E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

00:00:00.400 | When are you coming to Miami? Are you there already? I'm here. I just got here. Oh,

00:00:04.160 | cool. Come tomorrow. We'll have a big weekend. I mean, you get a ride on someone else's plane.

00:00:08.000 | Mine's been repossessed. You can give me a ride. I'll have mine for at least another couple weeks.

00:00:14.800 | I love my commercial. You know, I left my commercial. Every fan of all in this weekend

00:00:21.600 | startup stops me and takes a selfie. I cannot tell you the love in Miami. I sat down to have

00:00:26.800 | a meal outside. Were you by yourself or you were by myself? It's 1130. It's like, Hey,

00:00:31.760 | everything's closed. There was this one little place that's open. I kid you not. I sit down,

00:00:36.480 | two guys come over. We love the pod and I'm trying to eat my meal. And they're asking me

00:00:41.120 | questions and they want to know where's Friedberg's introduction. And I'm like, it's so

00:00:45.840 | bad. Well, I showed them the video and they were in stitches. I was like, guys, there's only like

00:00:52.400 | five people have seen this video and now it's you too. So there's seven people. They were so

00:00:56.560 | aware of it. They were like, oh, we're going to be there. They were like, oh, we're going to be there.

00:00:56.720 | They were like, oh, we're going to be there. They were like, oh, we're going to be there. They

00:00:56.720 | were like, oh, we're going to be there. They were like, oh, we're going to be there. They were like,

00:00:56.800 | oh, we're going to be there. They were like, oh, we're going to be there. They were like, oh, we're

00:00:56.800 | going to be there. They were like, oh, we're going to be there. They were like, oh, we're going to

00:00:57.200 | be there. They were like, oh, we're going to be there. They were like, oh, we're going to be there.

00:00:57.200 | We should never have cut that. Well, we could play it now. It was good. Thank you. It was

00:01:01.200 | incredible. I say we just we just throw to it right now. Is that a good plan? Maybe. And here we go.

00:01:07.040 | In three, two. This is like the nerd Olympics for Friedberg. He's like nerd stretching. He's having

00:01:13.680 | a nerd freak out right now. You know what I'm most excited about that? I don't have to listen to

00:01:18.640 | Jason's interest. Oh, my God. You're on like nerd role. That's like nerd Adderall. Take it easy,

00:01:23.680 | Dungeon Master. This guy hasn't been so happy since he rolled a 30 on the 30 sided die. Jesus.

00:01:31.680 | Oh, my God. I've got a plus seven. Where does that come from? Where? Oh, from Dungeons. I've

00:01:36.560 | never played. Oh, really? You were playing League of Legends. OK. OK, I'm going to just apologize

00:01:42.720 | in advance to the audience. I'm going to apologize in advance to the audience. I'm going to apologize

00:01:43.600 | in advance to the audience. OK, here we go. No interruptions, please. Thank you.

00:01:46.240 | In the voice of J. Cal. Hold on. Is there a frog in your throat? What's going on there? Oh, God.

00:01:55.040 | He's super loud and has nothing to say, but we keep him around because he has a producer we don't

00:02:02.240 | have to pay. One good investment in his 30 year career, but he wrote a book about it and tells all

00:02:07.920 | the VCs to kiss his rear. He's one of a kind will always come to your rescue when you're in a bind.

00:02:13.520 | He calls himself Mr. Calacanis, but we all just call him an anus.

00:02:17.600 | Jason Calacanis, everyone. Jason, welcome to the show.

00:02:20.160 | Great to be here. Great to be here. Thanks for the kind intro.

00:02:22.640 | Good to have you. His words are incendiary and divisive, but only if you identify as

00:02:28.160 | a gender fluid progressive. Otherwise to you, he's a scholarly god fighting the great war

00:02:33.520 | against the rise of the woke mob. Hey, pal, it's the 17th most important guy from PayPal.

00:02:39.040 | He's back with the same political speaking tracks. The one and only Mr. David Sachs.

00:02:43.520 | David, welcome to the show.

00:02:44.400 | Thank you. Thank you. I think we need to work with some of your rhymes, but.

00:02:47.120 | Yeah, we might need to tighten that up and workshop it. Yeah.

00:02:49.440 | Keep going. Maybe it gets better.

00:02:52.880 | He contradicts himself twice a week, but we're still enraptured because his mink sweaters are

00:02:57.760 | so sleek. His monologues last most of the show, but he never talks anymore about IPO 2.0.

00:03:03.920 | As he'll tell you over and over, he drinks the world's greatest wine,

00:03:07.360 | but commenting on other topics is a bit below his line. He's Silicon Valley's most renowned dictator,

00:03:12.960 | our friend, the verbal masturbator, Chamath Pali hot potato. Chamath, welcome to the show.

00:03:18.480 | Great to have you here.

00:03:20.080 | Wow. That was brutal.

00:03:21.280 | God.

00:03:21.840 | Oh, I'm not done. We're an increasingly notorious whack pack litigated by David Sachs,

00:03:27.440 | emceed by an investor hack and soon to be canceled because of the performance of Chamath's latest

00:03:32.080 | back. We are the all in pod and you'll never get this 90 minutes back. I'm the Sultan of science

00:03:38.480 | with an IQ of 103. I'm taking the throne as this podcast's new MVP.

00:03:42.480 | New MC. Thank you everyone.

00:03:44.640 | I'm going to have to, man. I don't want to read the YouTube comments on this one.

00:03:48.720 | All right. We'll scrap it.

00:03:49.680 | No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no,

00:03:53.520 | you can't spike this.

00:03:54.800 | Sachs commentary.

00:03:57.040 | Well, I mean, uh, it, it felt a little bit scorched earth to me.

00:04:00.720 | Yeah.

00:04:01.440 | Um, I thought mine was fine, but, uh, I think these other guys are a little bit shell shocked

00:04:06.000 | right now.

00:04:06.400 | I went a little hard. I actually wrote this for your, uh, for your birthday. And then I decided,

00:04:12.400 | to throw it in.

00:04:13.120 | Okay. Well,

00:04:14.080 | I guess maybe we save it for your birthday.

00:04:15.600 | Yeah. You may want to do something funnier for my birthday.

00:04:18.240 | I'll be back next week with some actually funny intro material, apologies to the audience.

00:04:23.680 | All right. All right. Listen, stocks and crypto have

00:04:42.320 | plummeted tiger coin based Shopify employee, RSUs meme stocks. It's all gone. Everybody.

00:04:47.040 | Uh, the world's over.

00:04:48.560 | Uh, so, uh, where do we start? You guys want to start with crypto stocks?

00:04:56.880 | Where do we even begin?

00:04:59.840 | Should we talk about what happened when rates went to zero

00:05:03.600 | and how financial assets inflated? And I think we talked about this during the pandemic,

00:05:09.040 | right? When the pandemic was starting to moth. I remember an early,

00:05:12.240 | show we did where you and I talked about how it felt like we were going into like the roaring

00:05:17.680 | rapids, right? At like magic mountain or Disneyland. I kind of described it like that.

00:05:21.200 | Like, it feels like you're going to a rushing river

00:05:22.960 | and there was just all this capital flowing so fast, like overnight. There were, it was like,

00:05:29.120 | all of a sudden we went from this like COVID standstill to, oh my God, this rush of capital.

00:05:35.040 | And you could feel it, right? All the businesses were all involved in,

00:05:38.080 | started getting term sheets and doing deals. And there was SPACs and transactions.

00:05:42.160 | It was an incredible rush of capital. And so when, you know, the central bank made interest

00:05:47.440 | rates zero and then banks could lend out money at close to zero and still make money.

00:05:52.880 | And then people could lever up assets and then those asset values inflated and they could borrow

00:05:58.000 | more and keep, you know, investing in more and buying more ultimately, you know, we had bubble

00:06:03.600 | after bubble. And, uh, we saw a lot of things that, um, may not have necessarily been valued

00:06:10.080 | based on a historical setting. But, um, you know, we saw a lot of things that, um, you know, may not

00:06:12.080 | have necessarily been valued based on a historical setting. So, um, we saw a lot of things that, um, we

00:06:12.320 | multiples or comparables or cashflow, but really it was just about, Hey, if I invest X dollars and

00:06:17.680 | someone else is willing to pay Y dollars for this asset tomorrow, I'm gonna make money.

00:06:22.480 | And, you know, suddenly the frigging vacuum came out, which was like, let's take all that money

00:06:27.200 | back. And so when interest rates got hiked, it was like all that money's coming back out of the

00:06:31.040 | system. And it was like this wishing sound, like the airlock got opened and all the cash came back

00:06:36.560 | out. And as a result, the bubbles just all deflated. And it happened so quickly that it's,

00:06:42.000 | what was crazy to me was that for so long, everyone's been talking about how everything

00:06:46.800 | feels so overvalued. So everyone was just waiting for the moment when the wishing sound began,

00:06:52.720 | and then everyone laid off all the risk and it happened so fast and it's still happening.

00:06:56.880 | People are still trying to unwind the things where they're, you know, in huge positions, but,

00:07:01.120 | uh, you know, I think it really is just, uh, it really is this, uh, this kind of incredible

00:07:07.520 | moment where you see all the money get pumped in and it all gets rushed out just as fast.

00:07:11.920 | Um, and I think we're all kind of like, you know, in awe at how quickly the response has been.

00:07:16.960 | So maybe some context is helpful from 2018,

00:07:21.600 | up until the beginning or not really the beginning of this year, but probably Q4 of last year,

00:07:27.920 | you could have calculated an incredibly tight correlation between

00:07:36.960 | the stock market and the fed money printer. So the fed is

00:07:41.840 | in control of how they can introduce dollars into the economy. How do they do that? They literally

00:07:48.080 | manifest money. They don't actually technically print it, but let's just assume for these purposes

00:07:52.800 | that they actually do print it. And they literally take that money and they enter the market and they

00:07:57.920 | buy things with it. And they're giving you this newly created money that they just created out of

00:08:01.920 | thin air from 19 or from 2018, up until about Q4 of last year, there was a 0.92 correlation between

00:08:11.440 | that and the $1.9 billion. So that's a correlation between the $1.9 billion and the $1.9 billion.

00:08:11.760 | And the S and P 500 going up. What does that mean? So if you look at a negative one correlation,

00:08:18.480 | that means that if something goes up, this thing goes down dollar for dollar, that would be

00:08:24.720 | perfectly negatively correlated. If you look at something that has a zero correlation, that means

00:08:29.920 | it's just random, whether whether one thing goes up and down has no influence on the other. But a

00:08:35.280 | point 92% correlation effectively means that for every dollar the Fed created, the stock market was

00:08:41.200 | going up. And that's what we're looking at. And that's what we're looking at. And that's what we're

00:08:41.680 | looking at. And that's what we're looking at. And that's what we're looking at. And that's what we're

00:08:41.920 | looking at. And that's what we're looking at. And that's what we're looking at. And that is literally

00:08:43.520 | what we had up until November of 2021. Since the beginning of this year, till about yesterday,

00:08:51.840 | so I think the number is still going up, probably by at least by a trillion dollars,

00:08:56.080 | we have destroyed collectively as a society. 35 trillion dollars in global market value.

00:09:03.920 | Now, to give you a sense of that, that's 14% of all global wealth,

00:09:11.600 | that has been destroyed in basically five months. And for reference, in 2008, when we went through,

00:09:18.320 | you know, a cataclysmic shock to the system that threatened the banking infrastructure of America,

00:09:23.840 | and a potential contagion to the world, that destroyed 19% of the world's global

00:09:29.360 | wealth at that point. So, you know, we're approaching some really crazy heady moments

00:09:36.400 | in time, where in terms of the market correction and the value destruction, the difference

00:09:41.520 | here is that the last time around, it was really about a handful of financial institutions,

00:09:47.680 | and some very specific assets, right? Mortgage backed securities, you know, some parts of the,

00:09:55.200 | of the credit market, and then a bunch of financial stocks. And that was largely it.

00:10:00.000 | This time around, as you just said, Freebrooke, it's literally everything that's getting smoked,

00:10:05.360 | there is not a place that you can effectively hide, that has been safe, crypto smoked, the

00:10:11.440 | credit markets, totally frozen, the equity markets, Nasdaq is in a bear market, the S&P is basically

00:10:18.160 | flirting with a bear market now. And I don't really see any end in sight. Meanwhile, we're

00:10:24.320 | waiting for CPI to downtick inflation hasn't really done that. It looks like consumer price index,

00:10:30.880 | how much stuff cost. So that's taking a lot longer than we thought to sort of roll over. Separately,

00:10:36.800 | jobless claims are now starting to tick up, which means that companies are beginning to affect layoffs,

00:10:41.360 | because they feel this pressure. So now you're going to see an unemployment rate that starts to

00:10:45.440 | go up. And then meanwhile, we're fighting a proxy war in the Ukraine against Russia to the tune of

00:10:51.680 | about, you know, $40 billion every sort of month or so when we open the paper and decide to read

00:10:57.040 | about it. So you put all these things together, it's not clear that there is the momentum to

00:11:02.400 | create a market bottom,

00:11:03.440 | real estate, Chamath, if you look at it, was a major

00:11:06.480 | compression in 2008. Real estate held up is holding up seems to be holding a little

00:11:11.280 | bit I don't know how long that's gonna last with mortgages going up. So when you were talking about

00:11:14.880 | all the different categories, I was like, that's the one category that I guess hasn't fallen yet.

00:11:18.880 | Sax, what's your take on this? Yeah, I mean, look, we're in a stock market crash that

00:11:23.120 | I think over the last week sort of became a panic. I mean, I think now there's panic selling going on.

00:11:27.200 | That's not to say that it's all oversold. But certainly there are names now that are

00:11:30.960 | starting to become screaming buys. But nobody has the capital to buy. I mean, it's easy to say,

00:11:37.040 | you know, in theory that you should be greedy when others are fearful and fearful

00:11:41.200 | when others are greedy. The problem is that everyone's already fully deployed. And then

00:11:45.360 | when the stock market crashes, they got no cash left to buy up new names. And, you know, that's

00:11:49.360 | one of the things that you've noticed in this downturn, and I'd say especially with crypto,

00:11:53.920 | is with all the other crypto downturns, there were always, you know, the crypto accounts saying

00:11:58.960 | hodl or buy the dip or, you know, they had the laser eyes going. I don't see any of that right

00:12:04.080 | now. No, you know, your capitulation fear. Exactly. Yeah, exactly. So this is just a route across the board.

00:12:11.120 | I agree. It's every asset class. I think home prices that's coming, Jason, because, like you

00:12:16.640 | said, mortgages are going up. Inventory is going up. So that's a leading indicator. People can't

00:12:22.960 | afford the same mortgage they did before because rates are going up very fast. So, you know,

00:12:29.200 | sellers are gonna have to drop prices. And until they're willing to do that, the inventories go up.

00:12:34.800 | That's a little dance that happens in real estate is the sellers don't want to accept

00:12:38.000 | reality and they don't have to sell because they're living in it, as opposed to the

00:12:41.040 | their crypto holdings, which they're not living in and they're not getting value from.

00:12:45.120 | And frankly, I think the consumer in general, that's the next shoe to drop here,

00:12:49.840 | because right now it's been you had this sort of financial correction. You had this massive

00:12:55.280 | asset inflation and now that the sort of the air has come out of the balloon. But the consumer

00:13:01.040 | has generally been holding up pretty well. Obviously, we had unemployment near 3%, very low,

00:13:07.120 | although the labor participation wasn't great, but the consumer was doing fine. It was sort of

00:13:10.960 | holding up the economy. Now, I think you've got a bunch of different factors that are going to

00:13:15.200 | really hurt the consumer over the next several months. Like you said, interest rates going up

00:13:19.200 | means that home loans become more expensive, car loans, any other personal consumption loans go up.

00:13:26.560 | Credit card debt now has all of a sudden skyrocketed. So there's an article in Axios on

00:13:32.320 | this, that the amount of consumer debt is surging. And to this highest level of increase in over

00:13:40.880 | a decade. So consumers are turning to plastic to cover the soaring cost of everything. And then

00:13:45.840 | because of inflation, that wages in real terms fell 2.6% over the past year. So in other words,

00:13:54.000 | inflation, when you say inflation, so if you're to look at wages in real terms,

00:13:57.840 | people are actually making less money, you give somebody a 10% raise 8% inflation, it nets out to

00:14:03.520 | two. Well, no, you're giving them a 6% raise. Oh, I'm sorry. Yeah. Or like, like a 5.6% raise.

00:14:10.800 | raise or something like that against 8% inflation. And net net third down 2.6%.

00:14:15.280 | They're down to not up. Yeah, in purchasing power.

00:14:18.080 | Exactly. In spending power. sex's point is like, I mean, the number was 60 billion of new consumer

00:14:24.800 | credit last month, which is like something we haven't seen in a very long time as consumers

00:14:29.120 | try and bridge this gap to afford the things that they've gotten used to spending money on.

00:14:32.960 | To jump up like that just indicates that we may be in the beginning of a consumer credit bubble now,

00:14:37.760 | which is scary, right? This is this is the question is what are the

00:14:40.720 | next shoes to drop? So So you think about like, what's happened in the market? So so far, it's

00:14:45.200 | mainly been multiple multiple compression, like earnings season was pretty good. I mean,

00:14:50.480 | it was amazing for some folks. Yeah, for some folks. So the stocks that got hammered were

00:14:54.480 | generally the COVID stocks. It was the Peloton, the Netflix, zoom, you know, you could like Coinbase

00:15:00.640 | and Robin Hood with the day traders because that was people are laying off that stuff. So but so

00:15:05.280 | basically, the COVID stocks have been hammered, but the B2B stocks actually had really good results.

00:15:10.640 | And yet, you know, the SAS index is down, like 80%. You know, the average SAS multiple,

00:15:18.480 | it was over 15 times, you know, last year, in the on the public comps announced down to 5.6. So the

00:15:26.400 | SAS companies have been hammered despite having great earnings. So we don't know now they're B2B,

00:15:30.960 | they don't, they're a little bit insulated from the consumer. But what we don't know is what

00:15:34.720 | happens over the next six months? If we go into a deep recession, then do even the B2B companies start

00:15:40.560 | being impacted? That would look like sacks just to be clear, you know, people maybe start canceling

00:15:46.720 | their Netflix, or they don't take that vacation. That's the consumer getting hit first, a business

00:15:50.720 | that's laying off 10 or 25% of their employees, which are starting to see that contagion.

00:15:54.720 | They might also pull out their SAS bill and say, here's 12 SAS products we're playing for.

00:15:59.280 | Let's consolidate down to eight, right, I've got a SAS startup that sells, you know, six and seven

00:16:04.000 | figure deals into enterprises. And they close their deal with Uber the day before Doris memo came

00:16:10.480 | out saying we got to be really focused on cost cutting what Wall Street wants now is free cash

00:16:13.760 | flow. Yep, we got to really sharpen our pencils. They were like, shoot, good thing we got this

00:16:17.360 | across the finish line. If it had been like two days later, it just would have been a much tougher

00:16:21.440 | process. So first, you're right, the companies that get impacted are the ones with exposure to

00:16:25.440 | the consumer. But then those companies start sharpening their pencils and buying less.

00:16:29.360 | So the question is, how much are earnings now going to be impacted in the B2B space? And what

00:16:35.840 | sort of recession do we have? I think like recession now is this inevitable? You can tomorrow

00:16:40.400 | last point, you can't have 14% of global wealth wiped out practically overnight, and not have that

00:16:46.720 | translate into a big recession, monetary velocity is going to slow dramatically, the money circulating

00:16:52.480 | around is you can feel the brakes happen, you can feel the the the table, people are just way poorer

00:16:57.760 | than they were six months ago. Now, guys, just to be clear, we actually haven't started to remove the

00:17:02.400 | money in the system. So the process of quantitative tightening, which is the feds mechanism of removing

00:17:08.880 | liquidity,

00:17:10.320 | is going to start now, to the tune of about $90 billion a month. But to run off all the money that

00:17:16.640 | they printed will still take three years, right. So we have to take about $3 trillion of excess

00:17:21.840 | capital out of the economy. And so if you add that 3 trillion as well, that's just going to disappear

00:17:28.000 | to the 14 trillion, we've already you know, or the 14%, the 35 trillion, sorry, you know, you're

00:17:34.720 | starting to touch numbers that are, you know, as bad as the GFC in terms of global wealth destruction.

00:17:39.680 | And again,

00:17:40.240 | you're referring to the great financial crisis, when you say GFC 2008,

00:17:44.240 | like the GFC, this wealth destruction is touching a lot of normal everyday folks

00:17:49.680 | in very broad based ways. And that wasn't necessarily the case, there were a lot of

00:17:54.400 | people that unfortunately lost their home. But even that was still relatively contained to the

00:17:59.680 | hundreds of 1000s. Here, we're talking about 10s of millions of people owning every kind of

00:18:05.200 | imaginable asset class, who's seen wealth destruction, you know, somewhere between 25%

00:18:10.160 | to 90%. And that's very hard to freeberg. Yeah, but I just want to make the case like people keep

00:18:16.720 | using this term wealth destruction. And it was only wealth that was accumulated in the last few

00:18:22.240 | quarters, since we had COVID. And we released all this capital and made interest rates zero

00:18:27.600 | and flooded the market with money. So everyone kind of gets the money. And then they're like,

00:18:31.360 | hey, I'm worth a lot more. And then all of a sudden, the free money is taken back. And you're

00:18:35.840 | like, Oh, my gosh, I'm worth less. I've been destroyed. It's you know, it's crazy. The real

00:18:40.080 | reality is, this was meant to stimulate the economy, money was released. And the idea when

00:18:45.840 | you release capital from a central bank is that that capital flows its way into productive assets,

00:18:51.360 | meaning businesses that can employ people that can create products that people want to consume.

00:18:56.400 | And ultimately, it's very hard to manage that when your only mechanism

00:19:00.720 | is to raise or lower interest rates and make capital available or buy bonds.

00:19:04.000 | At the end of the day, a lot of that capital flowed into financial assets and inflation

00:19:10.000 | and inflationary moments in terms of asset prices. And we didn't actually have that.

00:19:13.760 | And so we created a new system that inflated the value of those assets, the value of stocks,

00:19:18.960 | the value of crypto, the value of bonds that we own the value of startups that we all own.

00:19:23.120 | And all of those assets, the value of the stock went up, but the capital didn't necessarily flow

00:19:28.240 | into creating new jobs, creating new businesses and creating new products. I want to finish this

00:19:32.000 | one, because I think it's really important. And at the end of the day, if that capital didn't

00:19:36.640 | really go into create value, and it comes back out. And all that happened was we had

00:19:39.920 | a lot of people who were in a recession, and we didn't actually create new jobs and didn't actually

00:19:44.320 | stimulate the real productive economy. That's where we have a problem with stagflation and

00:19:49.040 | where we are inevitably going to run into a recession. And I think the biggest concern I have,

00:19:53.360 | let's be honest, we're in a recession right now. This is the second quarter.

00:19:56.480 | We're in a recession.

00:19:56.960 | The biggest concern I have, as I mentioned earlier, is this consumer credit problem.

00:20:01.840 | A lot of consumers got used to the free money over the past two years. And people took that money and

00:20:06.560 | they went and bought new cars or they bought crypto or they bought an NFT or another NFTs.

00:20:09.840 | Got used to living a lifestyle that allowed them to spend in a way that they otherwise would not

00:20:14.480 | have been able to spend. And then all of a sudden, the rug got pulled out. And now everyone's like,

00:20:19.840 | well, I want to keep living this lifestyle. I want to keep spending this money. I want to I had all

00:20:24.160 | this stuff taken away from me. Shoot, what am I going to do? And then they take on credit. And the

00:20:29.360 | credit markets haven't tightened enough yet on the consumer side that we may find ourselves in a

00:20:33.840 | really ugly consumer credit bubble. Here's a crazy statistic for you guys. In the 2008 financial crisis,

00:20:39.760 | the median home price to median income in the United States was 5x. Today, it's 7x. So people

00:20:47.360 | today own homes that are significantly more expensive relative to their income and earnings

00:20:54.000 | than was the case during the financial crisis that caused a massive housing bubble.

00:20:57.360 | You're missing a bunch of important data points here. The most important thing that happened

00:21:00.640 | was we changed the way that we are allowed to capitalize mortgages and the borrow rates.

00:21:05.520 | So that fundamentally is what drove that. Okay, so for example, you were not

00:21:09.680 | allowed for example, to have a qualifying mortgage be over a million dollars. At the end of last year,

00:21:14.240 | we changed those rules. So if you X out those effects that allow the FDIC and all of these,

00:21:19.680 | you know, Fannie Mae and Freddie Mac and all of this financial gobbledygook acronym infrastructure

00:21:25.120 | that props up the US economy. If you factor in those rules, I don't think it's as extreme as

00:21:30.000 | you're describing. What do you mean consumers have more debt per relative to the value of their home?

00:21:34.240 | Sorry, debt relative to their income that they did during the 2008 financial crisis. That's a fact.

00:21:39.600 | That's not me to do with the structural way the market works. But like,

00:21:42.560 | what I'm saying is the market allows you to be that levered without actually getting foreclosed

00:21:47.120 | on or, you know, you're allowed to get the borrow rates that allow you to do that. All I'm saying is,

00:21:51.120 | it's not like excess credit is being built up in the system abnormally by consumers. It's

00:21:56.960 | just that these products again, are being structured in a way that gets people down.

00:22:01.520 | And real estate is a very unique category because you have i buyers taking

00:22:05.600 | stuff off the market, you have regulation not letting people build more. So I would be very

00:22:09.520 | reticent to extrapolate what's happening in real estate.

00:22:12.400 | I don't think we have like a an issue in real estate, to be completely honest with you,

00:22:17.920 | I think that we may have a looming credit crisis. But the practical issue today is I

00:22:24.400 | think asset wealth destruction in the financial markets, whenever that happens,

00:22:28.320 | generally tends to lead to what SAC said, which is belt tightening by companies

00:22:32.320 | focus on maximizing short term free cash flow, which unfortunately, the way to cut that is

00:22:39.440 | by cutting OPEX. And the way that you cut OPEX is by unfortunately, spending less on goods and

00:22:45.440 | services, which affects other companies, and firing employees. And I think what you're going to start

00:22:50.800 | to see are a bunch of those things where these companies make these short term optimizations,

00:22:56.480 | then how that unfortunately impacts the consumer is what Friedberg said, which is that if the

00:23:01.920 | consumer was already living, you know, sort of at the knife's edge and using a lot of credit to

00:23:07.840 | basically allow them to live in a short term way, then they're going to be able to get a lot of

00:23:09.360 | money back. And so that's the kind of thing that's going to be happening. And so I think

00:23:11.520 | that's the kind of thing that's going to be happening. And I think that's the kind of thing

00:23:12.480 | that's going to be happening. And I think that's the kind of thing that's going to be happening.

00:23:13.200 | Whether that meant not having a job, or whether that meant, you know, vacationing and staying in

00:23:17.680 | Airbnbs, all of that will come to an end. Now, you can say what is the canary in the coal mine.

00:23:23.120 | And let me just give you one thing that hit the wire this morning, which will show you how bad the

00:23:30.800 | credit market is. So there was a article in Bloomberg that came out that said, instead of Elon

00:23:38.480 | taking marginally,

00:23:39.280 | loans to fund his acquisition of Twitter, there is an idea being floated by Morgan Stanley to use

00:23:46.560 | convertible debt. Now, I love this idea, because I think it's an excellent mechanism. This was the,

00:23:52.880 | you know, when Elon had convertible debt on Tesla, that was, you know, one big,

00:23:58.800 | escape velocity moment for me in my career in 2016. So I believe in these products,

00:24:04.080 | I believe that they work. But the reason I'm bringing this up is that the what it says,

00:24:09.200 | is I'll just read this to you, the preferred equity may have a 20 year maturity and include

00:24:13.840 | a feature allowing interest to be paid in kind at a rate of 14% a year. If the single greatest

00:24:20.000 | investors cost of capital for debt in today's market is 14%. I think you have to really start

00:24:26.320 | to question what the credit markets really look like for market clearing prices. Because

00:24:31.360 | if that's the price for a risk bearing asset, run by the greatest entrepreneur of our generation,

00:24:36.240 | there's a bunch of stuff free birth to your point, that's, you know, that's, you know, that's, you

00:24:39.120 | know, that's pretty mispriced. I think one thing that's a silver lining here is we did build up

00:24:45.760 | 11 million job openings, labor participation is really low right now, even post pandemic.

00:24:52.080 | People if you ask this question, I think Chamath is like, how are people going to get out of to

00:24:57.520 | freebergs point the lifestyle issue like they want to live is a pretty easy solution.

00:25:01.440 | Go back to work, get a second job, start working again, we peaked, you know, in the 90s with

00:25:09.040 | something around 67% labor force participation. And then we're now you know, just right around 62.

00:25:17.280 | This is a large number of people who could go back to work. Now, you mentioned that slight tick up

00:25:24.000 | ever so slight in unemployment claims. We'll see if that goes up. But I think the potential way out

00:25:30.000 | here is, is that it's bottom meaning like if you look now the last three or four, right?

00:25:35.440 | unemployment claims readings in a row have largely showed

00:25:38.960 | that it's floored. And it looks like in the last couple of readings that it's starting to tick up.

00:25:43.280 | Well, with 3% unemployment, we're kind of on a floor, you can't possibly have

00:25:46.960 | less unemployment, unemployment is going up, I think employment has peaked unemployment is going

00:25:53.760 | up. And it's exactly what Jamal said, look, all of us in our board meetings last several months,

00:25:57.280 | really, since the beginning of the year, have been warning founders that the environment is changing.

00:26:02.000 | Don't assume that we're always gonna have a boom in the cash is always going to be there. However,

00:26:06.000 | nobody's taking the advice. Well, because there's

00:26:08.880 | been resistance because people don't want to believe it. And then in addition, it's always

00:26:12.560 | like, well, how do you know it's not going to bounce back, right? And now I think after what's

00:26:18.000 | happened, really, since April, and really, in the last week or two, I think no one's really saying

00:26:23.680 | that anymore. Everyone understands that we're in a new environment. And they just don't die, they

00:26:27.760 | have experience with how bad it's going to be, or they don't, but everyone understands things have

00:26:31.520 | changed. So every company that's that's acting sensibly is freezing their hiring, putting a break

00:26:38.160 | on the growth. And then they're like, well, we're going to have to do this again. And then they're

00:26:38.800 | like, well, we're going to have to do this again. And then they're like, well, we're going to have to

00:26:39.280 | do this again. And then they're like, well, we're going to have to do this again. And then they're

00:26:40.480 | slowing down their plans. And that will absolutely translate into less job creation.

00:26:46.480 | Yeah, we've we've really pushed that exact plan. I used to sit down with our founders.

00:26:53.840 | And in these board meetings, what we would talk about is the base case.

00:26:57.440 | And then we would always talk about a blue sky case and a really bold case, right? So three

00:27:03.200 | flavors of kind of like, kind of go and do what you're doing, actually put a little bit more

00:27:08.720 | gas on it, and you know, press the gas and then really go for it. I've stopped all of that. You

00:27:14.000 | know, these last five months have been me and my founders basically saying, Okay, guys, what's the

00:27:18.960 | extreme bear case? What's the bear case? And then what's the base case? What's not? And what we are

00:27:26.800 | trying to figure out is how do we make sure that we can optimize for a contribution margin for

00:27:32.560 | profitability for cash flow? And when that's not possible, how do we minimize burns so that we can

00:27:38.640 | extend our runway as long as possible and show technical validation so that we can raise money on

00:27:43.680 | reasonable terms, not even great trips. And if the boards of these private companies haven't

00:27:48.560 | been doing that for the last five or six months, and the and the burn hasn't dramatically changed,

00:27:53.920 | I think that they are, they've been a little derelict in their duty. It's a it's a it's you're

00:27:59.200 | not doing a very good job as a board member or investor if you haven't forced these conversations

00:28:03.520 | with your CEO. And you shouldn't expect the CEO to bring this to you, in many ways, because

00:28:08.560 | it's very hard for them with the with the focus that they have every day to put this front of mind.

00:28:13.360 | But as Zach said, you have to do it as a director, if you're worth the salt at all, you have to do it.

00:28:20.000 | But it's been quite the opposite. We saw with fast.com. Co was the opposite, right? People

00:28:24.880 | were just not even considering it. It's just survival risk is on the table,

00:28:29.520 | you really have to act differently. It's kind of like the difference between

00:28:32.400 | a poker tournament and a cash game. You know, like players behave very differently in a poker tournament

00:28:38.480 | the players are much more conservative. Why? Because once you're out, you're out. So if you

00:28:42.240 | lose the wrong hand, you're busted out of the tournament. Whereas in a cash game, you can just

00:28:45.600 | rebuy. Well, we've gone from basically being in a cash game where people can just rebuy maybe they

00:28:50.240 | won't, you know, they could go out and raise more money, maybe it's not the valuation they want,

00:28:53.440 | maybe it's not as much they want. But you know, in a boom, you can always go raise more money. Now,

00:28:58.080 | if there's no more money available, to keep funding your plan, if it's not working, you really have to

00:29:03.200 | think about survival. And you have to be more conservative, you can't let yourself bust out of

00:29:07.680 | the tournament.

00:29:08.400 | By the way, I'll say two things on that one, what you're describing is exactly the condition that

00:29:14.400 | is now led to the fact that roughly one third of public biotech stocks are trading below cash.

00:29:19.200 | So they're not. Yeah, so their entity value, the biotech industry as a whole sin bio in particular,

00:29:28.000 | but really biotech. About a third of companies now trade below their cash balance. I'll send

00:29:33.600 | you guys some some links on this, Nick, I'll add it to the show notes afterwards. And the

00:29:38.320 | reason is, yeah, 40% of them have less than 20 months of cash. 60% of them have less than two

00:29:48.960 | and a half years worth of cash. And historically, biotech companies, they kind of run an R&D cycle

00:29:53.440 | to prove that their biotech product will work. And if it works, there'll be a pharma company that'll

00:29:58.080 | swoop in and give them some money to go through the next phase of clinical trials. Or they'll do

00:30:01.600 | a secondary offering and raise more money to get through the next phase. But because the capital

00:30:05.760 | markets are gone now for them, or the assumptions are gone, they're going to be more likely to go

00:30:08.240 | through the next phase of clinical trials. And so the assumption is, hey, there's not going to be

00:30:11.360 | any capital left, they're still burning, whatever it is 2030 4080 $100 million a quarter, they've

00:30:16.880 | only got a few $100 million in the bank. And everyone's like, hey, look, the odds of you guys

00:30:20.880 | actually, even if your technology works, even if your product works, the odds of you being able to

00:30:25.200 | get the funding to get through the next phase of clinical trials is much lower. Therefore, the the

00:30:30.160 | ascribed value of your business is negative. And we're seeing that across the board. I started

00:30:34.800 | working in Silicon Valley in 2001. That's when I graduated

00:30:38.160 | an investment bank doing tech M&A. And that was right after the.com implosion. Most of what I

00:30:43.360 | worked on was public companies that were selling for less than cash. Today, we don't talk about

00:30:47.680 | that over the last 20 years, because it just never seems to happen. Well, it's a phenomenal

00:30:51.200 | thing to happen, right? I mean, you could basically see what that means is, you could

00:30:54.800 | shut the company down and make a profit and still own the IP. So that is what happened in the.com

00:30:59.680 | area. Yes, we saw we sold a bunch of companies, I was on the banking side, representing the sellers,

00:31:04.480 | the private, the public companies, because there was no business, they were just

00:31:08.080 | burning money. And there was no line of sight to making money or line of sight to raising money.

00:31:11.920 | So the board said, you know what, we just got to get shut it down this thing out, shut it down.

00:31:16.160 | And then you know, hey, what's cheaper shutting it down, what's gonna make us more money shutting

00:31:19.680 | it down and distributing the cash, or letting a private equity firm come in and shut it down for

00:31:23.360 | us. And in a lot of cases, they sold these public companies to private equity firms,

00:31:27.280 | let's say the company's got 100 million in cash, they sold it for 60 million,

00:31:30.480 | private equity firm comes in, and they're like, boom, boom, boom, everyone's fired the sink shut

00:31:33.840 | down. And they liquidated it and they took you know, made made a $20 million spread on that thing.

00:31:38.000 | I will say on the on the flip side for private for private markets, and I think this is a really

00:31:41.760 | important, maybe point for us to have a conversation about over the past decade, as you

00:31:48.000 | guys know, there have been more venture money raised than at any time in history, the numbers

00:31:52.800 | have been going up every year, the number of funds total capital raised, but at the end of 2021,

00:31:57.440 | if you look at the total funds raised and the total capital deployed by venture funds,

00:32:01.520 | we have a $230 billion capital dry powder hangover. So there's a quarter there's a quarter

00:32:07.120 | trillion dollars of capital.

00:32:07.920 | of cash, sitting in venture coffers that they can call and write the checks into.

00:32:12.640 | So I think it provides a really interesting contrast that sets us up for a dynamic

00:32:17.280 | over the next few years on what's going to happen in private markets. Because you're going to have

00:32:20.800 | the haves and the have nots. The haves are going to have a lot of friggin money available to them

00:32:25.200 | because these venture funds need to be deployed over the next few years. The have nots are the

00:32:29.520 | ones that don't have proof points to a viable outcome in their business. But the haves are

00:32:33.760 | going to have a lot of capital available to them with one caveat.

00:32:37.840 | With one caveat, which is valuation. So what do you guys think will happen?

00:32:42.240 | There's two caveats in the context of everyone saying, Hey, there's no capital available,

00:32:45.360 | there's no capital available. That's not true. There's more capital than has ever been available.

00:32:48.720 | So how does it get allocated?

00:32:50.000 | So the first thing is, to Jamath's point, at what valuation and so there's going to need to be

00:32:55.680 | disciplined and they're going to do right the that money will go to the winners. Other thing to

00:33:00.400 | remember is during the great financial crisis for about a year, maybe even too many venture firms

00:33:06.960 | did not want to go to the winners. They were going to go to the winners. They were going to go to the

00:33:07.760 | winners. And so they were going to go to the winners. And so they were going to go to the winners.

00:33:07.840 | So they were going to go to the winners. And so they were going to go to the winners. And so they

00:33:07.920 | capital from LPS, whose portfolios were crushed, and LP said, I know we're on the hook for this.

00:33:13.040 | But I would appreciate it if you don't make a ton of investments right now, because we don't want to

00:33:17.040 | clear our already, you know, demolished portfolios to then fund your venture fund. So those are

00:33:23.760 | commitments, it's not cash in the bank. And those commitments only come from Harvard, Yale, CalPERS,

00:33:30.560 | Ford Foundation, whoever more or less on credit Kettering, if the GPS can ask the LPS for that.

00:33:35.840 | And the last time this happened, and I

00:33:37.680 | don't know if it will happen this time. But I think you remember to trauma. The LPS specifically

00:33:41.920 | said, Hey, pump the brakes. Yeah, let me build on what you say in 2000. The more extreme measure

00:33:47.520 | happened with which is that most of these venture investors returned the money and just cancelled

00:33:52.480 | and tore up the LPA. Now, why would they do that? Why would you tear up commitments for

00:33:57.200 | a quarter trillion dollars? It's because your portfolio is trash. Meaning, if you have made

00:34:03.920 | a bunch of horrible investments that you know, are now totally upside down,

00:34:08.160 | you have a responsibility to manage those investments to a reasonable outcome,

00:34:11.840 | and ideally even try to get some salvage value. And so you know, it's very hard for you to look

00:34:17.680 | at an LP in the eye and all of a sudden say, you know what, I'm going to deploy this fresh capital.

00:34:21.440 | And I'm in a psychologically good state of mind to do that well.

00:34:25.440 | And I think that what history shows is that when you have these drawdowns, the money is

00:34:31.520 | made by new entrants, or fresh capital, which doesn't have the legacy of a bad portfolio. The

00:34:37.520 | returns are not captured by the same people. And the reason is because they have the psychological

00:34:42.320 | baggage of a horrible portfolio or horrible marks. So for example, there was a tweet and I'll send

00:34:49.280 | this to you guys. This is from a guy named Matt Turk. He said to put the depth of the reset in

00:34:55.440 | context to justify a $1 billion value valuation $1 billion valuation. A cloud unicorn today would

00:35:04.800 | need to plan on doing 170% of the return on the stock market. And that's the kind of thing that

00:35:07.440 | is going to happen. So if you apply this current median cloud software multiple of $5.6 times forward

00:35:17.920 | revenue, now let's put it in a different way. If you're a company that's worth 10 billion,

00:35:23.120 | that means that you have to come up with $1.78 billion of annual recurring revenue for the market

00:35:30.960 | to give you a median multiple. How many SaaS companies and SaaS would sacks you'll know this.

00:35:36.320 | How many SaaS companies

00:35:37.360 | even get close to 2 billion of ARR? Probably a lot less than the number of SaaS companies that

00:35:43.120 | are worth 10 billion on paper. So, you know, by the way, we should also talk about who's the

00:35:48.240 | bag holder in that transaction. It's the employees and we should we should explain why that is in a

00:35:52.240 | second. But just to build on what you know, Jason is saying and freebrook what you're saying is,

00:35:56.240 | in moments like this, I would ignore all of the dry powder and all of that stuff.

00:36:02.400 | I think that there are a lot of venture investors today who've deployed way too quickly.

00:36:07.280 | Jason Wong And if they want to have any reputation

00:36:10.320 | over the next 10 years, we'll have to rehabilitate their portfolio and try to return money.

00:36:14.640 | Jason Wong Let me just say one thing. I saw an analysis

00:36:17.040 | from one of the biggest venture firms in the valley over a 14 fund cycle. So they looked at data from

00:36:24.000 | 14 funds. And they showed that 40% of their capital was deployed in businesses that they were chasing

00:36:32.000 | valuation meaning like the business wasn't performing well, and they needed to bridge the

00:36:35.360 | company or support it through a down payment. Jason Wong

00:36:37.200 | And they looked at all of the other companies that were doing that down round, or you know, some other

00:36:41.040 | sort of situation where at the time, it was let's support our portfolio 40% of their capital. On that

00:36:46.640 | 40%, they made like 50% losses. So they deployed money in a situation that was not kind of an

00:36:53.280 | accelerating, successful, you know, up round kind of business, it was declining business. And in that

00:36:58.960 | support, they lost half their money, the other 60%. They make like three x, right? So it kind of

00:37:03.680 | averages out that they make kind of whatever it is, two, two and a half x on the whole portfolio.

00:37:07.120 | But I think it really speaks to the condition that a lot of venture firms may make the mistake

00:37:12.000 | around doing over the next couple of years, which is I've got all of these businesses that are

00:37:16.960 | suffering through down rounds or need supportive capital. And I know it can get there. But that

00:37:21.120 | belief ultimately costs the LPS and costs the fund more. And it's why we saw such negative return

00:37:26.160 | cycles happen after the.com crash.

00:37:27.920 | Robert Leonard How about this? Since 1994? Okay, just guess how many funds private equity growth

00:37:37.040 | venture funds even existed that are greater than a billion dollars. So this is over, you know,

00:37:43.760 | 30 years, say, what do you mean? How many funds do you think even existed over a billion dollars

00:37:48.160 | since 1994? To today? How many funds? Like how many funds have been raised that are

00:37:53.120 | individual funds are the brand names? Yeah, since 1994? How many do you think there are?

00:37:57.280 | 450 1276? Oh, you're including private equity and stuff. Oh, I was gonna venture. Okay, sorry.

00:38:05.360 | Okay. So now, of those one

00:38:06.960 | 1276 private equity funds, or growth funds, or crossover funds, or got funds? How many do you

00:38:14.960 | think have actually managed to return more than 2.3 times the money 2.3 times? 10% 10% 5% 10% 22

00:38:24.960 | of them like under 2% under 2% Wow. So here's the point that I'm trying to make. Yeah, investing is

00:38:31.040 | very hard. In an upmarket, everybody looks like a genius. All of these funds come up

00:38:36.880 | with all of their nonsensical ways of showing IRRs and all of these fake gymnastics. But the truth is

00:38:44.240 | in the data. And what the data says is that in the last 30 years, the minute you get over your

00:38:49.040 | ski tips at a billion dollars, very few people know what they're doing. Very few. It's hard.

00:38:54.880 | It's hard. The multiples compress as you get to bigger deals. And you can't say just where

00:39:00.080 | the value is. Deny this numerical truth. Yeah. So again, I go back to, you know,

00:39:06.800 | the person that's always been talking about this, and who again, may be proven right, yet again,

00:39:11.680 | is Bill Gurley. You know, everybody would make fun, why is benchmark only raising $450 million?

00:39:17.520 | Why would they only raise $500 million? And they always were consistent. Because over the last 30

00:39:24.000 | or 40 years, over multiple cycles, we have seen that this is the best way to optimize both for

00:39:29.440 | return, yes, for mental clarity, and for making our LPS happy. Every variable was optimized at around 500%.

00:39:36.720 | And then you see 5 billion, 6 billion, $10 billion funds funding 5 billion, 6 billion,

00:39:44.000 | 10 billion, $20 billion private companies. And I think what we have to do is put two and two together

00:39:49.520 | and realize that it's going to be very difficult sledding from here for a lot of folks. And when

00:39:55.200 | the venture or crossover investor has this mental baggage that they're dealing with, they're not

00:40:01.760 | going to be able to provide fundamentally sound advice to the CEO, they're going to optimize for

00:40:06.240 | making that profit. And that's why we're talking about the LPS. And then you see 5 billion, 6 billion,

00:40:06.640 | $100 billion. And if you look at the LPS, it's going to be a very difficult thing. And I think

00:40:09.200 | that's why we're talking about the LPS. And then you see 5 billion, 6 billion, 6 billion, 7 billion,

00:40:09.760 | $100 billion. And then you see 5 billion, 6 billion, 6 billion, 7 billion, 7 billion, 7 billion, 7 billion,

00:40:09.840 | the CEOs will make a bunch of suboptimal decisions. It'll probably lead to a bunch of layoffs,

00:40:14.800 | bad technology decisions, things slow down. And the cycle is reflexive in that sense. And so,

00:40:19.760 | you know, we're going to go through a few years of sorting this thing out.

00:40:22.800 | Down rounds, liquidation preferences, nonsense, sacks will be

00:40:26.560 | yeah, so So look, I agree with that point that these mega funds are very hard to repay, because

00:40:31.520 | they require you to have multiple winners, not just winners, but mega winners. So we've always kept our

00:40:36.560 | funds in that five to $600 million range where you really only need one winner per fund to basically

00:40:42.160 | return the fund. But let me let me go back to this point about you explain the math, explain the math

00:40:46.400 | of that you typically own 1520% of a winner. So just even less by the time. Right, exactly. So,

00:40:54.480 | you know, if you own 10% of one deca corn, that's a billion dollars. And if it's a $500 million fund,

00:41:01.360 | you've doubled your fund. But if it's a one or $2 billion fund, you haven't even paid back the

00:41:06.480 | fund yet. So that's, I mean, this is how hard is it to hit a deca corn? Hard. It's hard.

00:41:12.560 | Hard, hard, hard, really, really hard to hit to have had to in a decade. Yeah, I've had to an

00:41:19.840 | exact same time period to go back to this point about dry powder. So I think it's actually

00:41:23.120 | important. So this will be a little bit more of a bright spot. So in a weird way, so there's a,

00:41:30.000 | I think, stunning article in tech crunch just two days ago, that said that Tiger Global, you know,

00:41:35.840 | which the head of the company, he's a big fan of Tiger Global, he's a big fan of Tiger Global,

00:41:36.400 | hedge fund, as of the end of April, the hedge fund had lost about 45%. And then may the first

00:41:41.840 | weeks of May have been even worse. So who knows what they're at now. But they had a separate

00:41:46.160 | venture vehicle. And their their history of their venture vehicles is that they raised

00:41:51.280 | 3.75 for a fund in 2020, then 6.65 billion in 2021. And then just this year,

00:42:01.040 | they closed a $12.7 billion fund in March. Now, I think that fund was raised

00:42:06.320 | as early as September last year, but maybe there was some money that still trickled in,

00:42:10.800 | and they finally closed it in March. But basically, what this article said is that

00:42:15.520 | this $12.7 billion fund that they just raised is already nearly depleted. It's something like

00:42:21.600 | two thirds of the fund has already been deployed. So this idea that they've got like a lot of dry

00:42:26.800 | powder sitting on the sidelines, I don't think they do. And then meanwhile, you know,

00:42:30.960 | the other big crossover funds, D1, Co2, they are completely risk off, I don't think they were ever

00:42:36.240 | as aggressive as Tiger. So they're not in as bad shape as Tiger. But they're just basically sitting

00:42:41.520 | on the sidelines till this thing sorts itself out. So basically, all of this capital that flooded the

00:42:47.120 | venture markets, this growth capital that came in over the last couple of years, is gone. I mean,

00:42:52.080 | that's basically dried up. Why did they go so fast,

00:42:53.680 | Zach? What was their thinking? Because you and I met with these folks, we saw them marking up

00:42:58.560 | our companies, because you and I, you typically do a Series A, that's your sweet spot,

00:43:02.000 | I typically do see it into Series A, you do A into B. They were coming in and marking up our and

00:43:06.160 | the BNC rounds. What was their thinking? What was their mistake here?

00:43:10.000 | I think the thinking was that we can create an index fund for pre IPO tech companies for sort

00:43:16.560 | of late stage private tech companies. The only problem was and by the way, they did, if you could,

00:43:23.200 | I think they did a good job sort of productizing that solution. I mean, if you send them your

00:43:27.120 | numbers in a certain format and do a meeting, they were like a term sheet generator. I mean,

00:43:30.800 | they speak out term sheet. Your original idea, Chamath, you had saw you had funding as a surface

00:43:36.080 | point. I did this thing called capital as a service where you would send us you would send

00:43:40.560 | us but you would send us your data or we would plug in to whatever you use, say it was stripe

00:43:45.600 | or Shopify, we would suck out the data, we would run it against a bunch of models, we would do a

00:43:50.080 | few simple regressions. And then we would just index you and then send you a term sheet. So we

00:43:54.160 | did do that all around the world. But we did it on very small dollars. You know, we did $500,000

00:43:59.440 | checks 250k checks, it was called capital as a service, it's still a phenomenally good idea. But

00:44:05.360 | you would want to keep it. You know, you're going to have to keep it. You're going to have to keep it.

00:44:06.000 | cure that business for probably 10 years. I would want it to do that on 10 years on my own money.

00:44:11.600 | You know, 10 1520 3050 million bucks before I would even dare raise LP money around that idea,

00:44:16.320 | because it's, I mean, at that point, it's the machines doing the work. And you have to really

00:44:20.640 | be sure your models are right. He asked the question sort of what was wrong with it. I think

00:44:24.960 | that the thing that was wrong with it actually was just that the public comps were all wrong, right?

00:44:29.920 | So they were modeling to the public valuation. These are wrong. Yeah.

00:44:35.920 | Well, no, it's look, they're hedge fund guys. So they're looking at they're looking at the public

00:44:39.920 | valuations. They're looking at the last private rounds, and they see a spread a large spread.

00:44:44.960 | And they're like, we can arb this. So they go in with a massive amount of money, create a term

00:44:49.040 | sheet generator, and they are the spread. The problem is that all the public valuations we now

00:44:53.920 | know were inflated. I actually think they did a reasonably good job in creating a great approach

00:45:00.560 | for founders who want late stage capital. If the valuations have been correct, I think it would work.

00:45:05.840 | Here's the problem. Right now, Peloton and Coinbase are both their market caps are trading

00:45:10.880 | at lower than their last private market valuation. So let that sink in. Like,

00:45:17.280 | if you did that last private round, you're underwater big time in those names,

00:45:21.520 | or I don't know, they were taking their signals from the public markets. And this

00:45:25.200 | is the problem with the Fed, and the administration, and Congress basically

00:45:30.400 | flooding the zone with all this fake money is that it distorts all the signals in the economy.

00:45:34.720 | Yes. And then

00:45:35.760 | people start making investment decisions that don't work. And then you have this massive

00:45:40.080 | correction. How long have we been doing this? How long have we been overfeeding the market? It

00:45:45.360 | obviously happened under Biden and Trump. Does it go back to Obama or no?

00:45:49.680 | Yeah, it started in 2008. Nine with the ballot and troubled asset relief program, which is basically

00:45:57.520 | a fund, you know, to create market liquidity, essentially. But what it also did on the heels of

00:46:05.680 | the great financial crisis was we introduced comfort around this idea of quantitative easing,

00:46:13.360 | or, you know, having what's called the Fed put, you may hear that a lot, what does that mean,

00:46:18.000 | which is that when market conditions get too, you know, stiff or rigid or inflexible,

00:46:25.040 | the Fed will generally step in with liquidity, typically into the credit market, never into

00:46:31.120 | the equity market. But what that does is that that also still flows into the equity market. So,

00:46:35.600 | you know, everybody behaves like there's a downside price at which the Fed is guaranteed to act and

00:46:40.560 | that really started to be a bailout that really started to be in people's psychology after the

00:46:45.440 | great financial crisis. And then through the, you know, 2010s, we had several instances

00:46:50.640 | where we had that where we had moments of sort of like market volatility.

00:46:54.960 | And all along the way, what we also had were academics that started to, you know,

00:47:00.400 | promote things like modern monetary theory, this idea that, you know, money printing was a good

00:47:04.960 | idea.

00:47:05.520 | And so we had this, again, very reflexive loop where, you know, anointed experts, you know,

00:47:11.600 | you know, did talk pieces and thought pieces and books, and then pseudo intellectuals would parrot

00:47:16.720 | this stuff. And then, you know, the government infrastructure would behave like this was a

00:47:21.200 | reasonable thing to do. And it built on itself for a decade. So we've been doing this for 13 or 14

00:47:25.520 | years now. And now we're trying to undo it and put the genie back in the bottle. And it's proving

00:47:30.320 | much, much harder than we thought, because people have unfortunately got addicted to the crack,

00:47:34.000 | they're addicted to the drug, they, you know, they're addicted to the drug.

00:47:35.440 | You're trying to take the oxy away. And that's a and people are going to go through

00:47:39.760 | withdrawal, really, really bad withdrawal.

00:47:43.200 | Yeah.

00:47:45.120 | If you have a quarter trillion dollars of dry powder, let's assume no one gives their money

00:47:49.600 | back. And they don't do stupid stuff like chase losing companies in their portfolio.

00:47:53.200 | And they allocated in a smart way to winning companies. Does that not mean that we end up

00:47:58.800 | seeing a significantly kind of outsized amount of capital going to a few highly successful businesses?

00:48:05.360 | That will end up seeing this kind of supercharging of a small set of businesses as opposed to this

00:48:11.440 | rise of the unicorn, which is what we saw over the past call it, you know, eight, seven, eight years,

00:48:16.880 | and that you have this big bifurcation in the market, the VC market starts to kind of say,

00:48:22.720 | hey, you're not making money, you don't have a line of sight to making money, you're off the

00:48:26.080 | table. But the, you know, top decile get overfunded, and they become, you know, kind of

00:48:31.600 | the next the next mega caps. No, yeah, I mean,

00:48:34.480 | it does not happen in this moment.

00:48:36.560 | Well, so look, if we look ahead two or three years, I had a

00:48:40.800 | Can I just tell you why? Let's take let's take the perfect company, which is stripe.

00:48:43.760 | Okay, so now $50 billion.

00:48:46.800 | Well, they've been funded to a mega cap, right? I mean,

00:48:49.600 | $50 billion of horrible VCs who have made horrible decisions heretofore,

00:48:54.240 | knocking on the call us a store saying, Can you please take my $50 billion? Because I'm

00:48:59.360 | trying to be money good. Why did the call us ins want to take on this headache? Why did

00:49:04.400 | they want to flutter, you know, mess set their cap table up with all these folks, and then at what

00:49:10.880 | price. So if you're sitting at the board of any really good, well run company, of course, you'll

00:49:15.920 | take some bite size, you know, amounts of very decisive capital in these moments, if you think

00:49:20.560 | you can market consolidate or whatever. But I think the point that all of these companies are

00:49:25.360 | going through is largely the same. If the best companies aren't doing what we just talked about,

00:49:30.480 | I would be shocked as well. The best companies are thinking, let's batten down the heckle.

00:49:34.320 | hatches. And let's not distract ourselves. And so I'm not sure this is the moment where a really

00:49:40.560 | horrible VC who's had a terrible track record who's just blundered through $5 billion is going

00:49:46.800 | to be able to put in a billion dollars to strike. What do you think,

00:49:50.560 | Sachs? Let me speak to kind of the environment that I think is going to happen over the next

00:49:54.080 | few years and then what founders will succeed. I think you're right, freeberg that the VCs are

00:50:00.240 | gonna become much more discriminating. And there's going to be a much more polarized outcome.

00:50:04.240 | Here for companies. I had a tweet storm that Elon actually gave a nice boost to by saying he agreed

00:50:10.400 | with it where I basically said, look, startups with high growth and moderate burn will get funded

00:50:15.200 | through this downturn. Starts with moderate growth and high burn will not get funded.

00:50:20.080 | So what's going to happen is that the sort of mediocre ones are going to, we're going to get

00:50:25.520 | to a very polarized outcome very quickly, where, you know, I think a lot of founders think that

00:50:30.080 | if their numbers are just okay, and not great, then they'll be able to raise but at a lower

00:50:34.160 | valuation, or they'll be able to raise something, but maybe not as much as they wanted. And what

00:50:38.080 | will happen is, the middle cases kind of go away in an environment like this. And everyone just

00:50:43.120 | wants to fund the best companies. So certain things will become absolutely fatal for startups

00:50:49.120 | in this environment. One is obviously if they're just not growing, they're not gonna be able to

00:50:52.640 | raise and good growth really starts in the early stages in terms of doubling year over year. Second,

00:50:58.320 | negative or low gross margins are absolutely fatal. Nobody wants to fund businesses that may not even be real

00:51:04.080 | businesses. And I would say acceptable gross margins really start at 50%. Third,

00:51:09.600 | CAC payback, people want to know that you can pay back your customer acquisition costs in

00:51:14.720 | a year or less. And then like I mentioned, the burn, you know, a burn multiple of one is really

00:51:21.040 | ideal where you're burning not more than your net new ARR, but certainly not more than two,

00:51:27.520 | I think burn multiples over two, where you're spending, you're burning $2 to add $1 of growth,

00:51:34.000 | that's where I think, you know, companies start becoming unfundable. So I think founders are going

00:51:38.400 | to have to pay a lot more attention to these disqualifiers. Yep. But I think that for companies

00:51:45.920 | who meet the criteria, who have good growth, low burn, good business fundamentals, they will be able

00:51:53.360 | to raise and look, here's what's going to happen. The crossover investors are washed out of the system,

00:51:58.880 | they're gone. I mean, Tiger's already deployed all of its capital. I don't know when they're gonna be back. So the

00:52:03.920 | so called tourist money, the, the basically the big investors who weren't in the system,

00:52:08.560 | a few years ago, they're basically going to leave the system. However, there will be the big

00:52:13.120 | traditional venture funds will have large funds, but they're going to deploy them much more slowly,

00:52:16.880 | these one year pace of deployments, they're going to stop. They'll be back to three. Exactly. So just

00:52:22.560 | think about that, even if you had the same amount of money being raised and deployed,

00:52:27.520 | but it was happening over three years instead of one, that would be a two thirds reduction

00:52:31.440 | in the availability of capital in the system. So which

00:52:33.840 | was that going to go to? You're not putting that in the best companies I'm talking about,

00:52:38.400 | you're not going to go to somebody who's going to blow through it in nine months,

00:52:41.360 | who's playing every hand, like you cannot play that way anymore. Exactly. So what we're telling

00:52:45.680 | our founders is number one, you got to lengthen your runway, like the days of raising a new round

00:52:50.160 | every 12 months are over, you got a plan on not raising for two to three years, if you can help it.

00:52:55.360 | And then you really have to sharpen your pencil and work on these business fundamentals. And,

00:52:59.840 | you know, one thing you need to do is you need to have a realistic conversation

00:53:03.760 | about, am I really able to raise another round in this environment with the metrics I currently have?

00:53:08.480 | And if the answer is no, you need to cut your burn to give yourself the time to fix the business. And

00:53:14.320 | that fixing a business normally takes two to three years. So you know, if you got less than two years,

00:53:19.600 | or even two and a half years of burn, and you have one of those disqualifiers I talked about,

00:53:24.080 | you better like cut your burn quickly to give yourself the time to fix those disqualifiers.

00:53:28.240 | Yeah, I mean, I wish people we've been talking about this for a year, folks. And you know, some

00:53:33.680 | founders just are not accepting the reality of the situation. And I if you look at what happened,

00:53:40.000 | we have a generation that's never experienced a down market. And these down markets happen so

00:53:44.560 | violently, that they think like people are panicking, you know, somebody made a joke like,

00:53:50.400 | Bill Gurley is called five of the last three recessions, you know, and it's like,

00:53:54.560 | well, I mean, we have scar tissue. And it's that the the velocity of the downturn,

00:54:00.080 | all those kids dunking on girly, well, guess who's gonna have the last laugh, I think,

00:54:03.600 | precisely, I texted Gurley last night, he's had the last thought. I literally DM to last night,

00:54:08.640 | I said, Listen, the water's great. Right now, I am doing deals back at six to $12 million in the seed

00:54:14.560 | space. With, you know, 200k in revenue and real founders and discipline, start investing again,

00:54:21.040 | it's great now. Because the deals are now taking I don't know if you're experiencing the sacks.

00:54:26.400 | But the deals went from taking two, three days. Now they're back up to four to six weeks.

00:54:30.960 | And we're having very thoughtful discussions. We're

00:54:33.520 | meeting a third time with founders, we're talking about their go to market strategy,

00:54:37.520 | we're getting to talk to three or four customers, I had founders,

00:54:40.400 | who said you can't be in this deal if you want to talk to my customers. And that wasn't one founder,

00:54:45.600 | multiple founders said, if you want to talk to our customers, then you don't get an allocation.

00:54:50.400 | And I said, Okay, the thing to keep in mind, I won't do the deal. But that was how dysfunctional

00:54:55.680 | this was, Chima. The thing to keep in mind is that all these late stage companies are mispriced,

00:54:59.920 | doesn't matter whether you're the bottom decile or the top decile.

00:55:03.440 | You are massively mispriced. And there needs to be some correction between 30 and 70% on valuation.

00:55:09.760 | How do you solve it?

00:55:11.680 | I have a point of view on that, actually, because so look, there's a major difference, I think,

00:55:16.720 | between evaluation, multiple collapse in the public markets for a supplier market, it's gone

00:55:22.720 | down, look, the SAS valuation multiples have gone down 70 80%. There's no disputing that.

00:55:27.040 | Look, it used to be the public markets were trading at 15%.

00:55:33.360 | Now, it's 15 times ARR for the median SAS company announced 5.6. So yeah, we're talking about

00:55:38.720 | two thirds 70 80% reductions. If it happened in the public stocks, it deserves to happen in the

00:55:44.880 | private stocks to Chima's absolutely right about that. And a lot of people aren't recognizing that

00:55:48.240 | fact. However, here's the difference. The median SAS company is growing maybe 15 to 20%.

00:55:53.440 | When you've lost 80% of your value, and you're only growing 15 to 20%, it's going to take you

00:55:58.560 | a decade to grow back into your old valuation. However, private good private companies, not all

00:56:03.280 | of them, but the great ones, they're still growing 3x year over year. So if you're able to grow 3x year

00:56:08.720 | over year, and you do it two years in a row, you're 9x where you were, even if the ARR multiple

00:56:14.480 | collapse 80%, you can still get an up round, it's not going to be the 9x up round, it might be a

00:56:20.000 | 2x up round. I know how that's mathematically true. But listen, if you're a hundred million

00:56:25.440 | dollar ARR business, let's just say you were able to raise at 10 or 11 billion. Yes, you're mathematically

00:56:33.200 | right that, you know, 100 million times nine is 900 million. But I think it's important to first

00:56:40.400 | say how many actual software companies are there that generate a billion dollars of ARR? Do you

00:56:45.520 | remember when Salesforce first passed a billion dollars of ARR? We thought my gosh, and then they

00:56:49.520 | said my blood. So this is exceptionally rare error. And I think that it behooves people to

00:56:56.400 | understand that law of large numbers aren't often violated. And so you know, before you go and

00:57:03.120 | do that simple math and convince yourself that it's possible, maybe you should actually not I'm

00:57:07.680 | not saying that to you, Sax, I'm saying that to the founder or to the boards, maybe you guys should

00:57:11.440 | actually just go in and have somebody run a screen and say, how many actual companies exist that have

00:57:16.320 | actually managed to generate more than a billion dollars of ARR, especially in a moment where people

00:57:20.640 | are cutting back on spend? How does that happen? So yeah, look, I agree, getting from 100 to a

00:57:26.560 | billion is really hard. You know, if you're a billion dollar company supposed to do because

00:57:31.280 | in this math, they have to get to 200 billion dollars.

00:57:33.040 | I think that's a really good point. I think that's a really good point. I think that's a really good point.

00:57:33.120 | billion dollars of ARR to be worth 10 billion. I do think a lot of how do we do that? How does

00:57:38.160 | the random task company that you and I have never heard of? How do they generate 2 billion of ARR? I

00:57:43.840 | can tell you the handful of companies that generate 2 billion of ARR. There are some incredible

00:57:47.520 | companies today that don't even yet, you know, like, look at an incredible company like unity.

00:57:53.280 | Incredible, the backbone of all you know, gaming and, you know, the move to 3d. This year, if they

00:57:59.360 | crush, they'll do 1.3 billion. Incredible.

00:58:02.960 | business. It's an incredible, it just went down 35%. This went down 35%. It's unbelievable.

00:58:09.520 | It's trading at four times revenue guys. Right? Some of these things are hard to believe,

00:58:14.160 | like Opendoor has 2.3 billion in cash and a $3.7 billion market cap, enterprise value 1.4. And they

00:58:20.640 | I think they also have a couple of billion in real estate, Coinbase 6 billion cash $12 billion market

00:58:25.200 | cap. So I guess in this part in the discussion, even with all these headwinds, can we give the

00:58:31.200 | protective mechanisms for employees?

00:58:32.880 | Because I again, I just Okay, good, good point. Let's do it. Let's do it. When you start a company

00:58:36.800 | and you're a founder, you have, you're taking the most risk, you're the person with the idea,

00:58:42.000 | you should be justly rewarded for that. The way that that happens,

00:58:45.760 | economically in a company is you get founder shares,

00:58:49.200 | the basis of those founder shares are effectively zero. And you're able to do a bunch of structuring

00:58:56.800 | when you first start a company that gives founders specifically some incredible tax advantages.

00:59:02.800 | You can, you know, do an 83 B election, which is effectively you buying the stock,

00:59:07.520 | starting the clock on long term capital gains, etc, etc. Then you have stock that you give to

00:59:14.080 | employees, they're one of two kinds, non qualified stock options and incentivize stock options,

00:59:19.760 | NSOs and ISOs. And you know, those have different tax treatments. But again,

00:59:26.160 | you know, when you're a very early employee, you get a mixture of these things also hugely accretive,

00:59:32.880 | it has a very low basis, you're building value. But here's what people don't understand. When a

00:59:39.680 | venture investor like myself or Jason explain basis, by the way, for people, for basis,

00:59:45.840 | your your price of your stock is effectively zero, you know, like a penny for it or something. Yeah,

00:59:50.960 | like, like the my stock at Facebook costs like half a penny. Got it. You know, whatever.

00:59:55.920 | It goes public, it's 15 $20, you get the spread, got it,

00:59:58.800 | you get the spread. And you pay long term capital gains on that if you've been able to,

01:00:02.640 | not in context, and and shifted to long term capital gains. Okay. So now,

01:00:09.760 | Sachs or Jason or myself come and invest in your company, what happens, we actually don't get

01:00:15.360 | equity, we don't get common stock, we actually get a synthetic form of debt called the preferred

01:00:20.960 | share. Okay. And typically, the way that it works is when we invest in a company,

01:00:26.240 | and this is how the entire venture ecosystem works. We actually create what's called a preference

01:00:32.560 | stack, which means we get an instrument that is senior to the common equity. Now, what does that

01:00:40.080 | mean? Well, it means that if your business goes out of business, we get our money back first,

01:00:45.760 | we also get an interest rate. And we're able to convert all of that at some point,

01:00:50.800 | the magical moment when a company goes public into common stock, and we give up our preferred rights.

01:00:57.680 | And we now have the same instrument as everybody else when a company goes public. That's the

01:01:01.840 | typical mechanism.

01:01:02.480 | Why does that exist? By the way, the preferred shares maybe explaining the why,

01:01:06.480 | why do VCs need that protection?

01:01:08.080 | To be honest with you, I don't know why it started. But it's a historical artifact

01:01:12.080 | of, you know, the 1960s and 70s.

01:01:14.400 | I think I know why it started. Okay, so this got lawyered, because let's say you start a company.

01:01:20.880 | And just to use some round numbers, a investor wants to give you $10 million to start the company

01:01:26.960 | and for 10% of the company $100 million valuation. If you didn't have preferred shares,

01:01:32.400 | then the founders could basically on the day after the money comes, they could say,

01:01:37.440 | hey, we want to liquidate the company, we decided we don't want to do this anymore.

01:01:40.640 | And they own 90% of the company. And they could basically then distribute out the 10 million

01:01:44.400 | to all the shareholders, and they would keep nine, and 1 million would go back to the investor.

01:01:48.320 | Right.

01:01:48.720 | So that's why lawyers came up with this idea of seniority. So that okay, if you disband the

01:01:54.880 | company, with the investors money still in there, it goes back first to the people who put in the

01:02:00.000 | money. That was the idea.

01:02:01.200 | And when the second person who put it in the money, that was the idea.

01:02:02.320 | piece was if the company gets sold for less than the cash put into it, at least the people with the

01:02:06.160 | cash and get their money out first. So if it sells for 10 million, you get your 10 million back or

01:02:10.960 | 11, you get 1 million after that. So let's just say Jason does the first million. So there now

01:02:15.840 | there's a million of preferred, then Saks does the series A and he puts in 10. Now there's 11 million

01:02:21.040 | of preferred even if it's at a much higher valuation. And then I come in and I give 100

01:02:25.840 | at an even higher valuation. So now there's $111 million of preferred shares. Now,

01:02:32.240 | if the company goes through all kinds of complications and mess, and let's just say

01:02:37.520 | we have to sell it to somebody else for $200 million. Well, guess what happens the first

01:02:42.480 | 111 of it comes back to myself, Jason and David, plus interest. So this is why venture investors

01:02:48.800 | have an incentive to pay and set these crazy valuations because they don't really care what the

01:02:53.600 | valuation is, as much as they care how much of all this preference is building. And do I believe that

01:03:02.160 | the liquidation value of the company is at least that much money. So if I think that freebrook's

01:03:07.920 | companies worth at least $111 million, I'll do it and I add my 100. Now, why is this important

01:03:13.440 | for employees? Before you join a startup, especially in this moment, I think it's very

01:03:19.040 | important for you to understand how much money have they raised? How much is this preference

01:03:25.680 | stack that exists? And do you believe that the company is going to be worth much more than that?

01:03:32.080 | Because that's the only way that you're going to actually participate in the equity. And we know now

01:03:37.680 | what the public market say. So if you go back to that tweet, you know, if it's a 10 or an $11

01:03:42.400 | billion company, okay, well, you need to generate $2 billion of revenue. And if you're at 100

01:03:48.800 | million, that means you have to 20x the revenue for the valuation to be worthwhile, for you to

01:03:54.720 | believe that this valuation is real. So this is just a little guide for employees, I just think

01:03:59.840 | it's very important that you guys start to do the math and start to think about what you're going to

01:04:02.000 | start to figure this out. Ask the hard questions. How many shares are outstanding? How many preferred

01:04:07.360 | shares? What's the overhang? What's my strike price preference stack? Yes, you know, how much

01:04:11.920 | is the total prep stack? How much revenue are we generating? Now, you should go and do the work to

01:04:17.680 | figure out what the public market comps are. Those are widely available. Hopefully somebody could

01:04:22.560 | actually just create a website that helps you do this. But all of these things are going to be very

01:04:26.800 | important for you. Otherwise, what will happen is if you join a company in this moment, at a fake

01:04:31.920 | valuation, and the valuation gets reset, you can effectively assume your options are worth zero.

01:04:37.600 | So if that was a important part of how you made the decision to join that company,

01:04:41.840 | you're being somewhat misled in a moment like this. And you need to have your own

01:04:47.840 | rational sense of what that company is worth. Conversely, I think boards and CEOs have a real

01:04:53.040 | responsibility now to do the hard work of resetting this and explaining it to their

01:04:56.880 | employees if they want to retain them. Because in a moment like this, if you have a valuation reset,

01:05:01.840 | you don't allow people to understand it, and you don't figure out a way to allow them to participate

01:05:06.240 | in some incremental way, I think it's going to be very problematic for employee retention.

01:05:09.920 | Okay, you know, in those contexts, look,

01:05:12.320 | there's a couple things that I always support. You know, if if you need to reprice the options,

01:05:18.640 | you know, you can reprice the options and give employees the benefit of a new 49a. So the company

01:05:23.840 | doesn't set the option price that's set by an external 49a audit. But if that 49a goes down,

01:05:31.760 | because of these factors we're talking about, you can basically the board can vote to reprice

01:05:37.360 | everyone's options. So at least they get the benefit of the lower

01:05:40.000 | explain what a 49a is just broad strokes.

01:05:42.400 | It's basically when stock options are issued, the law requires that the strike price of the

01:05:49.840 | option be the fair market price. And because of some accounting

01:05:54.400 | shenanigans a while back that got companies in trouble, it is now the case that companies don't set

01:06:01.680 | the fair market price. They go out, and they get some external auditor to do a 49a audit and then

01:06:09.440 | the 49a that gives you the fair market price. And specifically, it's a fair market price, the common

01:06:14.480 | stock, because what investors are buying is the preferred, because of the dynamic that Chamath is

01:06:19.200 | talking about where the preferred gets paid back first, the common stock is worth less per share,

01:06:25.440 | because it's got this overhang.

01:06:26.560 | Typically a fraction, a fifth, a 10th, something in that range is typically so if the shares were

01:06:31.600 | worth a dollar preferred, the fair market value of the common could be five cents, 10 cents, 15 cents

01:06:37.520 | depends on if the company is going to run out of money, how many months of runway they have,

01:06:41.120 | are they profitable. And so it is a fair thing to do and but you have to know that in a down market

01:06:46.000 | like this. If you had massive compression, boards need to look at that founders need to look at and

01:06:51.280 | say, Hey, listen, if the if the SAS multiples come down so much, well, our fair market value

01:06:57.440 | should come down that much, the fair market value might be worth 50% less 75%.

01:07:01.520 | That's correct, sex.

01:07:02.480 | Yeah, I mean, so the way it works is that when a company IPOs, you get rid of all the different

01:07:07.680 | classes of stock, you know, the everything, basically, the preferred converts to common

01:07:11.680 | in an IPO, one class of shares. Yeah, maybe you have like the dual stocks of the founder

01:07:16.000 | can maintain control. But from an economic perspective, you basically collapse into

01:07:19.600 | common stock. So when you IPO, common and preferred are the same. And so economically,

01:07:26.480 | they're converging to one to one as the company gets more and more mature and heads towards an exit

01:07:31.440 | exit. The earlier that you are, the riskier the company is, the more that the prep stack matters,

01:07:38.800 | the more overhang that creates. But the benefit to employees is it creates a larger discount

01:07:43.920 | on their strike price on the foreign nine a so that is the offsetting benefit. If the foreign

01:07:48.640 | nine a goes down, because the markets change, then the board can vote to apply a new foreign

01:07:54.240 | nine h the employees. That's a beneficial thing to do for everybody. So that's something you know,

01:07:59.840 | I've always supported. The other thing is, you know, I've always supported the other thing is,

01:08:01.360 | and if you're in a turnaround situation where you're actually worried that the prep stack is

01:08:06.080 | larger than the value of the company, in other words, more money has gone into the company,

01:08:10.480 | then the company may be worth an exit, then what you need to do because then then there's

01:08:14.800 | nothing for the employees, there's no incentive anymore, what you need to do is create a,

01:08:20.240 | basically, an employee participation, you create a corridor, where you say, okay, 30%

01:08:27.200 | of any acquisition price for this company is going to go to the employees, you

01:08:31.280 | create a management or employee carve out, really, it should be an employee carve out,

01:08:35.600 | not just management, but all the employees of the company should benefit from an acquisition.

01:08:41.200 | And sometimes you'll see boards be either unrealistic or stingy, they'll be kind of

01:08:45.680 | Pennywise and pound foolish, they won't create the incentive for the employees to get that sort

01:08:51.120 | of over capitalized company across the finish line. And, you know, it can be pretty frustrating

01:08:56.400 | to see when that when that happens. It's a good time for employees to understand this is a giant

01:09:01.200 | reset that's occurring. I think there is some good news here. I think we have a lot more people

01:09:07.920 | who are going to go back to work because they need to. And that'll be good for monetary velocity,

01:09:12.240 | fill these jobs 11 million jobs, I don't know if we've ever had this, I think it's a record,

01:09:16.240 | the number of jobs we've had, and we're bouncing along record low unemployment. Those two things

01:09:20.080 | could be what saves us could save us during this recession. It's something distinctly unique about

01:09:24.320 | this recession is job openings and low unemployment. We've never had a recession like this.

01:09:31.120 | So that's just fascinating in of itself. But for employees, and for companies,

01:09:36.320 | the new discipline might be there's not going to be four or five offers for every tech employee,

01:09:40.240 | if people are going to cut 10 to 25%. This is the contagion moment. And I think maybe just

01:09:45.040 | talking about layoff contagion in tech and how that works, because Facebook's on a hiring freeze.

01:09:50.880 | And you're starting to see the series BC companies all do 10 to 25% layoffs.

01:09:55.440 | Uber, Dara said, we're going to look at hiring as a luxury, that's probably not going to happen.

01:10:01.040 | And Apple, stunningly, I don't know if you're watching this, they have told people, we're one

01:10:07.040 | day a week now, two days a week in two weeks. And then by the end of this month, May, there'll be

01:10:11.840 | three days a week in the office mandatory, the head of machine learning said, Yeah, that doesn't work

01:10:16.320 | for my team. And they said, Okay. And he said, Okay, we don't have to do it. And they said,

01:10:20.960 | no, we're going to hire you. And they said, No, we're going to hire you. And Apple said,

01:10:25.040 | no, we're going to hire you. And Apple said, No, we're going to hire you. And Apple said,

01:10:30.960 | no, okay, we accept your resignation. So I think even the mighty Apple with unlimited cash reserves

01:10:35.600 | are saying, you know what, if we have to shed some people who don't want to come back to the office,

01:10:39.280 | that's like a de facto layoff. So maybe talking about this contagion, because if you're a company

01:10:43.760 | that doesn't lay off people, you're gonna look pretty weird in this market to your investors.

01:10:47.840 | And they're gonna be wondering, why aren't you laying people off? Go ahead, free burn.

01:10:50.320 | I feel like an old guy now been working in Silicon Valley for 20 years, 20, 21 years.

01:10:55.600 | And I remember, like, you know, one, there was kind of this period of time when there was a bunch of

01:11:00.880 | layoffs and a bunch of companies, reduced headcount. And, you know, there were other

01:11:06.080 | industries and people stayed employed. And then in the years that followed, like web two happened,

01:11:10.720 | and people kind of came back. But what was interesting is like the tech industry,

01:11:14.640 | which at the time was Silicon Valley, but is now fairly kind of, you know, well dispersed,

01:11:20.320 | attracted a lot of people from other industries, right? It used to be cool to get a job in financial

01:11:24.720 | services or investment banking out of college. And then all of a sudden,

01:11:27.440 | working at a startup was the cool thing. And there are a lot of people that move from New

01:11:30.800 | York in the last couple years to SF, leading up to the most recent crash after the pandemic.

01:11:36.880 | And so, you know, look, there is an ebb and a flow in and out of this industry. I do think

01:11:43.600 | that this capital overhang, however, this quarter trillion dollars of dry powder that's sitting in

01:11:48.240 | VC coffers is going to be significantly stimulatory in a very good way. I think

01:11:54.400 | it will create real jobs and enable real progress. It's not just about the companies

01:11:58.160 | that are on the brink of profitability, or the companies that are profitable.

01:12:00.720 | I think it's going to be a really important step for the future.

01:12:02.880 | If you take a step back, Jake, how you said something earlier that I thought was kind of

01:12:07.920 | a really important statement, which is like you're doing deals, right? You're making investments

01:12:12.480 | in startups.

01:12:13.200 | I'm more excited than I've been in years. This is my time. This is what I love.

01:12:18.080 | It's time to go. And so I talked earlier about how the capital stimulants that came out

01:12:24.800 | from the Fed and, and the and the bond buying they were doing and so on, led to an inflation and a bunch

01:12:30.640 | of assets and that capital ultimately didn't find its way into productive assets. But it's not about

01:12:35.440 | all of that capital finding its way into productive assets. If enough of it find its way into

01:12:40.000 | productive assets, productive assets, meaning businesses that create something of value for

01:12:44.480 | customers and make money doing so, and as a result can grow and create new jobs and create new areas

01:12:50.320 | of the economy. If that happens enough times over, there's enough growth in the economy and

01:12:55.520 | enough new jobs that are created, that really rationalizes all of the money that was friggin

01:13:00.160 | wasted.

01:13:00.560 | on speculative nonsense over the past few years. And I think the fact that we've got a quarter

01:13:05.200 | trillion dollars sitting in VC coffers more than we've ever had, that's a quarter trillion dollars

01:13:09.760 | ready to fund the next generation of technology businesses that can build new jobs and create new

01:13:15.600 | areas of the economy, new areas of growth that we've never seen before. And that's what's happened

01:13:20.400 | in the past.

01:13:20.880 | How do you think a person let's just say you're playing poker,

01:13:24.480 | and you just get punched in the face, seven rounds in a row, you're stuck three buy ins,

01:13:30.480 | how does that person make that good next decision? Now,

01:13:34.800 | I will tell you three stories from my last week, because my last week has been filled with

01:13:38.720 | these experiences. All right, sorry, go ahead.

01:13:40.160 | So let me let me just talk about the the business of investing in the psychology of investing.

01:13:45.680 | So look at probably who has been the most incredible performer this year is Ken Griffin

01:13:52.960 | and Citadel. And right underneath him is this guy is the Englander who runs a place called

01:13:58.400 | Millennium. And then you know,

01:14:00.400 | a close third would probably be Stevie Cohen at SEC. Now, how do these guys run their business,

01:14:06.880 | they have hundreds and hundreds of teams investing in all kinds of different things.

01:14:12.640 | And what they figured out over time is how to dial up and dial down

01:14:18.240 | the volume of who's performing. And what they have realized is that when you go through a

01:14:25.040 | pattern of losing money, it is very difficult for you to then make incremental gains.

01:14:30.320 | And so you have to be very careful about that. And then you have to be very careful about the

01:14:34.160 | amount of money that you're going to lose. And then you have to be very careful about the amount

01:14:37.280 | of money that you're going to lose. And then you have to be very careful about the amount of money

01:14:39.920 | that you're going to lose. And then you have to be very careful about the amount of money that you're

01:14:41.280 | going to lose. And then you have to be very careful about the amount of money that you're going to lose.

01:14:43.680 | And then you have to be very careful about the amount of money that you're going to lose.

01:14:46.000 | And then you have to be very careful about the amount of money that you're going to lose.

01:14:48.320 | And then you have to be very careful about the amount of money that you're going to lose.

01:14:50.160 | And then you have to be very careful about the amount of money that you're going to lose.

01:14:53.200 | Jason Wong I personally don't think so,

01:14:54.880 | operating across the entire lifecycle. And I think that there's something to be said,

01:14:59.600 | and I saw it in 2000, folks who have lost a lot of money, make incrementally poor decisions. I think

01:15:05.680 | why Jason is firing a little bit of a hot hand was he mostly let his companies get marked up. And he

01:15:12.480 | was mostly frustrated the last couple years in valuations.

01:15:15.280 | Jason Young Early stage valuations, lack of discipline.

01:15:18.240 | Jason Wong He's operating effectively in slate.

01:15:21.040 | Jason Wong But I don't think it's a binary condition

01:15:23.120 | Chamath. I think generally what you're saying is right. I'll tell you the reaction I'm seeing in

01:15:27.840 | the market.

01:15:28.320 | Chamath Krupa One last thing to add to your thing. And on top of that,

01:15:30.880 | there are only seven or eight people who've actually made money in this entire market.

01:15:34.800 | Jason Wong Yeah.

01:15:35.680 | Chamath Krupa Early stage investors have done well. Early

01:15:39.600 | stage investors have done.

01:15:40.480 | Jason Wong We returned our first fund. That was nice.

01:15:42.560 | Chamath Krupa Yeah, I'm in the black.

01:15:43.440 | Jason Wong Stacks, you, Gurley. I mean, what about all the other thousands of people that raise

01:15:50.000 | Chamath Krupa You gotta distribute. People don't distribute shares. We've talked about this a couple

01:15:53.040 | of times Chamath. Like it's so hard to make money. And you when you have a chance to distribute, I

01:15:57.440 | feel really good.

01:15:58.800 | Chamath Krupa I've been wanting to talk about some of these companies. You know,

01:16:01.440 | I have a Bloomberg at my desk. And one thing that I look at every now and then is the ownership table

01:16:05.680 | of some of these high flying stocks. And you'll see some incredible things, which is these folks

01:16:10.960 | have held on. And they are holding billions of dollars now of paper losses that they have to

01:16:17.680 | go back to their LPs and say, hard conversation, Mrs. Foundation, I know that you wanted to fund

01:16:22.960 | cancer research. You know, I had $9 billion of gains, and now it's two. Oops.

01:16:29.440 | Gurley So look, I think what you're saying generally is right.

01:16:34.000 | People are psychologically tainted when they take a big hit in the face. Everyone has this

01:16:38.800 | experience. My observation over the past two weeks, I have seen a lot of PMs and public

01:16:45.200 | PMs, portfolio managers, as well as private VCs, all react to me in the same way when opportunities

01:16:52.880 | have kind of been discussed, which is I'm sitting on my hands. I mean, there was a PM I saw this week

01:16:58.480 | of a, you know, anyway, I would say I've never seen him jarred. Like I've never seen him just

01:17:05.520 | shocked. Like we were talking about something that was so obviously up his alley, you know,

01:17:11.520 | such a great fit for him, but he is just not doing anything.

01:17:16.160 | David Because they're worried about

01:17:17.520 | careerists now. So I mean, I had I had a crossover investor told me told me that, look,

01:17:22.800 | I think that things are oversold right now. This is an attractive time.

01:17:26.480 | Gurley But they won't take an act.

01:17:27.440 | David Right. Because because look, if I'm right,

01:17:30.240 | that they're oversold, and it goes up, great, I make a little bit of money. But if I'm wrong,

01:17:34.080 | I'm not just losing money. I'm risking I'm risking my career.

01:17:37.520 | Gurley I'm catching falling knives.

01:17:38.880 | David Yeah. So why would I do that? I'm just gonna sit and wait.

01:17:41.200 | Gurley I'm the opposite right now. Yeah.

01:17:42.560 | David Guys, the same is true in VC. So I had several VCs this week, who kind of shared the

01:17:47.440 | same point of view, which is at our partnership meetings. I don't know what you guys are doing,

01:17:50.880 | Sachs at your fund. But they're like, at our partnership meetings, we just cannot align on

01:17:55.360 | whether or not we're paying the right valuation. And so we're at a standstill. We're just waiting

01:17:59.600 | to see when the quote market settles out. And then we'll make decisions because I don't want to be

01:18:03.760 | the guy in the VC context catching knives. But look, that's a near term psychological phenomenon.

01:18:09.680 | I think the reaction Chamath is everyone sitting on their hands. But over time,

01:18:13.040 | Gurley It's not I just told you the data

01:18:15.280 | for the last 30 years, only 22 out of 1300 funds have returned more than 2.3 times

01:18:20.800 | a billion dollars. It's not near term.

01:18:23.600 | David That's not the point I was I was trying to

01:18:25.360 | make earlier, which was there's a quarter trillion dollars. We got that point about the fact that

01:18:30.720 | there is going to be funding available. It doesn't matter if these guys are going to make money or not,

01:18:35.840 | or they're going to make shitty investments or not. There is going to be a stimulatory effect,

01:18:40.080 | all you need is one of the next trillion dollar mega caps to emerge from the quarter trillion

01:18:46.000 | that sitting and then will be the entire industry look fantastic. And for that business to transfer

01:18:50.720 | into the next trillion. And then we're going to have to transform the landscape of some part of

01:18:54.080 | the VC jobs to be created. I think it's but we've but we've never by the way, we've never seen that

01:19:00.320 | in history. We've never had this much dry powder sitting on the sidelines. And this is where the

01:19:04.160 | free money should go. It should go to creating new companies that create new jobs. And it is

01:19:08.640 | it's found its way there. The trillions of dollars that have fueled crazy asset bubbles left and

01:19:13.280 | right. Some amount of it made its way into funding the creation of new companies that are going to

01:19:18.560 | create jobs. And that is the good thing of what's happened over the last couple of years.

01:19:20.640 | Despite the asset implosion of all these bubbly things that have happened.

01:19:24.000 | Amazing. Shamath, I wanted to answer your question. So what do you do if you get punched

01:19:27.120 | in the face seven times you're running bad in a poker game? Yeah, if you look at Phil Hellmuth,

01:19:31.680 | or other people who you know, go through that variance, I think what will you take a break,

01:19:36.400 | go for a walk around the pool, and you did pick a different smaller game.

01:19:40.160 | One thing I like to think about is, hey, I'm going to play a better play better cards to

01:19:45.360 | start your hand, and maybe play in position and in in the analogy here, playing better cards,

01:19:50.560 | you know, backing better founders and better products, and then playing a position knowing

01:19:55.120 | we're in the lifecycle of a company value is created, and that goes to valuation. So I'm laser

01:20:00.080 | focused right now on just, you know, world class teams that are running their business as well, and

01:20:04.960 | that I can invest in early and if there are founders out there, like who are trying to figure

01:20:09.840 | this out, and they're not getting funding, I think looking I think you said this last week, maybe two

01:20:14.480 | weeks ago, and listen, your last valuation last year is a great valuation this year. And if you

01:20:19.680 | had people

01:20:20.480 | who wanted to invest last year who couldn't get in, going back to your $30 million valuation last

01:20:25.600 | year, and topping off 3 million with the people who couldn't get in, and you told them, you know,

01:20:29.680 | 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

01:20:34.160 | the VCs are out there in the early stage, you know, making bets on sub $15 million, sub $12

01:20:40.080 | million companies in the seed round. If they're focused on customers and product, you know,

01:20:46.560 | got a couple of 100k in revenue, it's I think it's a good bet. And I

01:20:50.400 | I'm going to increase our investing in those type of companies under 20 million under 15 million

01:20:56.000 | focus teams who understand that the climate has changed. If you're not taking the medicine,

01:21:01.440 | you have to Saks is excellent tweetstorm, you're DQ from funding, I think it's very

01:21:07.120 | important that people understand what Saks said. If you do not accept the reality of VC who has

01:21:12.400 | lived through one, two or three of these cycles is going to disqualify you and they're not telling

01:21:17.520 | you why they're disqualifying you. It's just not a fit. Couldn't get my point.

01:21:20.320 | Partners around it. You know, let's keep in touch. Let me know how it could be helpful.

01:21:23.680 | The other thing is an entire generation of investors have been coddling entrepreneurs.

01:21:29.520 | And in moments like this, sometimes you need to actually have hard conversations. And if

01:21:34.480 | that's true, yes, I don't know how you tell that entrepreneur, listen, you need to be

01:21:38.160 | actually five days a week. In the office, you need to do a 25% riff, you need to stop all the

01:21:43.920 | extraneous spend, forget the exposed brick walls and the kind bars, we need to get down to just

01:21:50.240 | ones and zeros. That's also an entire generation of capital, capital allocators who don't know how

01:21:56.000 | to do this job in a moment like this. They've never had those conversations. They've never

01:22:00.080 | had those conversations. Just to build on Friedberg's point, the idea that you would be at

01:22:04.880 | a standstill about price in a moment like this, to me is shocking. If I mean, if I was an LP,

01:22:10.800 | in that venture fund, I would write it to zero, there should be no

01:22:15.440 | intellectual standstill whatsoever in a moment like this.

01:22:18.240 | Right. Yeah.

01:22:20.160 | We're still investing.

01:22:21.200 | It's obvious what the prices are.

01:22:22.400 | Yeah, we're still investing. It's just that lower valuations.

01:22:25.040 | There should be no standstill. Exactly. This is the time to invest, Sachs, right? I mean,

01:22:29.280 | Yeah, I want to say something sort of positive, because a lot of founders watch the show.

01:22:33.760 | It's like, look, what Jason said, you need to accept reality. And if you don't, you're going

01:22:38.480 | to have a bucket of very cold water dumped on your head when you go on fundraise and realize

01:22:43.440 | that you're not gonna be able to make it. And then all of a sudden, you're gonna be packing up

01:22:46.720 | shop very quickly. So you got to get

01:22:50.080 | a reality check and understand. But look, great companies are built during downturns.

01:22:55.120 | You know, PayPal was built during the dot com crash. My company Yammer was built during the

01:22:59.840 | Great Recession.

01:23:00.960 | Google, Uber.

01:23:02.160 | Totally. I mean, the list goes on and on. So downturns are great times to build companies,

01:23:06.560 | because the war for talent subsides. So it's so much easier to recruit people. There's a lot

01:23:10.720 | fewer competitors getting funded. So there's way less noise in the ecosystem. The only thing that

01:23:15.440 | gets harder is fundraising. So you need to make sure that your money lasts, you do the right

01:23:20.000 | things, you focus on business fundamentals, you don't dequeue yourself. And if you do that,

01:23:25.200 | you'll be fine. You just brought up something incredible. I remember we raised money from

01:23:29.600 | Microsoft at a $15.3 billion valuation. The great financial crisis took hold and marked his credit,

01:23:38.640 | reset the valuation. We were already profitable. So we didn't necessarily need to raise that money.

01:23:44.720 | But we I think we raised a billion dollars at like a $9 billion valuation. So we took a, you know, 30

01:23:49.920 | 303 40% haircut, a down round, Facebook had a down round, we padded our balance sheet, and we said we

01:23:56.000 | are now going to go and crush and to your point, we were really able to compete much more effectively

01:24:01.360 | coming out of the GFC against Google for talent and against everybody else in that moment. Yeah.

01:24:06.560 | And so if this is what people like Zuck are willing to do, you have to really hold people's

01:24:13.280 | feet to the fire for founders who are not him. What is the Fastdoc co founder willing to do?

01:24:19.840 | Shut it down like like literally the some founders, I find this very disturbing. But

01:24:24.160 | there are some founders who are so unwilling to make the cuts or take the medicine that they would

01:24:27.920 | rather run the fucking car into the wall than hit the brakes like hit the fucking brakes, save your

01:24:33.600 | company live to fight another day. If you have six months of runway, get to 12 and try to live.

01:24:39.280 | Raise your prices. You're totally right. Every single company that hits the wall and goes

01:24:44.720 | out of business that didn't do a round of layoffs 12 months before was asleep at the wheel.

01:24:49.760 | They were literally texting and driving. They were texting and driving.

01:24:52.880 | Where was the round of layoffs a year before they ran out of money that at least

01:24:57.280 | gave them more runway? They didn't even do it. They just assumed they could go. David,

01:25:01.600 | if you think about it, your series your seed round was hard. Getting into Y Combinator was hard. Your

01:25:06.160 | series A, okay, it was it was hard. You had to do 25 meetings, but you got a term sheet. Your series

01:25:10.960 | B, you had five people offer your term sheets. Your series D, C and D were people begging you

01:25:16.800 | to take their money and saying name a price. So what does that mean?

01:25:19.680 | David Collum:

01:25:20.720 | That's what it means. You have to take the money and say, Hey, I'm going to do this.

01:25:23.840 | I'm going to do this. I'm going to do that. And then you have to take the money and say,

01:25:26.160 | Hey, I'm going to do this. And then you have to take the money and say, Hey, I'm going to do this.

01:25:28.320 | And then you have to take the money and say, Hey, I'm going to do this. And then you have to take

01:25:30.640 | the money and say, Hey, I'm going to do this. And then you have to take the money and say, Hey,

01:25:32.800 | I'm going to do this. And then you have to take the money and say, Hey, I'm going to do this.

01:25:35.600 | David Collum:

01:25:36.640 | And then you have to take the money and say, Hey, I'm going to do this. And then you have to take

01:25:38.960 | the same focus you had of selling people on buying shares in your company and put that into your

01:25:44.160 | product, the actual service and raise your prices. So many people are charging so little for their

01:25:48.640 | SaaS product or software. And they're like, I can't make this business work. And we say to them,

01:25:52.480 | if you doubled or tripled your price, would you lose? What percentage of customers would you lose?

01:25:56.400 | And they say, we'd lose like 10%. And I'm like, did you just, you have a million in revenue,

01:26:01.200 | 2 million, 10% off 2 million. You've got 1.8. Would you rather make 800,000 more and be

01:26:06.720 | break even right now? And there are two months. Sometimes

01:26:08.880 | David Collum: Founders just have this amazing moment

01:26:10.560 | where like, Oh yeah, I guess we could charge more. And if we lost some customers, that wouldn't be

01:26:13.440 | the end of the world and we'd be profitable. David Collum:

01:26:15.360 | I think this speaks to the fact that, you know, it takes a very specific skill to be a very good

01:26:20.720 | founder. You need a level of intellectual curiosity. You need some, at some moments to

01:26:26.640 | listen, but at some moments to know just when to do what you feel is right. But it takes a lot of

01:26:31.360 | skill to be an investor. And I think we've glossed over how hard that business is as well, because

01:26:35.360 | the reality is if, if, if Michael Moritz were to tell you that you

01:26:38.800 | do it, you'd be hard pressed to not, to not say yes.

01:26:41.040 | Of course.

01:26:41.440 | If he really told you to do that, you would do it because, you know, these are,

01:26:44.960 | these are sort of the big, the big names in our industry. But the reality is the fact that it's

01:26:49.680 | not happening also speaks to the fact that there's probably, there shouldn't be a quarter trillion

01:26:54.080 | dollars of funds that are probably stranded in the hands of really inexperienced allocators,

01:27:00.080 | who are going to light it on fire for the most part. And they're not going to have the courage

01:27:05.200 | to sort of lead these.

01:27:06.080 | See what happens. All you need is

01:27:08.720 | all you need is one.

01:27:09.440 | Everybody should think about what I don't know what, how you phrase it to founder sacks,

01:27:14.480 | but I say to them when I invest in their companies, listen, when, whenever things

01:27:17.920 | get really hard and you have a conversation, that is the hardest conversation. That's making

01:27:21.520 | the most nervous. That's making you stare at the ceiling and grind your teeth to your gums.

01:27:25.840 | I want you to just call me and I can tell you like, I, you know, not speaking out of turn here,

01:27:30.240 | but you know, Travis called me once or twice on a Saturday and said, Hey, we're struggling with X.

01:27:33.600 | What do you think? And Travis knows how to run a business a thousand times better than me, but be

01:27:38.640 | a sounding board and giving your founders permission to come to you when things are

01:27:42.640 | fucked up is critically important as an investor and being able to have an intellectually honest

01:27:46.960 | to your point, Shemoth discussion about the hardest issues is really what the job is in my

01:27:51.920 | mind. What is going to send this company off the rails? What is the big fear you have? And let's

01:27:57.520 | just put it on the table and let's, as, as Travis would say, let's have a jam session. Let's jam on

01:28:02.000 | that until we solve the problem. So if you're suffering out there, you're scared. You know,

01:28:06.720 | it's gotta be an investor in your group who will have a

01:28:08.560 | candid discussion. If I had to give a punch list of things, if I was a founder right now,

01:28:13.040 | here, here are the things that I would do is I would sit down and really look at your growth

01:28:17.440 | and your burn and have an honest conversation with your co-founder or with one or two of your

01:28:21.920 | trusted board members and really say, what is the real valuation of this business today? And what

01:28:26.800 | could it actually be? And if there's a big gap between that and where you've last raised money,

01:28:32.320 | the right thing to do is to think about in one bucket, resetting the valuation in a second,

01:28:38.480 | bucket, making your employees whole and in a third bucket, managing your burn so that you extend your

01:28:44.320 | runway. I think if you could do those three things and take the hard medicine, now you will be much

01:28:50.240 | better off for it. You'll be appreciated by your employees and you'll have shown some real metal,

01:28:57.120 | in a real crucible moment to use a Sequoia phrase.

01:29:00.400 | How do you guys think the market's going to settle out? Do you have any predictions on

01:29:03.840 | the bottom? I will tell you a statistic. I think Michael Burry put this out yesterday. He

01:29:08.400 | did not. He deletes his tweets every day. Very interesting character, by the way. But

01:29:14.640 | he pointed out how from top to bottom during the kind of '02 era, '01, you know, 2000 era,

01:29:24.800 | and then during the 2009 era, you know, kind of those big drawdowns in the market.

01:29:29.520 | He looked at companies like Microsoft, JP Morgan. I forgot which others but highlighted that, you know,

01:29:38.320 | the market was going to be tanking for quite a while. And these days that are big updates,

01:29:42.960 | everyone's trying to call the bottom. And he's like, you know, I'm going to call the bottom.

01:29:45.600 | And he's like, you know, I'm going to call the bottom. And he's like, you know, I'm going to call

01:29:48.080 | the bottom. And he's like, you know, I'm going to call the bottom. And he's like, you know,

01:29:51.200 | I'm going to call the bottom. And he's like, you know, I'm going to call the bottom. And he's like,

01:29:53.360 | you know, I'm going to call the bottom. And he's like, you know, I'm going to call the bottom.

01:29:55.200 | And he's like, you know, I'm going to call the bottom. And he's like, you know, I'm going to call

01:29:57.200 | the bottom. And he's like, you know, I'm going to call the bottom. And he's like, you know, I'm going

01:29:59.200 | to call the bottom. And he's like, you know, I'm going to call the bottom. And he's like, you know,

01:29:59.280 | I'm going to call the bottom. And he's like, you know, I'm going to call the bottom. And he's like,

01:29:59.280 | a few days and a few weeks now, which is like, you know, the dead cat bounce day,

01:30:03.040 | where the market's going to be tanking for quite a while. And these days that are big updates,

01:30:07.200 | everyone's trying to call the bottom. He's like, no, this is the dead cat bounce moment.

01:30:10.400 | And he's like, if you look at kind of the structural rotation that's necessary

01:30:14.080 | for these markets to ultimately find their bottom, you know, we've got several multiple

01:30:18.400 | still to go with respect to volume that needs to trade before you find what the true market bottom

01:30:23.120 | is. So you know, it was a really interesting kind of insight to this kind of statistical insight

01:30:28.160 | that he pulled together and put on Twitter. I wanted to see if you guys kind of think that

01:30:32.000 | that might be the right way to think about it and how you react to, you know, these conversations

01:30:35.760 | around where's the bottom going to be? Can I just pull up this one chart,

01:30:38.640 | because it kind of speaks to this. So this is CPI inflation versus the Fed funds rate.

01:30:44.000 | So if you look at this, it goes all the way back to 1954.

01:30:48.720 | I shared it with you guys in the chat. The two have moved more or less in lockstep with each

01:30:54.000 | other, which makes sense because the Fed raises the Fed funds rate in order to combat inflation.

01:31:00.320 | So Fed funds and inflation sort of move in lockstep. If you look at what's happened over

01:31:04.320 | the past year, these two things have moved violently out of sync with each other. You have

01:31:09.360 | inflation now going all the way up to 8%. Meanwhile, the Fed funds rate is only down at like

01:31:15.040 | 1%. Even with all the rate highs, you know, the Fed funds rate is down at like 1%. Meanwhile, the

01:31:17.120 | Fed funds rate is only down at like 1%. Meanwhile, the Fed funds rate is only down at like 1%. Even with all the rate highs,

01:31:17.520 | rates only down at like 1%. Meanwhile, the Fed funds rates only down at like 1%. Even with all the rate highs,

01:31:17.520 | and the talk of rate hikes that we've had, we're only at a 1%, you know, Fed funds rate.

01:31:24.160 | Now, the expectation is, it's going to go higher, the 10-year T-bulls over 3%.

01:31:29.440 | But the point is, the Fed is in a really tough spot here, because it feels like we're going

01:31:34.160 | into recession, which would normally mean you cut rates, but then you've got inflation

01:31:38.960 | demanding that we jack up rates far more. And I think this is the problem. And this

01:31:44.880 | is what's going to be very tough about our current situation is if we go into a recession,

01:31:47.280 | over the next six months, what does the Fed do about that? I mean, they don't really have much

01:31:52.320 | dry powder here. In previous recessions, like the GFC in '08, I mean, interest rates were around 5%.

01:31:58.000 | So when they slashed them to zero, they had some serious, you know, that was some serious relief.

01:32:03.440 | Here you're at 1%, what do you do? You drop that to zero. And then meanwhile,

01:32:06.720 | inflation still rampaging at 5%. This is what's so hard about it.

01:32:10.800 | Then look at this other chart, which is, this came from a blog, a blog post called The Most Reckless

01:32:17.040 | Fed Ever. So in this most reckless Fed ever, they basically just took the Fed funds rate and

01:32:23.760 | subtracted inflation to get the real Fed funds rates, the Fed's funds rate, debt of inflation.

01:32:29.600 | And what you could see here is that starting around 2018, '19, the real Fed funds rate

01:32:36.240 | started going negative and then very, very negative to the point now where it's basically

01:32:40.240 | a negative 7%. So, you know, why is that? Because the Fed waited way too long to basically

01:32:46.800 | take away the punch bowl and start reacting to inflation. You had Powell say a year ago

01:32:52.480 | that inflation was transitory and then they didn't react to it till the end of the year.

01:32:56.720 | They should have stopped the QE right then and there, and then gradually started raising rates

01:33:01.520 | instead of these violent moves that we've had this year that are plunging the economy into recession

01:33:06.560 | that have caused the stock market crash. Now, what did Powell just say a week or two ago? He said

01:33:10.960 | he doesn't see a risk of recession on the horizon. It's like, what are you smoking? I mean, this is

01:33:16.560 | just like his inflation is transitory comment a year ago. You're wondering, like, do we have better

01:33:20.960 | data than the Fed chair does? Because from where we're sitting, we're seeing a stock market crash,

01:33:26.560 | a panic and a recession, and he doesn't even see it. It's like...

01:33:30.000 | Denial is not just a river in Egypt. This is crazy.

01:33:33.040 | Look, I mean, we call it a crash, but, you know, some people might just say that

01:33:37.120 | investors are violently reacting to the shifting tides on capital availability.

01:33:42.320 | But I will tell you, I'll say this one more time, because I think it's so important

01:33:46.320 | and it's my kind of prediction of the week. I really think we're going to run into a consumer

01:33:52.800 | credit bubble here. I do not think that consumers are going to slow down their spending or change

01:33:58.960 | their lifestyle as quickly as investors are changing their investing style. We have seen

01:34:03.840 | investors in public markets and private markets take massive corrective hits this week and last

01:34:08.400 | week, and they're changing their behavior and some of the stories we shared today.

01:34:12.080 | But consumers are taking on more credit. They're opening credit cards. They're taking out bigger

01:34:16.080 | loans. Prices are going up 10% year over year for them. And so the concern is if we actually do hit

01:34:21.520 | a recession and we don't see real wage growth and the consumer credit bubble continues to grow,

01:34:26.480 | we're going to face a credit crisis in call it nine to, you know, nine months to a year,

01:34:32.080 | where we're all going to wake up and be like, wait a second, how are consumers going to be

01:34:35.200 | able to afford all this credit? Very simple.

01:34:36.880 | And I don't know how you bridge that hole. End of the great resignation. That whole concept

01:34:41.040 | of like fun employed and I'm going to flip NFTs and I'm not going to go to work. That's out the

01:34:45.840 | window. So people who've been enjoying it, people are going to need jobs.

01:34:49.760 | That there are, there are more shoes to drop here. And I think consumer is one of them.

01:34:53.600 | And maybe there's systemic risks in the system that haven't been flushed out yet.

01:34:57.120 | And meanwhile, you've got a fed chair in denial about what's happening and you've got a president

01:35:01.600 | of the United States. Sue's more focused on what's happening in Ukraine than what's happening in the

01:35:06.000 | United States. We are let we have Tweedle Dee and Tweedle dumb on this case. Biden and Powell are

01:35:11.520 | going to go down as the worst president and fed chair of all time.

01:35:15.600 | No, it is. It is like the anti Reagan Volcker combination. I mean, they've caused this problem.

01:35:20.560 | First of all, this is a long, I don't know if I agree. It's a longer conversation. I got to run,

01:35:24.960 | but yeah, like, you know, I think we all spent a little bit of money too. We all want to blame

01:35:29.360 | someone. The reality is there was a massive leveraging that happened going into 2008.

01:35:34.000 | And we got to work it out. We thought we were delivering and I don't think we've been delivering

01:35:37.920 | since 2008. And all of a sudden the chickens coming home to roost or whatever the term is.

01:35:42.880 | And we're all sort of waking up to the fact that wait a second.

01:35:45.360 | The system with 10 trillion. We got to work. That's the cause. It's not. And more recently,

01:35:50.960 | consumers and all of us have gotten years ago. It's not for 14 years ago.

01:35:55.280 | Three years austerity measures in the long cycle here. But go, if you look back through time,

01:36:02.080 | roughly, if you look at like the average mean P for the S&P 500, it can go down to as low as 3000.

01:36:07.040 | It could. But I think the reality is there's a Fed put somewhere in between here because,

01:36:12.480 | you know, if we see the credit markets

01:36:15.120 | really seize up, which we would if the equity markets continue to retrench,

01:36:19.520 | the Fed will be forced to step in with liquidity and we back to where we were before. So,

01:36:23.840 | you know, I actually think we're probably close to a near bottom ish here 3800 ish in the S&P 500.

01:36:32.160 | You're actually starting to see some of these early green shoots of a market bottom. What are

01:36:37.680 | those? It's when the most heavily shorted stocks start to rip up, you know, sort of the gain stop

01:36:44.880 | like rallies and you're seeing that actually today. So it's a it's a really interesting day

01:36:49.600 | when the market is roughly flat, slightly down. But some of these companies, you know,

01:36:53.680 | Well, block percent, square five, 6%

01:36:57.680 | are mad as a 25% even lift went up 5%. So this is the bad.

01:37:02.480 | There was definitely some panic selling yesterday.

01:37:04.080 | I think it's bouncing along the bottom. Yeah.

01:37:05.360 | There was so much panic selling yesterday that the market's bouncing up from that.

01:37:08.320 | Look, the market is a leading indicator, not a lagging indicator. And so it's it adjusts first.

01:37:14.640 | And then the real economy adjusts after that. And the risk right now is the stock market is

01:37:18.800 | telling us something about where the real economy is headed. And the problem is that the Fed and the

01:37:23.680 | central government don't really have the tools to fight the recession because interest rates

01:37:27.440 | are already so low. And, you know, Biden already spent all the money. I mean, they broke the glass

01:37:32.320 | in case of emergency last year. They spent that last $2 trillion of emergency relief.

01:37:37.360 | Look, Larry Summers told him they didn't need to do it. Remember that?

01:37:41.680 | Larry Summers told him it would lead to inflation. Nobody I know,

01:37:44.400 | I know no one wants to listen to Larry Summers. He's like one of those guys.

01:37:47.200 | You never want to. It's correct. But Larry Summers was correct. The administration did not listen to

01:37:52.560 | him. Larry, who I know very well, and a wife who I love is like girly as well. He's generally right

01:37:58.480 | in the end. And so I would just kind of Yeah, you know, he was right.

01:38:01.840 | I mean, we do need to get back to the Clinton, you know, moderate, like balance the budget,

01:38:06.960 | stop spending some austerity measures. Like we can only work our way out of this. And

01:38:11.040 | I think what we're going to learn from this is the concept of free money

01:38:14.160 | and printing money is not sustainable. And the concept of Americans not going to work

01:38:18.720 | is not going to make the economy that Americans want to live in. I know this sounds fucking crazy.

01:38:24.240 | But if you want to spend money and you want to enjoy life, you got to work you can't, we can't

01:38:30.640 | have this kind of labor participation. And we can't have people flipping NF T's for a living.

01:38:35.280 | That's not work. You're right, Jason, you're right about that.

01:38:39.040 | I saw this thing where there's a there's a new product implementation on Airbnb,

01:38:43.920 | that allows you to kind of like, you know, search by campgrounds or search by castles or

01:38:48.960 | by vibe, it's vibe search. And, and it's a perfect encapsulation of this moment where there are folks

01:38:58.400 | who have all of this flexibility they've never enjoyed before, that their mindset, you know,

01:39:03.520 | especially if you're like a social striver, like you can signal that you're different from everybody

01:39:08.400 | else by lifestyle. But that works in a in a world where there's lots of free money. And when that

01:39:13.680 | free money gets taken away, I'm not sure that you're renting castles to spend a week here in

01:39:18.400 | a week there. Well, I mean, we all want to talk about UBI, I think it's a very virtual signaling

01:39:23.280 | thing to do. And it's a very like world positive thing to do all there's gonna be so much money

01:39:27.360 | that we can just drop it from the heavens. And everybody's gonna get a private jet,

01:39:31.200 | everybody's gonna get to flip their NF T's. And your board apes going to become worth a million

01:39:35.520 | dollars, your Bitcoin is going to be a million dollars each. This is not reality, folks. Value

01:39:39.520 | is created when you make stuff in the world when you write code when you build companies when you

01:39:42.880 | go to work.

01:39:43.440 | But it's gonna take a long time.

01:39:45.520 | I mean, at some point, maybe we'll have some energy source and you know, robots building

01:39:50.000 | everything for us. But we got to wrap here. We'll see everybody at the all in summit. There'll be a

01:39:54.720 | bunch of stuff dropping do just a couple of programming notes. Please, please, please,

01:39:58.400 | there are no more tickets up. Do not try and crash the party. There's gonna be security there.

01:40:01.920 | Everybody with a badge. We're going to be checking the badges to moth. Everybody's got a photo on

01:40:05.840 | their badge. Please don't bring a plus one. And please, please, please, please do not try to crash.

01:40:10.400 | Thank you. Love you. Love you. Talk to you soon, everybody. We'll see you next

01:40:13.200 | time on the all in podcast. Bye bye.

01:40:15.200 | Let your winners ride.

01:40:18.080 | Rain Man David Sacks.

01:40:20.960 | And it said we open source it to the fans and they've just gone crazy with it.

01:40:27.760 | Love you.

01:40:28.400 | I'm going all in.

01:40:31.760 | Besties are gone.

01:40:38.000 | That is my dog taking a notice in your driveway.

01:40:42.960 | Oh, man. My avatars will meet me at.

01:40:47.200 | You should all just get a room and just have one big huge orgy because they're all just useless.

01:40:51.120 | It's like this like sexual tension that they just need to release somehow.

01:40:54.160 | What you're the beat. What your beat. What your beat. We need to get merch.

01:41:02.000 | I'm doing all in. I'm doing all in.

01:41:12.000 | .

E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

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