have a point of view on that actually because um so so look there's a major difference i think
00:55:16
between evaluation multiple collapse in the public markets for
00:55:21
surprise market it's gone down look the sas valuation multiples have gone down 70 80 percent there's no disputing that
00:55:29
look it used to be the the public markets were trading at 15 times arr for the median sas company
00:55:36
now it's 5.6 so yeah we're talking about two thirds seventy eighty percent
00:55:41
reductions if it happened in the public stocks it deserves to happen in the private stocks too much absolutely right
00:55:46
about that and a lot of people aren't recognizing that fact however here's the difference the median sas company is growing maybe
00:55:52
15 to 20 percent when you've lost 80 of your value and you're only growing 15 to 20 it's going to take you a decade to
00:55:59
grow back into your old valuation however good private companies not all of them but the great ones they're still
00:56:04
growing 3x year over year so if you're able to grow 3x year over year and you do it 2 years in a row you're 9x where
00:56:11
you were even if the ar multiple collapsed 80 you can still get an up round it's not
00:56:17
going to be the 9x up round it might be a 2x up round i know how that's mathematically true but
00:56:22
listen if you're a 100 million dollar arr business let's just say you were able to raise at 10 or 11
00:56:30
billion yes you're mathematically right that you know 100 million times 9 is 900
00:56:37
million but i think it's important to first say how many actual software companies are
00:56:42
there that generate a billion dollars of arr do you remember when salesforce first passed a billion dollars of ar we
00:56:48
thought my gosh and then they said so this is exceptionally rare error and i
00:56:54
think that it behooves people to understand that law of large numbers aren't often violated
00:57:01
and so you know before you go and do that simple math and convince yourself that it's possible maybe you should
00:57:06
actually no i'm not saying that to you saks i'm saying that to the founder or to the boards maybe you guys should actually just go in and have somebody
00:57:13
run a screen and say how many actual companies exist that have actually managed to generate more than a billion
00:57:18
dollars of ar especially in a moment where people are cutting back on spend how does that happen
00:57:24
so yeah look i agree getting from a hundred to a billion is really hard you know if you're good billion dollar
00:57:29
company's supposed to do because in this math they have to get to two billion dollars of ar to be worth 10 billion i
00:57:36
do think a lot of how do we do that how does the random fast company that you and i have never heard of
00:57:41
how do they generate 2 billion of ar i can tell you the handful of companies that generate 2 billion of ar there are some incredible companies today that
00:57:48
don't even yet you know like look at an incredible company like unity incredible
00:57:53
the backbone of all you know gaming and you know the move to 3d this year if they crush they'll do 1.3
00:58:01
billion incredible business it's an increase yeah it just went down 35
00:58:06
years went down 35 it's unbelievable it's trading at four times revenue guys
00:58:12
some of these things are hard to believe like open door has 2.3 billion in cash and a 3.7 billion dollar market cap
00:58:19
enterprise value 1.4 and i think they also have a couple of billion in real estate coinbase 6 billion cash 12
00:58:24
billion dollar market cap so i guess in this part in the discussion even with all these headwinds can we
00:58:30
give the protective mechanisms for employees because i again i just yes okay good good point let's do it let's do it when you start a company and
00:58:36
you're a founder you have you're taking the most risk you're the person with the idea
00:58:42
you should be justly rewarded for that the way that that happens economically in a company is you get
00:58:48
founder shares the basis of those founders shares are effectively zero
00:58:53
and you're able to do a bunch of structuring when you first start a company that gives founders specifically
00:59:00
some incredible tax advantages you can you know do an 83b election which is effectively you buying the
00:59:06
stock starting the clock on long-term capital gains etc etc then
00:59:12
you have stock that you give to employees they're one of two kinds non-qualified stock options and
00:59:18
incentivized stock options nsos and isos and you know those have different tax
00:59:24
treatments but again you know when you're a very early employee you get a mixture of these things also hugely
00:59:31
accretive it has a very low basis you're building value
00:59:36
but here's what people don't understand when a venture investor like myself or jason explain basis by the way for
00:59:43
people who are foreign the price of your stock is effectively
00:59:48
zero you know like a penny for it or something yeah like like the my stock at facebook costs like half a penny got it
00:59:54
you know whatever it goes public it's 15 20 you get the spread got it you get the spread and you pay long-term capital
01:00:01
gains on that if you've been able to not income yeah and and and shift it to long-term
01:00:07
capital gains okay so now saks or jason or myself come and invest in your company
01:00:13
what happens we actually don't get equity we don't get common stock we actually get a synthetic form of debt
01:00:20
called the preferred share okay and typically the way that it works is when we invest in a company and this
01:00:26
is how the entire venture ecosystem works we actually create what's called a
01:00:31
preference stack which means we get an instrument that is senior
01:00:38
to the common equity now what does that mean well it means that if your business goes out of business
01:00:44
we get our money back first we also get an interest rate and we're able to convert all of that at some
01:00:50
point the magical moment when a company goes public into common stock
01:00:55
and we give up our preferred rights and we now have the same instrument as everybody else when a company goes
01:01:01
public that's the typical mechanism why does that exist by the way the preferred shares may be explaining the why why do
01:01:06
vcs need that protection to be honest i don't know why it started but it's a historical artifact of you know the
01:01:13
1960s and 70s i think i know why it started okay so the the this got lawyered
01:01:18
because let's say you start a company and just to use some round numbers a
01:01:24
investor wants to give you 10 million to start the company and for 10 of the company 100 million valuation
01:01:30
if you didn't have preferred shares then the founders could basically on the
01:01:35
for the day after the money comes in could say hey we want to liquidate the company we decided we don't want to do this anymore and they own 90 of the
01:01:41
company and they could basically then distribute out the 10 million to all the shareholders and they would keep nine and one million would go back to the
01:01:48
investor so that's why lawyers came with this idea of seniority so that okay if
01:01:53
you disband the company with the investors money still in there it goes back first to the people who put in the
01:02:00
money that was the idea and well and the second piece was if the company gets sold for less than the cash put into it
01:02:05
at least the people with the cash and get their money out first right so if it sells for 10 million you get your 10 million back or 11 you get 1
01:02:12
million after that so let's just say jason does the first million so there now there's a million of preferred then
01:02:17
sax does the series a and he puts in 10 now there's 11 million of preferred even if it's at a much higher valuation
01:02:23
and then i come in and i give 100 at an even higher valuation so now there's a 111 million dollars of preferred shares
01:02:32
now if the company goes through all kinds of um complications and mess and
01:02:37
let's just say we have to sell it to somebody else for 200 million dollars well guess what happens the first 111 of
01:02:43
it comes back to myself jason and david plus interest so this is why venture investors have an incentive to pay and
01:02:50
set these crazy valuations because they don't really care what the valuation is as much as they care how much of all
01:02:57
this preference is building and do i rationally believe that the liquidation
01:03:02
value of the company is at least that much money so if i think that friedberg's company is worth at least
01:03:08
111 million dollars i'll do it and i add my hundred now why is this important for employees
01:03:14
before you join a startup especially in this moment i think it's very important for you to
01:03:20
understand how much money have they raised how much is this preference stack that
01:03:26
exists and do you believe that the company is going to be worth much more than that because that's the
01:03:33
only way that you're going to actually participate in the equity and we know now what the public markets
01:03:38
say so if you go back to that tweet you know if it's a 10 or an 11 billion dollar company okay well you need to
01:03:45
generate uh two billion dollars of revenue and if you're at 100 million that means you have to 20x the revenue
01:03:52
for the valuation to be worthwhile for you to believe that this valuation is real
01:03:57
so this is just a little guide for employees i just think it's very important that you guys start to do the math and start to figure this out ask
01:04:03
the hard questions how many shares are outstanding how many preferred shares what's the overhang
01:04:08
what's my strike price it's a preference stack yes you know how much is the total prep stack how much revenue are we
01:04:14
generating now you should go and do the work to figure out what the public market comps are
01:04:20
those are widely available hopefully somebody could actually just create a website that helps you do this but all of these things are going to be
01:04:26
very important for you otherwise what will happen is if you join a company in this moment at a fake valuation
01:04:33
and the valuation gets reset you can effectively assume your options are worth zero so if that was a important
01:04:39
part of how you made the decision to join that company you're being somewhat misled in a moment
01:04:45
like this and you need to have your own rational sense of what that company's worth conversely i think boards and ceos have
01:04:52
a real responsibility now to do the hard work of resetting this and explaining it to their employees if they want to retain them because in a
01:04:59
moment like this if you have evaluation reset you don't allow people to understand it and you don't figure out a way to allow them to participate in some
01:05:06
incremental way i think it's going to be very problematic for employee retention okay you know in those contexts look
01:05:12
there's a couple things that i always support you know if if you need to reprice the
01:05:18
options you know you can reprice the options and give employees the benefit of a new r9a so the company doesn't set
01:05:24
the option price that's set by an external foreign a audit but if that foreign ina goes down
01:05:32
because of these factors we're talking about you can basically the board can vote to reprice everyone's options so at least
01:05:38
they get the benefit of the lower explain what a 409 a is just broad strokes it's uh
01:05:44
basically when stock options are issued the law requires that the strike price
01:05:49
of the option be the fair market price and because of some accounting
01:05:56
shenanigans a while back that got companies in trouble it is now the case that companies don't
01:06:01
set don't determine their own fair market price they go out and they get some external auditor to do
01:06:08
a 409 a audit and then the foreign aid that gives you the fair market price and specifically it's a fair market price of
01:06:13
the common stock because what investors are buying is the preferred because of the dynamic that chamath is talking
01:06:19
about where the preferred gets paid back first the common stock is worth less per share
01:06:25
because it's got this overhang typically a fraction a fifth a tenth something in that range is typically so if the shares
01:06:31
were worth a dollar for preferred the fair market value of the common could be five cents 10 cents 15 cents
01:06:37
depends on if the company's going to run out of money how many months of runway they have are they profitable and so it
01:06:43
is a fair thing to do and but you have to know that in a down market like this if you have massive compression boards
01:06:49
need to look at that founders need to look at and say hey listen if the if the sas multiples come down so much
01:06:56
well our fair market value should come down that much the fair market value might be worth 50 less 75 percent less
01:07:01
correct sacks yeah i mean so so the way it works is that when a company ipos you get rid of all the different classes of
01:07:08
stock you know the everything basically the preferred converts to common in an ipo one class of shares yeah yeah maybe
01:07:14
you have like the dual stocks of the founder can maintain control but from an economic perspective you basically collapse into um common stock so when
01:07:21
you ipo common and preferred are the same and so economically they're converging to one
01:07:27
to one as the company gets more and more mature and heads towards an exit the earlier that you are the riskier the
01:07:35
company is the more that the prep stack matters the more overhang that creates
01:07:40
but the benefit to employees is it creates a larger discount on their strike price on the 409 a so that is the
01:07:46
offsetting benefit if the 499 a goes down because the market's changed then
01:07:52
the board can vote to apply a new 498 to the employees that's a beneficial thing to do for everybody
01:07:58
so that that's something you know i've always supported the other thing is that if you're in a turnaround situation where you're actually worried that the
01:08:05
pref stack is larger than the value of the company in other words more money has gone into the company than the
01:08:10
company may be worth at exit then what you need to do because then then there's nothing for the employees there's no
01:08:15
incentive anymore what you need to do is create a
01:08:21
basically an employee participation you create a corridor where you say okay 30
01:08:28
of any acquisition price for this company is going to go to the employees you created a management or employee carve out
01:08:34
really it should be an employee carve out not just management but all the employees of the company should benefit
01:08:39
uh from an acquisition and sometimes you'll see boards be either unrealistic or stingy they'll be kind of pennywise
01:08:46
and pound foolish they won't create the incentive for the employees to get that sort of over capitalized company
01:08:52
across the finish line and um you know it can be pretty frustrating to see when that when that happens it's a good time for employees
01:08:59
to understand this this is a giant reset that's occurring um i think there is some good news here
01:09:06
i think we have a lot more people who are going to go back to work because they need to um and that'll be good for monetary velocity fill these jobs 11
01:09:13
million jobs i don't know if we've ever had this i think it's a record the number of jobs we've had and we're bouncing along record low unemployment
01:09:19
those two things could be what saves us could save us during this recession and something distinctly unique about this
01:09:24
recession is job openings and low unemployment we've never had a recession like this so
01:09:32
that that's fascinating of itself but for employees and for companies the new discipline might be there's not going to be four or
01:09:38
five offers for every tech employee if people are going to cut 10 to 25 percent this is the contagion moment and i think
01:09:44
maybe just talking about layoff contagion in tech and how that works because facebook's on a hiring
01:09:50
freeze and you're starting to see the series bc companies all do 10 to 25 layoffs
01:09:56
uh uber dara said we're going to look at hiring as a luxury that's probably not going to happen
01:10:01
the only person who said they were going to hire into this was google sundar today said maybe as many as 12 000
01:10:08
people over the next couple years a couple thousand a year and apple
01:10:13
stunningly i don't know if you're watching this they have told people we're one day a week now two days a week
01:10:19
in two weeks and then by the end of this month may they'll be three days a week in the office mandatory the head of
01:10:25
machine learning said yeah that doesn't work for my team and they said okay and he said okay we don't have to do it and
01:10:30
they said no okay we accept your resignation so i think even the mighty apple with unlimited cash reserves are
01:10:35
saying you know what if we have to shed some people who don't want to come back to the office that's like a de facto layoff so maybe talking about this
01:10:42
contagion because if you're a company that doesn't lay off people you're going to look pretty weird in this market to your investors and they're going to be
01:10:48
wondering why aren't you laying people off go ahead i feel like an old guy now been working in silicon valley for
01:10:53
20 years 20 to 21 years and i remember like in one there was
01:10:59
kind of this period of time when there was a bunch of layoffs and a bunch of companies reduced head count and you know there
01:11:05
were other industries and people stayed employed and then in the years that followed like web 2 happened and people
01:11:11
kind of came back but what was interesting is like the tech industry which at the time was silicon valley but
01:11:16
is now fairly kind of you know um well dispersed attracted a lot of people from other
01:11:22
industries right it used to be cool to get a job in financial services or investment banking out of college and then all of a sudden working at a
01:11:27
startup was the cool thing and there are a lot of people that moved from new york in the last couple of years to sf
01:11:33
um leading up to the most recent crash after the pandemic um and so you know look there is an ebb
01:11:40
and a flow in and out of this industry i do think that this capital overhang however this quarter trillion dollars of
01:11:47
dry powder that's sitting in vc coffers um is going to be significantly stimulatory in a very good way um i
01:11:54
think it will create real jobs and and enable real progress it's not just about the companies that are on the brink of profitability or the companies that are
01:12:00
profitable trying to juice profits if you take a step back jake how you you said something earlier that i thought
01:12:06
was um kind of a really important statement which is like you're doing deals right you're making investments in
01:12:12
startups and i'm more excited than i've been in years this is my time this is this is your time it's time to go and so
01:12:20
i talked earlier about how the the capital stimulants that came out from the fed and
01:12:26
uh and the and the bond buying they were doing and so on led to an inflation and a bunch of assets and that capital
01:12:31
ultimately didn't find its way into productive assets but it's not about all of that capital finding its way into
01:12:37
productive assets if enough of it finds its way into productive assets productive assets meaning businesses
01:12:42
that create something of value for customers and make money doing so and as a result can grow and create new jobs
01:12:49
and create new areas of the economy if that happens enough times over there is enough growth in the economy and enough
01:12:55
new jobs that are created that really rationalizes all of the money that was freaking wasted on speculative nonsense
01:13:02
over the past few years and i think the fact that we've got a quarter trillion dollars sitting in vc coffers more than we've ever had that's a quarter trillion
01:13:09
dollars ready to fund the next generation of technology businesses that can build new jobs and create new areas
01:13:15
of the economy new areas of growth that we've never seen before and that's what's happened in the past how do you
01:13:21
think a person let's just say you're playing poker and you just get punched in the face
01:13:27
seven rounds in a row you're stuck three buy-ins how does that person make that good next
01:13:34
decision now i will i will tell you three stories from my last week because my last week has been filled with these experiences sorry go ahead
01:13:40
so let me let me just talk about the the the business of investing in the psychology of investing
01:13:46
so look at probably who has been the most incredible performer this year
01:13:52
is ken griffin in citadel and right underneath him is this guy izzy englander
01:13:57
who runs a place called millennium and then you know a close third would probably be stevie cohen
01:14:03
at sec now how do these guys run their business they have hundreds and hundreds of teams
01:14:10
investing in all kinds of different things and what they've figured out over time
01:14:16
is how to dial up and dial down the volume of who's performing and what
01:14:21
they have realized is that when you go through a pattern of losing money
01:14:26
it is very difficult for you to then make incrementally good decisions
01:14:32
and so they have a dynamic system that allows them to move capital away from those folks who
01:14:38
are psychologically not in a great place to do it to move capital towards other folks who are as a result they are
01:14:44
always winning and i just want you to react to that because i think there's one thing that
01:14:49
we can say oh venture is a special thing it's not like anything else i personally don't think so operating
01:14:55
across the entire life cycle and i think that there's something to be said and i saw it in 2000 folks who have
01:15:02
lost a lot of money make incrementally poor decisions i think why jason
01:15:07
is firing a little bit of a hot hand was he mostly let his companies get marked up and he was mostly frustrated the last
01:15:13
couple years in valuations early stage valuations lack of discipline he's operating effectively between slate
01:15:21
but i don't think it's a binary condition chamath um i think generally what you're saying is right i'll tell you the reaction i'm
01:15:27
seeing in the market one last thing to add to your thing and on top of that there are only seven or eight people who've actually made money in this
01:15:34
entire market the yeah stage investors had done well
01:15:39
early stage investors have done we returned our first fund that was nice yeah i'm in the black stacks you yeah
01:15:45
girly i mean what about all the other thousands of people that raises distributors people
01:15:51
don't distribute shares we've talked about this a couple of times tomorrow like it's so hard to make money and you when you have a chance to distribute i
01:15:57
feel really good about some of these companies um you know i i have a bloomberg at my desk and one thing that
01:16:03
i look at every now and then is the ownership table of some of these high-flying stocks and you'll see some incredible things
01:16:10
which is these folks have held on and they are holding billions of dollars
01:16:15
now of paper losses that they have to go back to their lp's and say heart conversation mrs foundation i know that you wanted to
01:16:22
fund cancer research you know i had nine billion dollars of gains and now it's two
01:16:29
oops so look i think um what you're saying generally is right
01:16:34
people are psychologically tainted when they take a big hit in the face everyone has this experience
01:16:40
my observation over the past two weeks i've seen a lot of pms and public
01:16:46
pms a portfolio managers as well as private vcs all react to me in the same way when
01:16:52
opportunities have kind of been discussed which is i'm sitting on my hands i mean there's a pm i saw this week
01:16:59
of uh you know anyway uh i would say i've never seen him jarred like i've never
01:17:04
seen him just shocked like we were talking about something that was so uh obviously up his alley you know such
01:17:11
a great fit for him but he is just not doing anything and because they're worried about
01:17:17
careerists now so no i mean i i had i had a crossover investor tell me tell me that look i think that things are
01:17:24
oversold right now this is an attractive time right because because look if i'm right
01:17:30
that they're oversold and it goes up great i make a little bit of money but if i'm wrong i'm not not just losing money
01:17:35
i'm risking i'm risking my career i'm catching knives yeah so why would i do that i'm just going to sit and wait i'm
01:17:41
the opposite right now yeah guys the same is true in vc so i had several vcs this week who kind of shared the same
01:17:47
point of view which is at our partnership meetings i don't know what you guys are doing saks at your fund but they're like at our partnership
01:17:53
meetings we just cannot align on whether or not we're paying the right valuation and so we're at a standstill we're just
01:17:59
waiting to see when the quote market settles out and then we'll make decisions because i don't want to be the guy in the vc context catching knives
01:18:06
but look that's a near-term psychological phenomenon i think the reaction to moth is everyone sitting on
01:18:11
their hands but over time it's not i just told you the data for the last 30 years only 22 out of 1300 funds have
01:18:19
returned more than 2.3 times a billion dollars it's not near-term that's not the point i was i was trying to make
01:18:25
earlier which was there's a quarter trillion dollars this is a macro point about the fact
01:18:30
that there is going to be funding available i it doesn't matter if these guys are going to make money or not or
01:18:36
they're going to make shitty investments or not there is going to be a stimulatory fact all you need is one of
01:18:41
the next trillion dollar mega caps to emerge from the quarter trillion that's sitting and there will be for the entire
01:18:47
industry to look fantastic and for that business to transform the landscape of some part yeah
01:18:57
we've never seen that in history we've never had this much dry powder sitting on the sidelines and this is where the
01:19:02
free money should go it should go to creating new companies that create new jobs and it is it's found its way there
01:19:08
in the trillions of dollars that have fueled crazy asset bubbles left and right some amount of it made its way
01:19:14
into funding the creation of new companies that are going to create jobs and that is the good thing of what's
01:19:19
happened over the last couple of years despite the asset implosion of all these bubbly things that that have happened
01:19:24
amazing shaman i wanted to answer your question what do you do if you get punched in the face seven times you're you're running bad in a poker game you
01:19:30
know if you look at phil hellmuth or other people who you know go through that variance i think where you take a break go for a walk
01:19:36
around the pool pick up your chips and you did pick a different small game one thing i like to think about is hey
01:19:42
i'm going to play a better play better cards to start your hand and maybe play in position and in in the analogy here
01:19:49
playing better cards you know backing better founders and better products and then playing a position knowing where in
01:19:55
the life cycle of a company value is created and that goes to valuation so i'm laser focused right now on just you
01:20:02
know world-class teams that are running their business as well and that i can invest in early and if
01:20:07
there are founders out there like who are trying to figure this out and they're not getting funding i think
01:20:12
looking i think you said this last week's actually maybe two weeks ago hey listen your last valuation last year is
01:20:17
a great valuation this year and if you had people who wanted to invest last year who couldn't get in
01:20:23
going back to your 30 million valuation last year and topping off 3 million with the people who couldn't get in and you
01:20:28
told them you know i'll come back to you when it's 90 million go see if they still want to put that bet in and then for the vcs are out
01:20:34
there in the early stage you know making bets on some 15 million sub 12
01:20:40
million dollar companies in the seed round um if if they're focused on customers and product
01:20:46
you know got a couple 100k in revenue it's i think it's a good bet uh and and i'm i'm going to increase our investing
01:20:52
in those type of companies under 20 million under 15 million focused teams who understand that the climate has
01:20:58
changed if you're not taking the medicine you have to sacs's excellent tweet storm
01:21:05
you're dequeued from funding i think it's very important that people understand what sac said if you do not accept the reality a vc who has lived
01:21:12
through one two or three of these cycles is going to disqualify you and they're not telling you why they're
01:21:17
disqualifying you it's just not a fit couldn't get my partners around it you know let's keep in touch let me know how
01:21:23
it could be helpful the other thing is an entire generation of investors have been coddling entrepreneurs
01:21:30
and in moments like this sometimes you need to actually have hard conversations and if you train yes i don't know how
01:21:36
you tell that entrepreneur listen you need to be actually five days a week in the office you need to do a 25 riff
01:21:42
you need to stop all the extraneous spend forget the exposed brick walls and the kind bars we need to get down to
01:21:49
just ones and zeros that's also an entire generation of capital capital allocators who don't
01:21:55
know how to do this job in a moment like this they've never had those conversations they've never had those conversations just to build on free
01:22:02
brook's point the idea that you you would be at a standstill about price in a moment like this to me is shocking if
01:22:09
i mean if i was an lp in that venture fund i would write it to zero there should be no intellectual
01:22:16
stance still whatsoever in a moment like this right yeah obviously we're still investigating what the prices are yeah
01:22:22
we're still investing it's just that lower valuations there should be no stand still exactly this is the time to
01:22:28
invest sex right i mean yeah i want to say something sort of positive because a lot of founders watch the show
01:22:34
it's like look what jason said if you need to accept reality and if you don't you're going to have a bucket of you
01:22:40
know very cold water dumped on your head when you go out and fundraise and realize that you're not going to make it and then you know all of a sudden you're
01:22:45
going to be packing up shop very quickly so you got to get you got to get a reality check and
01:22:51
understand but look great companies are built during downturns you know paypal was built during the dotcom crash
01:22:58
uh my company yammer was built during the great recession google uber totally i mean the list goes on and on so
01:23:04
downturns are great times to build companies because the war for talent subsides so it's so much easier to recruit people there's a lot fewer
01:23:11
competitors getting funded so there's way less noise in the ecosystem the only thing that gets harder is fundraising so
01:23:17
you need to make sure that your money lasts you do the right things you focus on business fundamentals you don't dq
01:23:23
yourself david and if you do that you'll be fine you just brought up something incredible i remember we raised money
01:23:29
from microsoft at a 15.3 billion dollar the great financial crisis took hold
01:23:36
and marked his credit reset the valuation we were already profitable so we didn't
01:23:42
necessarily need to raise that money but we i think we raised a billion dollars at like a nine billion dollar valuation
01:23:48
so we took a you know thirty three forty percent haircut a down round facebook had a down round we patted our balance
01:23:55
sheet and we said we are now going to go and crush and to your point we were really able to compete much more
01:24:00
effectively coming out of the gfc against google for talent and against everybody else in that moment yeah and
01:24:06
so if if this is what people like zuck are willing to do you have to really hold um people's feet
01:24:13
to the fire for founders who are not him what is the fast doc founder willing to do you know like shut
01:24:20
it down like like literally there's some founders i find this very disturbing but there are some founders who are so
01:24:25
unwilling to make the cuts or take the medicine that they would rather run the [ __ ] car into the wall then hit the brakes like hit the [ __ ]
01:24:32
brakes save your company live to fight another day if you have six months of runway get to 12 and then try to lift
01:24:39
another raise your prices you're totally right every single company that hits the wall and goes out
01:24:44
of business that didn't do a round of layoffs 12 months before was asleep at the wheel
01:24:50
but they were just like testing and driving they were texting and driving where was the round of layoffs a year before they ran out of money that at
01:24:57
least gave them more runway they didn't even do it they just assumed they could go david if you think about it your series
01:25:03
your seed round was hard getting into y combinator was hard you're serious a okay it was it was hard you had to do 25
01:25:09
meetings but you got a term sheet your series b you had five people offer you term sheets your series d
01:25:14
c and d were people begging you to take their money and saying name a price so what does that founder think the next
01:25:21
round of funding is gonna be each round became less work and higher valuations and you know what a generation also
01:25:28
not all founders but there's a group of founders who became better at selling vcs on investing in their company than
01:25:35
selling customers on buying their product you have to take the same focus you had of selling people on buying
01:25:42
shares in your company and put that into your product the actual service and raise your prices so many people are
01:25:47
charging so little for their sas product or software and they're like i can't make this business work and we say to them if you doubled or tripled your
01:25:53
price would you lose what percentage of customers would you lose and they say we'd lose like 10 and i'm like
01:25:58
did you just you have a million in revenue 2 million 10 off 2 million
01:26:04
you've got 1.8 would you rather make 800 000 more and be break even right now and they're sometimes founders just have this
01:26:10
amazing moment where like oh yeah i guess we could charge more and if we lost some customers that wouldn't be the end of the world and we'd be profitable
01:26:15
i think this speaks to the fact that you know it takes a very specific skill to be a very good founder
01:26:22
you need a level of intellectual curiosity you need some some moments to listen but at some moments to know just
01:26:28
when to do what you feel is right but it takes a lot of skill to be an investor and i think we've glossed over
01:26:33
how hard that business is as well because the reality is if if if michael moritz were to tell you that you'd do it
01:26:39
you'd be hard-pressed to not to not say yes of course if early told you to do that you would do it because you know
01:26:44
these are these are sort of the big the big names in our industry but the reality is the fact that it's
01:26:49
not happening also speaks to the fact that there's probably there shouldn't be a quarter trillion dollars of funds that
01:26:55
are probably stranded in the hands of really inexperienced allocators um who
01:27:01
are going to light it on fire for the most part and they're not going to have the courage to sort of lead these
01:27:06
see what happens all you need is all you need is one everybody should think about what i
01:27:12
don't know how you phrase it to founder sacks but i say to them when i invest in their companies listen whenever things
01:27:17
get really hard and you have a conversation that is the hardest conversation that's making you the most nervous that's making you stare at the
01:27:23
ceiling and grind your [ __ ] teeth to your gums i want you to just call me and i can tell you like i you know i'm not
01:27:29
speaking out of turn here but you know travis called me once or twice on a saturday and said hey we're struggling with x what do you think and travis knows how
01:27:36
to run a business a thousand times better than me but being a sounding board and giving your founders permission to come to you when things
01:27:42
are [ __ ] up is critically important as an investor and being able to have it intellectually honest to your point
01:27:47
jamal discussion about the hardest issues is really what the job is in my mind
01:27:52
what is going to send this company off the rails what is the big fear you have and let's just put it on the table and let's as as
01:27:59
travis would say let's have a jam session let's jam on that until we solve the problem so if you're suffering out
01:28:05
there you're scared you know there's got to be an investor in your group who will have a candid discussion if i had to give a punch list
01:28:11
of things if i was a founder right now here are the things that i would do is i would sit down and really look at your
01:28:16
growth and your burn and have an honest conversation with your co-founder or with one or two of your trusted board
01:28:22
members and really say what is the real evaluation of this business today and what could it actually be and if there's
01:28:28
a big gap between that and where you've last raised money the right thing to do is to think about
01:28:35
in one bucket resetting the valuation in a second bucket making your employees whole and in a third bucket managing
01:28:42
your burn so that you extend your runway i think if you could do those three things and take the hard medicine now you will
01:28:49
be much better off for it you'll be appreciated by your employees and you'll
01:28:55
have shown some real metal um in a real crucible moment to use a sequoia phrase
01:29:00
how do you guys think the market's gonna settle out you have any predictions on the bottom i will tell you a statistic i
01:29:06
think michael bury put this out yesterday he did not um he deletes his tweets every day
01:29:12
um very interesting character by the way but um he pointed out how from top to bottom
01:29:19
uh during the kind of o2 era 01 you know 2000 era and then during the 2009 era uh
01:29:26
you know kind of those those big drawdowns in the market he looked at companies like microsoft jp
01:29:33
morgan um i forgot which others but highlighted that you know on average it took six
01:29:40
times their total shares outstanding for them to go from top to bottom meaning that the shares ultimately
01:29:46
turned over 6x the total you know diluted shares out and so far in those stocks we've only
01:29:53
seen half of the total shares outstanding turnover since peak so his and he's been making this case
01:29:58
for you know kind of a few days in a few weeks now which is like you know the dead cat bounce day where the market's
01:30:03
going to be tanking for quite a while and these days that are big updates everyone's trying to call the bottom he's like no this is the dead cat bounce
01:30:09
moment and he's like if you look at kind of the structural rotation that's necessary for these markets to
01:30:14
ultimately find their bottom you know we've got several multiple still to go with respect to volume that needs to
01:30:20
trade before you find what the true market bottom is so you know it was a really interesting
01:30:26
kind of insight this kind of statistical insight that he pulled together and put on twitter i wanted to see if you guys
01:30:31
kind of think that that might be the right way to think about it and how you react to you know these conversations around where's the bottom going to be
01:30:37
can i just pull up this one chart because it kind of speaks to this so um this is cpi inflation versus the fed
01:30:43
funds rate so if you look at this it goes all the way back to 1954
01:30:48
i shared it with you guys in the chat the the two have moved more or less in lockstep with each other
01:30:55
which makes sense because the fed raises the fed funds rate in order to combat inflation so fed funds and inflation
01:31:02
sort of move in lockstep if you look at what's happened over the past year these two things have moved violently
01:31:07
out of sync with each other you have inflation now going all the way up to eight percent meanwhile the fed funds rate's only down
01:31:14
at like one percent even with all the rate hikes and the talk of rate hikes that we've had
01:31:20
we're only at a one percent you know uh fed funds rate now the expectation is it's gonna go
01:31:26
higher the ten-year table is over 3 but the point is the fed is in a really
01:31:32
tough spot here because it feels like we're going into recession which would normally mean you cut rates but then
01:31:37
you've got inflation demanding that we jack up rates far more and i think this is the problem
01:31:44
and this is what's going to be very tough about our current situation is if we go into recession over the next six months what does the fed do about that i
01:31:51
mean they don't really have much dry powder here in previous recessions like the gfc and 08 i mean interest rates
01:31:57
were around five percent so when they slosh them to zero they had some serious you know that was some serious relief
01:32:03
here you're at one percent what do you do you drop that to zero and then meanwhile inflation's still rampaging at
01:32:08
five percent this is what's so hard about it then look at this other chart which is this came from a blog
01:32:15
a blog post called the most reckless fed ever so in this most reckless fed ever
01:32:20
they basically just took the fed funds rate and subtracted inflation to get the real fed
01:32:26
funds rates the fed's funds rate debt of inflation and what you could see here is that starting around
01:32:33
2018-19 the real fed funds rate started going negative and then very very negative to the point now where it's
01:32:39
basically a negative seven percent so you know why is that because the fed waited way too long
01:32:46
to basically take away the punch bowl and start reacting to inflation you had powell say a year ago that inflation was
01:32:53
transitory and then they didn't react to it until the end of the year they should have stopped the qe right then and there
01:32:59
and then gradually started raising rates instead of these violent moves that we've had this year that are plunging
01:33:05
the economy into recession that have caused the stock market crash now what did powell just say a week or two ago he
01:33:10
said he doesn't see a risk of recession on the horizon it's like what are you smoking i mean this is just like his
01:33:17
inflationist transfer comment a year ago you're wondering like do we have better data than the than the fed chair does
01:33:23
because from where we're sitting we're seeing a stock market crash a panic and a recession and he doesn't even see it
01:33:29
it's like denial is not just a river in egypt this is crazy look i mean we call it a
01:33:34
crash but you know some people might just say that investors are violently reacting uh to the shifting tides on
01:33:41
capital availability but i will tell you i'll say this one more time because i think it's so important um and it's my
01:33:47
kind of prediction of the week i really think we're going to run into a consumer credit bubble here
01:33:54
i do not think that consumers are going to slow down their spending or change their lifestyle as quickly as investors
01:34:01
are changing their investing style we have seen investors in public markets and private markets take massive
01:34:06
corrective hits this week and last week and they're changing their behavior and some of the stories we share today but
01:34:12
consumers are taking on more credit they're opening credit cards they're taking out bigger loans prices are going
01:34:17
up 10 year-over-year for them and so the concern is if we actually do hit a recession and we don't see real wage
01:34:23
growth and the consumer credit bubble continues to grow we're going to face a credit crisis
01:34:28
and call it nine to you know nine months to a year where we're all going to wake up and be like wait a second how are
01:34:34
consumers going to be able to afford all this credit very i don't know how you pay i don't know end of the great resignation that whole
01:34:40
concept of like fun employed and i'm going to flip nfts and i'm not going to go to work that's out the window so
01:34:47
we've been enjoying it if you're going to need that there are there are more shoes to drop here and i think consumer is one of them and maybe
01:34:54
there's systemic risks in the system that haven't been flushed out yet and meanwhile you've got a fetch chair in
01:34:59
denial about what's happening and you've got to present the united states sue's more focused on what's happening in ukraine and what's happening in the
01:35:05
united states we are let we have tweedledee and tweedledum on this case biden and powell are going to go down as
01:35:12
the worst president and fetchers of all times no it is it is like the anti-reagan volcker combination i mean
01:35:19
they've caused this problem so first of all that's a long i don't know if i agree it's a longer conversation i gotta
01:35:24
run but yeah like you know what i think we all we all want to blame someone the reality
01:35:30
is there was a massive leveraging that happened going into 2008 and we got to work it out we thought we were delivering and i don't think we've been
01:35:37
delivering since 2008. and all of a sudden the chickens coming home to roost or whatever the term is and we're all
01:35:43
sort of waking up to the fact that wait a second flooded this system with 10 trillion money in the last two years
01:35:48
that's the cause it's not and more recently consumers at all 14 years ago it's over 14 years ago
01:35:57
austerity measures cycle here go if you look back through time roughly
01:36:02
if you look at like the average mean pe for the s p 500 it can go down to as low as 3 000.
01:36:08
it could but i think the reality is there's a fed put somewhere in between here because you know um if we see the
01:36:14
credit markets really seize up which we would if the equity markets continue to retrench um the fed will be
01:36:20
forced to step in with liquidity and we back to where we were before so you know i actually think we're probably
01:36:26
close to a near bottom ish here 3 800 ish in the s p 500 you're actually
01:36:32
starting to see some of these early green shoots of a market bottom what are those it's
01:36:38
when the most heavily shorted stocks start to rip up you know sort of the
01:36:43
gain stop gamestop like rallies and you're seeing that actually today so it's a it's a really interesting day
01:36:49
when the market is roughly flat slightly down but some of these companies you know
01:36:55
percent square five six percent five percent even lift went up five percent so i this
01:37:02
is the battery there was definitely something excellent on the bottom yeah there was so much panic selling yesterday that the
01:37:07
market's bouncing up from that look the market is a leading indicator not a lagging indicator and so it's it
01:37:13
adjusts first and then the real economy adjusts after that and the risk right now is the stock market is telling us
01:37:19
something about where the real economy is headed and the problem is that the fed and the central government don't
01:37:24
really have the tools to fight the recession because interest rates are already so low and you know buying already spent all
01:37:30
the money i mean they broke the glass in case of emergency last year they spent that last two trillion dollars of
01:37:36
emergency relief when look larry summers told him they didn't need to do it remember that larry
01:37:41
summers told him it would lead to inflation nobody i know no one wants to listen to larry summers he's like one of those guys you never want to know this
01:37:48
is correct but larry summers was correct the administration did not listen to him larry who i know very well and a wife
01:37:55
who who i love uh is like girly as well he's he's generally right in the end and so i would just kind of yeah you know he
01:38:01
was right i mean we do need to get back to the clinton you know moderate like balance the budget stop
01:38:07
spending some austerity measures like we can only work our way out of this and i think what we're going to learn from this is the concept of free money and
01:38:14
printing money is not sustainable and the concept of americans not going to work is not going to make the economy
01:38:20
that americans want to live in i know this sounds [ __ ] crazy but if you want to
01:38:26
spend money and you want to enjoy life you got to work you can't we can't have
01:38:31
this kind of labor participation we can't have people flipping nfts for a living that's not work
01:38:36
yeah you're right jason you're right about that i saw this thing where um there's a there's a new product
01:38:42
implementation on airbnb that allows you to kind of like you know search by campgrounds or search by castles or
01:38:48
something it's my vibe it's vibe search and and uh
01:38:54
it's it's a perfect encapsulation of this moment where there are folks who have all of this flexibility they've
01:39:00
never enjoyed before that their mindset you know especially if you're like a social striver like you can signal
01:39:07
that you're different from everybody else by living this lifestyle but that works in a in a world where there's lots
01:39:12
of free money and when that free money gets taken away i'm not sure that you're renting castles to spend a week here and a week there
01:39:19
well i mean we all want to talk about ubi i think it's a very virtuous signaling thing to do and it's a very like world positive
01:39:25
thing to do oh there's gonna be so much money that we can just drop it from the heavens and everybody's gonna get a
01:39:30
private jet and everybody's gonna get to flip their nfts and your board apes gonna become worth a million dollars
01:39:35
your bitcoin's gonna be a million dollars each this is not reality folks value is created when you make stuff in the world when you write code when you
01:39:42
build companies when you go to work but it's going to take a long time i mean at some point maybe we'll have some
01:39:47
energy source and and you know robots building everything for us but we got a wrap here we'll see everybody at the all
01:39:53
summit uh there'll be uh a bunch of stuff dropping do just a couple of programming notes please please please
01:39:58
there are no more tickets up do not try and crash the party there's gonna be security there everybody with a badge we're gonna be checking the badges jim
01:40:04
off everybody's got a photo on their badge please don't bring a plus one and please please please please do not try
01:40:09
to crash thank you love you i love you talk to you soon everybody we'll see you next time on the all-in podcast bye-bye
01:40:17
let your winners [Music]
01:40:26
and they've just gone crazy with it [Music]
01:40:49
one big huge orgy because they're all just useless it's like this like sexual tension that they just need to release
01:40:54
[Music] your feet
01:41:05
[Music]
