You know, the number one question I get from founders who come in here, the number one question I get from my LPs is where are we in this correction? What stage of grief are we in, Bill? - And when does it end? (upbeat music) - Hey man, good to see you.

- Good to be seen. - Of course, you know, to the audience, do your own homework, make your own investing decisions. We are not your investment gurus. So Bill, talk to me a little bit about what you've been thinking about this week. - Yeah, so one of the things I've been thinking about lately and we'll go into it in more depth is how some of the big decisions and there've been kind of sequence of events in the large LLM market, I think are gonna create some pretty big market distortions that might be felt, you know, along the way by a number of different players.

So I wanna go in deep on that. What about yourself? - Well, I was prepping for our annual LP update today. I mean, I've been doing these now for over 15 years and it's always that time of year where I stop, forces me to telescope out, I think about valuations, about what's going on with Mag7 over the last year, about long run tech compounding, about this AI cycle and what's gonna happen this year.

Then I also had this, you know, I guess my first tweet that went over a million views over the course of the last week, which, you know, it's still amazing to me that because of regulatory capture, people just aren't getting their calcium CT exam. They're still like enslaved to looking at their cholesterol.

We saw the tragic news on that Warriors coach this week, you know, so I'm just thinking everybody over the age of 40 needs to get this CT scan, but-- - Hey, let me ask you a quick question on this before we dive in. So you shared this with me.

I had had a spiked LDL on just a simple test and I went and did this and it was pretty simple. I mean, I was in and out, you know, in a flash. Like it's not like it was a big invasive thing. And so if it's so simple and so powerful, why do you think the establishment's fighting it?

- You know, I think we establish standards of care in this country and in this case, the standard of care is to track people's cholesterol and no doctors have an incentive to do anything other than standard of care. And so I think they worry about liability. I think other doctors just aren't on top of it, but the reality is a CT scan, you don't need a doctor referral.

It costs less than a hundred bucks, as you know, takes less than 30 minutes in and out, non-invasive at all. And it actually will tell you whether or not you have plaque in your artery. So, you know, it's, you know, I saw, I saw after this tragic death this week, the head of preventative cardiology at Stanford, Dr.

Marin said, you know, perhaps had he had a calcium CT, he'd be alive today. So it's just a no brainer. I'm thrilled that you did it. I know we've been on this with all of our friends and so that's good news. - Awesome. - Well, let's dig in. We may as well start with the hottest topic of the day in Silicon Valley, which is AI.

You know, you stirred the pot a bit this week. - And it was reacting to a tweet out of your firm. So put the tweet up, let's tell the story. So put the tweet up. What was the point of the tweet and what was in the graph? Like what was being discussed?

- You know, as you know, so Apoorv on my team who helps cover AI, he started looking into the amount of venture capital investment. Everybody's talking about whether or not we're in a VC winter. But if you look at the aggregated amount of VC capital that's being invested, it's a big number.

But if you deconstruct it a little bit, what you see is that we have this explosion in venture capital investing coming out of four companies, right? He called them MANG. Microsoft, Amazon, you know, NVIDIA and Google. And so as you can see on this chart, we go from almost no venture capital investing, you know, out of these folks six or seven years ago to all of a sudden this $25 billion last year in VC investing, it led to the question like, why is this happening?

And you know, it's not being distributed equally. It's only going to a few companies. So really what's going on? And so I turn to you, you know, you retweeted it. You had some things to say, what's going on? - Yeah, and let me start with two kind of high level thoughts before I drill in.

The first thing is, you know, it's awesome that this new paradigm has come along. One of the things that makes venture capital investing, being a part of Silicon Valley so much fun is you always get to move on to the new thing. It's a learn it all mentality all the time.

And it's just super invigorating when the new thing pops up and everyone gets to go play with it and talk about it. And you have to learn it. And if you don't, you get left behind and it's a big part of the ecosystem. So it's exciting that there's a new gold rush and 'cause I'm about to say something that's going to sound cynical.

And so I want to start with that. The second thing is, you know, I don't, some of the things I'm going to say, I don't have perfect visibility, obviously, inside these large companies, exactly what they're doing. But I have an intuition of what's happening. If anyone out there, you know, after I make these statements says, no, Bill, you got it all wrong.

You know, let me know and we'll correct it and we'll talk about it. So what I wrote, I'll just read it. I said, this is what happens when you invest with credits that allow you to goose your own revenues. So I think if we think about this historically, Microsoft found itself in a position where it realized, one, that AI could have a massive impact on the products they already have.

And that's been proven, you know, in the development world with CoPilot, now they're implementing it for Office and all the productivity apps. So they knew it was powerful. Second, they felt they were behind. And so they embraced open AI. And obviously the relationship between Satya and Sam is quite well known at this point.

As part of that relationship, they made a quote, and I definitely use quotes, investment in open AI. And we've been, the world's been told a big part of that investment wasn't cash dollars, but credits for cloud services. - Correct. - And what we then speculated happened after that is the other large cloud service providers became fearful of loss of relevance or loss of market share because of this type of transaction.

And so we started seeing copycat transactions happen along the way. And so the reason I think that, well, I'll walk into some of the details of what could happen. But what I fear is that this is happening at such a large level, and maybe we haven't seen the end of it, right?

I think there's reason you can see more, that it's gonna create a market distortion. And if we think back to the last cycle, I lived through the market distortion created by zero interest rates and the Vision Fund and the Vision Fund copycats, and all of a sudden billions of dollars are piling into companies.

And the reason this matters, if you're a player in the ecosystem, is if there's a massive market distortion, the rules that you've been taught to live by can all of a sudden either not apply or there's new rules that apply. It can get messy. The playing field can get messy.

- Okay, so let's break it down for just a second. So I think I understand what you're saying. So you're basically saying Microsoft decided to make a big investment in open AI. Amazon decided to make a big investment into Anthropic, just as two examples. And of the billions of dollars that they're investing at these very high valuations, those startup companies need to spend those billions back on the services from the people who gave them the money.

- And they have the need, right? They have the need either for training or even a lot of them are reselling their software packaged with the compute. And so it's like a value added service, right? We're putting AI on top of a CPU that you would rent otherwise. Now, let's think about this from both players' side.

From the big company players' side, I would just say definitively, and this could get me in trouble, but this is low quality revenue. Like this is flat out low quality revenue. And I'm certain that they've got their auditor to sign off on it. But I don't think there's any way you can argue that it's high quality revenue.

Here's an example I'll give you. Well, first of all, it's cashless, right? It's cashless revenue. So when the credit's reused, you get zero cash coming in and we know you have an amortized cost against that big capex that you made. - And the reason you have zero cash coming in, Bill, is because you gave the cash, you gave it to them as a form of investment and they're turning around and handing it to you.

So from a company's perspective, it's like taking out of your left pocket and putting it in your right pocket. - Well, yeah. I mean, a big skeptic would say you're using your balance sheet to drive your income statement, which should be a no-no. The other way I think to highlight the low quality revenue is imagine there's a startup.

I came up with a cool name for the startup. It's called the Ultra Hosting Company, UHC. So UHC got a bunch of money from venture capitalists. They built a big server farm and their only customers they have are companies that they went out and gave credits away to as a form of investment.

That's 100% of their customers. So they have tons of revenue as they reuse these things and zero cash flow whatsoever. And so I think that highlights it, right? 'Cause some people will say, oh, it's just a small percentage of this big company's revenue. I'm like, it doesn't matter. It's still, it is what it is.

- So Bill, if we steel man why this might be okay, right? Because I don't hear you saying this isn't illegal. You're not saying it's a violation of GAAP. You're not saying they're defying their auditors. What you're saying, I think at a minimum is that if Microsoft is putting money in, or I hear you saying two things.

If Microsoft's putting money into OpenAI at $90 billion, I think the first thing I'm hearing you say is you gotta be a little bit skeptical of that valuation because it's not exactly an arm's length transaction. - Well, yeah, and here's another, here's a way to really drill in on that, going back to Ultra Hosting Company.

Let's assume for the sake of this discussion that the service being provided is a commodity. And one could argue putting a bunch of NVIDIA servers and GPUs in a cluster and renting them to you is a commodity service, right? So if I'm competing with you to invest in this startup for you to turn around and use my commodity service, isn't there a strong argument that the way I would get there is by taking a price up to a level where you choose me over them?

And so all of a sudden, you've got definitive proof that the way you would win the war, and you get another benefit. You get revenue, you get market share. So at the very least, there's an argument of might you be maximizing this versus that? And so yes, I think the valuations could be superfluous as a result of this.

And that's one of the many market distortions that would happen as a result of this activity. The second thing is this could all come to an end. And so I think for the big hosting providers, having revenue that is non-typical, let's just call it atypical, could backfire if we reach a point which this type of activity is no longer done for whatever reason.

- Okay, now let's describe a scenario that I think you would have less issue with, right? If $10 billion was just invested into OpenAI by the five leading SandHill firms, and then if OpenAI in an arm's length commercial transaction decided to buy $10 billion worth of services from Microsoft to Azure to train GPT-5, GPT-6, et cetera, you're saying like that's no problem.

The problem that you see here is that that's coming from Microsoft. So I guess when we look at this, the indicator that there's a problem from you might be, do these companies have the ability to raise this type of capital? Because if they're just substituting Microsoft for somebody else who could provide the services, that's one thing.

But if they don't have the ability to raise this capital from alternative sources, it would seem to be more evidence of your case. - Well, and there's another element that you're touching on 'cause we read, you might've seen an article in the information this week about how Google's having to change their compensation policies to keep up with the comp that's coming out of the major AI companies.

And we've heard talk of what I would call pretty early secondaries at OpenAI. And so if, let's just call it accelerated liquidity is part of what it takes to get a killer AI engineer, then you will have to have funding other than just credits to be able to fund those secondaries.

That's one thing. But yeah, I agree with you. Let me talk briefly about why I think this could be a problem for those players and even for the other smaller companies in the ecosystem. So I believe that once you have these credits inside your company, somebody is certainly gonna make the argument, right?

Or they're either gonna be ignorant to the cost because it's now not a real cash cost, right? I have these huge credits that I'm using and or they'll fool themselves into thinking if I sell my service below the replaceable cost of the credit, that's really a negative gross margin sale.

But I bet you a ton of people walk into that world. And if there's a price war for AI services, all these kinds of things, I could easily imagine people pricing below the credit cost. So just another distortion that could happen. I think the difficult thing as an investor for Altimeter, we looked at all of these businesses, all of these models, and there were two things that were really difficult for us.

One was the complexity of the transaction. Just looking at open AI and trying to understand the nature of the relationship with Microsoft. Again, I wanna stipulate from the start, as I've said, I think AI is gonna be bigger than the internet itself. I mean, using compute to build intelligence is a powerful thing for all of us.

So I'm actually happy as both a human and happy as an investor that in fact, these models are getting funded and that they're being built. But I'm just saying as an arm's length investor, looking at these valuations, it was hard for me to even, and I've been doing this a long time, to even understand the nature of the security I was buying and the relationship with these companies.

So I think that's why a lot of firms like Altimeter have had trouble getting to a yes decision. Set aside the fundamental decision, which is can these companies actually generate a lot of durable and ongoing revenue from this if we have open source providers who are going to collapse the price of the market down to zero?

So for us, we haven't invested in any of these. These were the two bigger challenges, but I will say I haven't invested, but I've sat here and thought to myself, man, I may be missing the biggest thing in the world because open AI and Anthropic and these other companies, their valuations have continued to skyrocket.

The usage is very clear. The teams that they built are absolutely remarkable. What they're putting into the market is terrific, but I do think that it is a really important thing that you're pointing out, which is at a very minimum, I think we can say that the participation of MANG, Microsoft, Amazon, Nvidia, and Google, is distorting the price in the market in a way that wouldn't have occur if it was all arm's length transaction with financial investors.

Yeah, and I'm also not saying anything negative about the companies or the technology or what they built. My primary point is that they've done these unusual transactions. That has become, that has been mimicked, right? It's become a bit viral and the competitors have had to do it as well.

And now it's at such a scale where I think it could distort the market that we're in. In the ways that I talked about. I'll tell you one other negative externality of this, one other fallout of doing this, right? If we have the largest companies in the world who are effectively anointing the winners with their capital, it makes it really hard for a true startup that has to raise money from venture capitalists who don't have $25 billion to deploy to be able to raise the capital required to compete.

It's a sport of kings, sport of kings. And look, one person said to me, well, if Amazon can't buy a vacuum cleaner company, what are they supposed to do with their capital? So it may be that the lack of M&A leads to people to be more experimental with how they wanna deploy CapEx and get usage off of that CapEx.

That could play a role here as well. - Well, I think that the thing I'm gonna be looking for, Bill, we know there is a lot of secondary transaction being done at that $90 billion. In all of these, there's a lot of secondary being done. You've talked at length about secondary at these early stages as being a warning sign and not good for the culture of these companies.

One of the things I'm gonna be looking for is, do they- - By the way, maybe it's a great thing for the players. They say, don't hate the player, hate the game. And in some ways, it's just equivalent to the latest sports figure getting the breakthrough deal. I'm talking about for the AI engineers themselves.

- So is the answer to this, Bill, like if both of these companies, if OpenAI and Anthropic went public, washed their cap tables out, now had to raise the money from the public markets to the extent they were burning it, would you feel better about the health of the situation?

- Yeah, by the way, health implies, once again, it's negative. I just think it's really different. And when you have different factors, these large externalities in the market that we all play in, all of a sudden the rules are different and the game plays out in a different way.

That's my only warning is watch out. I think there will be ramifications of having done this. That's my main thing. - The one thing I'm pretty excited about is we have a lot of competition, right? It's very clear this is viewed internally as somewhat existential at Microsoft, Amazon, Nvidia, Google, et cetera.

And you're gonna have a lot of competition. These companies have incredible balance sheets. As a result of this incredible investment, we're probably going to accelerate the path to AGI. So I'm glad they are deploying their capital, but I agree with you. It makes it very difficult for the venture capitalists out there.

And for other founders, if you're a founder and you wanna compete in this, you know, in the model game, you know, and you don't have their backing, there is no chance. - And while we're here, I can't help but mention it. It's, you know, you mentioned open source. I personally am just a massive believer in open source.

And there's a topic we're gonna get to later that I think we'll all come back to it. But it's so powerful for society that these ideas can be shared so openly. And for me, it's been a sad reality that some of the larger LLM players have literally attacked open source directly and are telling, you know, regulators to try and disable it.

And when I see that, you know, because I've never seen it this early in a market, well, I've never even seen attacking open source before. And I recognize it's highly competitive, but when I see it, it makes me skeptical. And I look at the LLM models. I mean, they're scaled up on parameter count and the width of the attention window.

There easily could be limitations to that. Like, if you just think about how optimization models work, they could run out. Like, it's not infinite scaling on those types of things. And then a very smart, I was having a conversation with Melanie Mitchell from the Santa Fe Institute is a very smart AI specialist.

And she thinks data may be what causes the asymptote. In other words, what new data are you going to put in the training model? It's already sucked everything up. And so those things could cause a bit of an asymptote, a bit of a ceiling and the open source models, at least on all the performance tests that are being published are just running fast behind.

And so I could see why the players might try and cut off open sources needs. It makes me disgusted. I really hate it. - I also think it's impossible. You saw that thread out of Zuckerberg this week, where he said by the end of the year, they're going to have the equivalent or this year 600,000 H100 GPUs running in super compute.

And that he was, and there's been a lot of debate on this and he made it clear, they're committed to open sourcing AGI. And it just reminds me of the conversations that you've seen Elon have on X. And he's raising capital for his own X.AI. But we have a company called OpenAI that clearly is a closed model and we have- - And used to be open source.

- Right. - And now attacking open source. - And we have the founder who everybody thought was, perhaps not in favor of open source who's actually running the open source model now. So I think the competitive landscape looks great. We have not seen any bumping up against those scaling laws.

I think, you know, Alad said in a tweet yesterday, we're going to have four or five companies that hit chat GPT-4 level this year with their models. I think that's exactly right. I think it's going to be an exciting time, but maybe, what do you think about- - We can circle back to- - Let's jump over to our second topic.

- Okay, great. So you just had your big LP meeting. Why don't you, if you're willing to, pull the curtain back a little bit and tell the world what you're talking about. - Well, you know, as you know, we cover both public and venture markets. And, you know, I had this thesis 15 years ago as a founder that venture capital companies were going to stay private longer.

They were going to scale faster. They were going to have more impact on the public markets. I think that's played out exactly how we thought that it would. I mean, you have 40, 50, in the case of ByteDance, a $300 billion still venture company, private company that's not public.

And so the insights you can glean from being in that market really in order to the value on the public side and then from public back to venture. This morning, you know, like the things we went through, it causes me to telescope out and think about this. Last year, we saw this multiple expansion.

I would call it really reversion to the mean as the market played catch up to the big pullback, right? Remember 2022, and maybe we can pull up this chart that we showed on software valuations. But, you know, if you think about the pullback that happened, Mike Wilson said, we're going to have a hard landing at the beginning of last year.

Larry Summers was causing a panic about interest rates. Things like Meta and Uber and Nvidia, they all had massive pullbacks. Think about it. Meta was trading at six times earnings. And so if you look at this chart, what this chart shows, and this is public software kind of valuations.

And you can see that we were over 100% above the 10-year historical valuation, that blue line in the middle of '21 and '22. We troughed at the beginning of '23 at about 35%. And what was that, Brad? Was that this kind of, we live in a COVID world forever now, software is the only place that the world exists?

That kind of thinking. Right, remember, we were talking about this chart in our own chats. And we were saying, man, this doesn't make any sense. But we knew it was zero interest rates, the ZURP environment that was leading to this. I just listened to a pod you and I did at Soan Conference in May of 2021, Bill.

I should have been able to save myself a lot more money because we were worried about interest rates and multiples and inflation in May of '21 before the Fed started acting. And that was part of it. But remember, everybody said, well, maybe it's different this time. Because we pulled forward digitization, nobody's going to leave their house.

Everybody's going to have to buy everything online and do everything online. So I think people tried to justify these multiples. But at the start of last year, we were down to 30%, 35% below the 10-year historical average. We had a big run up. You saw a lot of these names, Meta, Uber, Nvidia, up over 100% over the course of the last year.

But that brings us to where we are today. So you really got to go. Maybe we can bring up this next chart, which is we shared this with our investors. We said, OK, great. The beginning of 2023 was an incredible opportunity, Meta trading at six times earnings. But what about today?

Well, this shows you the multiple expansion that we saw in '23. And now both tech and non-tech are trading at a premium to the 10-year average. So the blue line represents tech. This is the Qs. We're trading at about a 36% premium to the 10-year average. I just showed you software.

Software is still trading at a discount because people are more skeptical of software. But when you look at the Qs, Nvidia, Microsoft, some of these bigger names, it really shows you that premium. And then even non-tech-- and this is the one that's a bit of a head scratcher to me-- non-tech is trading at a premium, a 12% premium to the 10-year average.

And then finally, a show by comparison. If we look at this next chart, the big three, what I call Microsoft, Nvidia, and Meta, they, too, are trading at a premium, about a 14% premium. But if you look at their peg ratio, this is growth-adjusted on the bottom of that slide.

They're basically trading in line with where they've traded the last 10 years. So what does all this tells us? It tells-- Hey, can I-- let me interrupt. And then we're going to go back to what does all this tell you. One thing that we've never spent a lot of time talking about is that the largest companies in our world have some of the highest growth rates.

And I think that's unprecedented. Why do you think that's happening? Well, I'll tell you. Remember, back at Harvard Business School, they taught us the diminishing returns of scale. Remember the-- I think it was Lou Gershner wrote the book Elephants Can Dance? Yeah. There was this idea that elephants can't dance, that companies get large, they can't innovate, they can't earn a great return on capital.

And so eventually, they get competed away. I would suggest that we actually have a new phenomenon going on in the world, which is an increasing advantage of scale, not a decreasing advantage of scale. And why is that? Well, because if you want to train on 600,000 H100s like we just talked Zuckerberg doing with the Lama 3 model, you have to have a business that is generating the massive cash piles that he's generating in order to do that.

And so I do think, like you said, it's a very unique moment in time. Now listen, that doesn't mean that you're there forever. I've been out there saying Google's got a lot of challenges as they try to transition their search monopoly to their answer monopoly. I think they're wrapped around an axle in terms of doing the things they need to do to catch up and to compete and to protect that search monopoly.

But I do think that this is a moment in time where there are those increasing advantages of scale. Listen to this figure. We expect-- our forecast is that Microsoft and Amazon, Snowflake, they'll all accelerate their growth rates this year. Accelerating your growth rate-- as an old stock analyst, accelerating your growth rate at that scale is unheard of, unheard of.

And so that's kind of the takedown, that we were-- OK, so I took you off on that. Let's go back. You presented a lot of data, a lot of historic-- to here we are now. Now what does it mean? What does that mean for people going forward? Yeah, I mean, listen.

I think that, as the charts have showed, all attack, if you look at the Qs combined, they certainly aren't the deal they were at the start of '23. Like, the amazing thing is that we had the lowest exposures at the start of '23. Investors were so nervous they weren't investing, and yet things were being given away for free.

And now we see some of that money coming off the sidelines, out of those money market accounts, into all of these names. After, meta has moved from $90 a share to $380 a share. I still think there are great returns to be had here, but the returns are much more normalized.

I think the return to target in our portfolio is 20% to 30%, whereas the start of last year, Bill, it was like 80%. And we saw those returns play out. So that's the big thing. The world is normalized. Multiples have normalized. It's not going to be as easy as it was at the start of '23.

I want to show one other chart, because I think this is the thing that we don't talk about enough in this business. And this is long-term, long-run compounding in tech. You know how it goes with our friends. We're always talking about much more shorter-term stuff. But this chart, I had my team pulled together.

And I said, if we look over the last 10 years, what have earnings compounded at for tech versus non-tech? And what have stock prices compounded at at tech versus non-tech? Is all this just a bunch of crazy people in Silicon Valley that are running up prices and multiples? Or is there a reason that tech has grown faster?

And if you look at this, over the last 10 years, technology companies have compounded earnings at 13%. And their stock prices have compounded at 17%, so a little bit faster than earnings have compounded. But if you look at non-tech, so if you take the S&P and you strip out all the tech companies, they've only compounded earnings at about 6%.

And their stock prices have grown at about 8%. So let me ask you this question, Bill. Technology has gone from 5% of global GDP to 15% over the course of the last 15 years. When we have this conversation five or 10 years now, is tech going to be more or less than 15% of global GDP?

I'm going to say more, but with an asterisk. So your chart has left off 2009 and 1999. And if you were-- the argument you're making can be used holistically at any point in time. But if your point of entry is '99, '09, or the top of-- the end of 2021 here, you're not in a good place.

So maybe you have to-- what do you call when you roll in? Like dollar cost average or something? Price of entry matters. But what I would suggest to you is it's almost certain that tech's going to be a larger portion of the global GDP in 5, 10 years because technology is becoming more important every day in every company's life, every person's life.

The second thing I would tell you is that I think that technology in aggregate will continue to out-earn non-technology companies. Why? Because of the age of efficiency. Why? Because of an AI super cycle. And so what I said basically, if you're playing from home, I think the biggest free lunch in all of investing is the asymmetric bet over the long haul on technology companies compounding.

Now, the hard thing, as you know, Bill, is are you able to pick the ones that do the best versus the ones that don't do great? Because we know lots of technology companies get wiped out, get wiped out. So I mean, I think unless you do it for a living, you probably just buy the index and you're betting on technology out-compounding.

For us, we have a lot of fun trying to pick the ones that are going to be the winners versus-- What are the best-- I don't know if you know, but just for listeners, what are the best tech indexes? Or are there other ones? Listen, there are a lot of ETFs like growth software ETFs or growth internet ETFs.

You can invest in the Qs. It turns out that even the SPY, which is the S&P 500 index, is very quickly becoming a tech index. And so I think a big mistake-- here's an interesting one. A big mistake that a lot of technology investors have made is nobody feels smart just investing in the big companies.

They want to present to their friends the company nobody's ever heard of that turns into a 10-bagger or a 50-bagger or a 100-bagger. It's a much more interesting conversation to have a cocktail party presenting that idea than it is presenting the idea for Microsoft, which is going to compound at 15%, which has led investors to be grossly under-leveraged to the largest companies that have done the best and over-leveraged to the rest of the technology complex.

And we just mentioned you had an unusual-- I mean, I can't articulate how unusual it is for the biggest companies to be succeeding, because my entire career up until now, the large companies become a laughingstock. And Microsoft had a window, Freesatche, where it was in that place. It was considered to be like HP or DEC or IBM.

And it was just assumed that the startups would come along and roll them, and that the big company gets stodgy and lead footed and falls behind. So this is a different world we're in. Yeah, I agree with that. Hey, how about we shift gears here a second? So that's public markets.

Great year in '23. '24 going to be a little more challenging. People panicked when we started the year. Mag 7 was down, I don't know, 5%. Now it's up a lot. And so we'll see where it shakes out. But VC, man, we've talked a lot about this, where we are in this VC correction.

The number one question I get from founders who come in here, the number one question I get from my LPs is, where are we in this correction? What stage of grief are we in, Bill? And when does it end? Well, look, for reasons that you and I have talked about a lot, I think the most differentiated element of this correction, versus '09, versus '01, is the amount of capital that the companies went into the correction with, the speed at which they lowered cost afterwards.

So there wasn't denial. Everyone got along pretty quickly. And therefore, the elongated window, months of cash-- it'll encourage a lot of our companies to track months of cash, just burn rate divided by how much you have in the bank account. That was elongated. And so things are taking long to play out, because the day of reckoning has been pushed out.

Now, one thing that's really wild to me, in '01 and '02, when a company went bankrupt, it was news. Every single one of them, when they shut down, there was this website called F'd Company that literally tracked them. And the VCs were-- For those at home who couldn't see your air quotes, Bill, that was F'd Up Company.

Yeah. And the guy that ran that site actually runs a really cool company in the audio space that helps you post on Spotify. Anyway, we were all vilified. We were just taken down. Oh, you've got these dumb companies. That doesn't seem to be happening. You guys stumbled on this chart.

You can pull up-- I think it's from Carta data or something. But the first 3/4 of 2023 saw-- what is it-- around 180, 1/4 of shutdowns. And so our run rate-- let's assume the run rate's like 200. We're at like 800 a year shutdown. No one's writing about it.

I mean, we had convoy. There's a few high-profile ones where people wrote about. For the most part, I guess with the election in Ukraine and Gaza, there's so much going on that maybe people just don't give a shit. But it's wild that it's happening so quietly. So that's one thing.

I guess it is happening, even though-- I mean, it's not so quiet in Silicon Valley. Like, I feel for a lot of founders and, frankly, early-stage venture capital firms, even when companies are doing well, they're really having challenges raising a follow-on round of capital. Yeah, and if you look at this other chart, series A and series B type funding, it's way down.

And that's where you take out the credit funding we were talking about and get that out of the mix. And so, yeah, it's tough. You and I have discussed this many times, but I think the number one thing a founder can do is to, as quickly as possible, get in touch with what your real actual valuation is and then ask yourself, what do I need to do structurally to give this company a fighting chance, knowing that that's reality?

And I think a lot of people live in a reality distortion field. This, to me, is something that I'm deeply passionate about because I think it's a unique moment in time right now, where I think, because of what happened in Zerp, Bill, founder-friendly, this term founder-friendly, it kind of was like just telling the founder what they wanted to hear.

Whereas, maybe pull up this tweet from Jam and Ball, my team last week, and I'll just read you what he said. Lots of talk about getting fit, but too few boards and founders are having honest conversations. I've always preached to the team here, founder-friendly is doing the right thing and being truthful with founders, like the letter to Meta on time to get fit, saying up front what's too often discussed outside the boardroom and behind their backs, even if it means making hard decisions like layoffs, selling, shutting down, down rounds, et cetera.

And so I look at the situation today, frankly, I don't know whether it's because venture capitalists are a lot younger, a lot of people just moved into the system, they haven't seen a drawdown before, whether they're on too many boards and spread too thin, so they just can't handle the deluge of conversation.

But my biggest concern is that boards haven't even been having the tough conversations, right? We certainly have the examples like you pointed out. And take something like Klarna, and I think Sequoia deserves some credit here. If you look at Klarna or you look at what happened in Instacart, I mean, Klarna's 2021 round, right, $46 billion led by SoftBank, Sequoia, Dragoneer, Silverlake in that round, $46 billion.

They do a round in '22 at $6.7 billion, right, Sequoia and Silverlake. That, to me, is a great set of people around a board table having an honest conversation with the founder and getting the business reset. You cannot-- it's not good for the employees. It's not good for the company.

It's not good for the investors if you're living in delusion when it comes to your cap table and to your evaluation. So I think we're starting to see more momentum of this. I certainly know in our portfolio, we're pushing really hard on every board that we're on, on having those conversations, getting liquid.

If you don't have a model that you feel comfortable with to get back to that valuation, you can sell the business. But you've got to sell, restructure, or take the business public. I mean, those are the doors. Yeah, people get overly focused on this last round valuation thing. Like, it is-- I can't tell you how many founders I've had a conversation with where it's clear the number one objective in their function about the next financing is to clear the bar of the last round.

And it just shouldn't matter that much. Especially after we just went over the waterfall that we did, you've got to just get that out of your head. It's so stupid. You've created an artificial constraint that's just not that big a deal at the end of the day. I used to have this chart-- I wish I had prepared it-- but of the logos of the public companies that traded below their offering price.

And it's some of the best companies in the world. It includes Amazon and Salesforce. And Google. And yeah, a whole bunch of great companies. And yet, if you go to IPO and you're arguing over price, they'll say, the one thing you can't possibly let happen is you trade below your offering price, even though some of the greatest companies in the world did it.

And so I think that's a similar kind of silly constraint that people throw out there. I would say this about your initial comment. Some of the board members are just too young. They have never lived through it. They don't know. They were trained in the last 10 years. They've only seen up.

Some of them are naive, which means they haven't studied economics and finance to the extent that they should. I might point them to one of my favorite blog posts, the keys to the 10x revenue club. Because Silicon Valley mostly lives on price to revenue multiples. It is the conversation du jour in Silicon Valley.

And it's one of the most naive ways you could value a financial asset in the world. And so people just need to sharpen their pencils to a certain extent. Yeah, I mean, just a couple of comments there. I mean, you and I both know, we talked about it even at the top, price to revenue.

So you see this all the time in software. It's just a shorthand for investors to get to discounted free cash flow. But here's the problem. Because I live in the public markets, we do DCFs all the time. But how many people in Silicon Valley even build a model on the company, right?

Like there's just not a lot of that that goes on. If you're doing seed in series A, that's not what this is predicated on either. But when you're investing in a business at over a billion dollar valuation, you sure as the hell better be building a model and understanding what the exit value is going to be based upon a normalized multiple into the public markets.

And so I think way too little of that was going on. We're seeing these corrections beginning to occur. But if I go back to my first question I had for you on this topic, Bill, I went back and I saw a talk you did in 2012. And somebody said, oh, 2008 wasn't so bad.

We've bounced right back, et cetera. And you said, you know, listen, 2008, 2009 wasn't so bad because the bubble never got that big. And here's the interesting thing about what you said. You said, I don't know if we'll ever see a bubble again like we saw in 1999. So was the ZURP bubble as big as the bubble we saw in 1999?

And will it take us the same four or five years that it took in 1999 for the world to work through that entire backlog? Well, it was wildly different in terms of one thing, which is the amount of capital being thrown around. And so the companies-- in '99, a huge round was $20, $30 million.

And so we went well past that with billion dollar rounds and whatnot. And so from that standpoint, I think you could argue maybe the price height of the bubble may have been similar, or maybe even lower, because then we were giving companies with no revenue huge prices. But the capital intensity of the bubble, I would say is a more important metric, was bigger.

It was bigger. And how long will it take? I don't know. I mean, I'd love to see companies start going public again. You and I have talked about this. I don't think the window's closed. Like, you may not like the valuation. Like, you've got to decide. You may be afraid to be public.

You may have had someone tell you it's too hard. Like, all those things. But it's not closed. Like, it's just a matter of price. And it just takes a while for everyone to get busy getting busy after you've come through-- For sure. I may even take it a step further, Bill.

There is a voracious, voracious appetite for IPOs. Normally, we have over 100 tech IPOs a year. And we've basically gone two years with no tech IPOs. Well, we had three, but whatever. No, you had a handful. But I'll tell you this. Yeah. Most of the folks who are on the buy side, right?

So think about whether you're a long only fund, a capital group, or TRO, or whether you're Altimeter, or CO2, or Tiger, et cetera, right? If all you're buying is Mag 7, you're feeling a little bit uncomfortable. You're looking for new ideas all the time, right? And so I think the only thing holding us back is to find high-quality companies that are going to the public markets and accepting the valuations of the public markets, which is the market-clearing price.

I think you're going to see the dam really break on this this year, particularly in the back half of this year. And the reason is because people got to raise capital, right? And I just think they're coming to grips with it. And I thought we would see some IPOs that were either related to recapping or raising capital.

And sometimes what you need first is the derivative instrument that then makes you realize, oh, shit, I really got to get public and convert everyone to common. That happened to Square, actually. They had done a time bomb derivative thing that then made you go public. And so maybe we've got to have those first, and then we'll have more.

But I would have thought you'd seen more. I think a lot of people also have this silly argument that we've got to wait for someone big to go first. And I actually think we'll probably see a smaller company with a courageous founder step through the window. We don't have to wait around for Stripe.

That's kind of a silly notion. You asked a question earlier that I just wanted to touch on I just remembered, which was, why is it taking longer for founders, maybe, to come around to the valuation adjustment? I think one of the reasons is that with all the secondary liquidity that occurred this time around, you know the hardest thing is, if you ever anchor your net worth, if you ever look at, oh, I own 20% of this company, it's valued at $10 billion.

So therefore, I'm worth $2 billion. And if you set that anchor in, and worse yet, if you start living your life that way, and then all of a sudden, you have this dramatic reset down 80%, and you're like, oh, I'm not worth $2 billion. Instead, somebody says, your company's really worth a billion or $2 billion.

All of a sudden, go back to the stages of grief. What's that stage? Denial. And then anger. No doubt. Right? I think it plays a role. You're nowhere close to it. What I finally see happening this year, I think 2024 in terms of the stages of grief, is the year of acceptance.

I think people are just going to have to get liquid. They're going to accept the prices that they have to accept. Because frankly, there are no more soft banks to bail them out. And the public market's not going to overpay, because the public market knows what the clearing price is.

And so that, I think, gets founders to the stage of acceptance. But I think we probably have another quarter or two to get there. I think we've beaten that one to death. By the way, I'll say something. You made me think of something that I will share, maybe on behalf of all venture capitalists, and maybe to make everyone's lives easier.

One of the easy defaults you go to in the middle is, oh, I'll just go to my insiders and ask for a bridge. And I will tell you, at least all the data I've seen, the success stories coming off a bridge are few to none. That's why we always refer to them as peers, rather than bridges.

Peers, as in walking off the end of a pier. Yeah, like it doesn't get you to the other side. It just takes you out into the water. You're much better off talking through a recap with investors than you are doing. You're just piling delay upon delay. You're just setting yourself up for more failure.

It reminds me of a related subject, Bill. I remember at the start of last year, we were talking about who were the companies that were going to follow Facebook in terms down the path of layoffs and getting fit. And somebody produced an article. And they said, once we started to see a trickle of companies, they hired some consultants.

And they said, how many people should we lay off? And they all magically came up with 13% or 14%. And we're like, why 13% or 14%? And they said, well, it's bigger than 10%. And it's not as hard as 20%. And I think that this is the other piece of evidence we have here that people just didn't get the drill.

We always say, do it all up front. Get it over with. And get on to rebuilding your business with unit economics that makes sense. But unfortunately, if you just look at the number of layoffs being announced, I think we now are up to 40 or 50 big companies. I mean, just recently Wayfair and eBay and go through the list.

But these were all decisions that could have been made at the beginning of '22. I'm wondering, at the beginning of '23, it's shocking to me that we're in the first quarter of '24. This correction started more than two years ago. Why are people just now getting to the conclusion that they should be getting fit?

There's a lot of wishful thinking. And quite frankly, let's paint it in a very different light. Startups aren't created by pessimists. They're created by blind optimists, right? And so your most likely mindset, if you're the type of founder who runs at walls, is that you're going to figure it out, that it'll be better.

I'll make it work. I'll get back to where we were. That's how you're programmed to behave. Although I'll tell you, the story of Elon is always up and to the right. People need to celebrate the stories about Elon's survival and Elon not hiring people and Elon making it through the near-death experiences of 2008.

What he did at Twitter, laying off 75% of the people-- I saw somebody tweet the other day, Bill. They said, I guess Twitter isn't going to fall over, right? I mean, the platform is as vibrant and the product development cycle is as vibrant as it's ever been. Why don't we maybe want to jump onto topic four?

Sure. So I think through our discussion, we'll get back to why this relates to VC and tech. But a lot of people found it quite interesting, let's say, the new leader of Argentina's speech at the World Economic Forum, Mille. And we'll put a link in, but I'm sure most everyone's seen it by now.

Obviously, very different from all the other talks that are there. But why was it meaningful to you? Well, the first thing I did when I listened to the speech-- and it's something I've thought about a lot-- was Mille's an economist. When's the last time you heard a politician give a major address?

And he starts it off by talking about the empirical evidence and starts quoting data. So my first question was, I want to see this data. So I had one of my analysts go back and pull the data, which was the underlying support data that maybe we can bring up.

And what this data shows-- so this is the years it takes to double global GDP per capita. Now, first, maybe we should just start off by saying, why should we care about this? So GDP really is the excess, the progress, the prosperity that's created by a fixed amount of labor and capital in the world.

We have a fixed number of human beings. They can only work so many hours a day. And we have a fixed amount of capital in the world. And what are all the things and services that we can produce with that? And that is the global GDP. Well, what he noted in this chart shows that basically from year zero to the year 1800, we had almost zero GDP globally.

And we had very little prosperity. We had very little excess. One might think of it in a very primitive way, even before the year zero, that we were hunter-gatherers and we basically lived a subsistence life, OK? So in that case, he said, takes you 3,500 years for global GDP to double.

And then something crazy happens around the year 1800. Remember, Adam Smith's Wealth of Nation about free market capitalism published in like 1775, 1780. And so we have free market capitalism, market democracies introduced into the world about that point in time. And just coincidentally, we start seeing an acceleration in the rate of global GDP growth.

So the period 1820 to 1900, it only takes 87 years to double GDP. And then 1900 to 1950, only 60 years. And by the time you get to the year 2000, we're doubling global GDP every 20 to 30 years, OK? Which results in this chart, the next chart, which is-- this is just such a shocking hockey stick chart to look at, OK?

So this is the increase in global GDP over the course of the last 2,000 years, right? You almost have none. And then it starts going up a hockey stick. And then we said, let's forecast it forward for the next 100 years. And if we forecast it forward and we just assume that we have the same rate of GDP being added every year that we have this year, so we're not assuming any acceleration from AI, no systems getting better, you just see the advancements caused by this.

And Millet was, of course, arguing that this was the result of free markets and competition. Yep, no doubt. So Bill, I think if we look at this, one of my questions for you gets back to this. Why should we care so much about these empirical facts and this speech?

And what are the risks to this? So I would highly encourage listeners to read two books. The first one is The Rational Optimist by Matt Ridley. And the second one is How Innovation Works, also by Matt Ridley. And they should be read in that order. One's almost a sequel of the first one.

But in The Rational Optimist, Matt talks about the underlying mechanisms that lead to the data you just shared and what Millet was talking about. And he sums it up in around two functions. One is ideas being exchanged. He calls it ideas having sex. I'll give you an example. And we can go back to early agriculture.

If I learn how to plow and put seeds in the ground and I go to a town to trade, I can tell someone else how to do it. I can show them how. And now they can go and do it on their own. And that exchange of idea was free.

But it had a magnificent lift to prosperity. It's ironic because when I wrote down that I wanted to use that example, the thing that immediately popped in my mind was in the AI world, the DeepMind paper about the attention window, attention is all you can need. This concept was done inside of Google as an open source concept, immediately copied by all the other players.

So open AI doesn't exist today if that's patented and controlled. It just doesn't, which is another irony around this open source argument because they've been affronted massively from a major-- but the idea of being shared-- and this is also why I'm such a massive open source proponent because I think it's so relevant to prosperity for the masses.

If ideas can be shared, there's zero cost but infinite lift. And then the second part of it in Ridley's book is commerce. For all the reasons Adam Smith talked about, it's just a way to allocate resources. So if you get both of those things humming, you get massive success.

It's super interesting if you look at the history of China because they've opened up and closed multiple times. So they used to be like a third of world GDP. And then they closed their borders and quit trading. And they went down way into the low 200s or something. And then, of course-- by the way, let me share something on my screen if I can.

I'm going to try. Yeah, right here. So this is my favorite test of AI bot. I asked the very simple question, what single human being has brought the most humans out of poverty? And ChatGPT got it right, of course. Deng Xiaoping, who brought capitalism to China and brought 500 million people out of poverty.

No other human being, not the most-- not Mother Teresa, no altruist, no socialist, has come anywhere close to this number that was done merely by unleashing the human potential that was latent inside of China by allowing for idea sharing and commerce to have this massive impact. And I even think there's an argument in the past, let's say, three or four years, that by stopping commerce, or at least restricting it a bit and stopping trade, has led to at least the shakiness within the Chinese economy, which may have led to what happened in Silicon Valley in that meeting.

And like, hey, maybe we need to get this thing back on tracks. Because of that, you asked what could harm it. One of my favorite thinkers and professors is a gentleman named Ricardo Hausman at the Kennedy School. He's Venezuelan. And he was giving a presentation once about what went wrong in Venezuela.

And he said they attacked the invisible hand. And I love that phrase. Attacked the invisible hand. Yeah. And so these people-- and I'm sure they're well-meaning, but that view capitalism as the cause of poverty or negative prosperity. When the data all says it's the opposite, it's actually the thing that brings people out of prosperity, that appears to be the way you get yourself in trouble.

Yeah. I think you meant out of poverty and into prosperity. Out of poverty and into prosperity. And that seems to me, I think, the reason that this speech, in particular at Davos, right? Because there's this phenomenon that's been criticized there for years, that there's a move toward perhaps collectivism, that we need to move away from free markets.

And I think people set up this false dichotomy, like that people are absolutists on free markets and they don't think that there should be any regulation, no government's kind of anarchist view, or that you should have this very collectivist organization. It seems to me like the United States has constantly been in search of a balance between embracing its DNA of free market capitalism, while at the same time putting in basic protections for the least fortunate among us, for those who can't take care of themselves, for the people who don't benefit equally in society.

But I think what we've seen is over the last few years, some concerns among the two of us included, that the pendulum swung too far, that there was a lot of anti-capitalist, anti-free markets, almost anti-democratic fervor, that somehow it was unfair. It wasn't equitable to all participants. Go ahead.

I would just say the social safety net is funded by the progress that's created from capitalism and tech and growth and all the things that we talked about. And if you eliminate the latter, there is no money for the former, at least in the long run. Well, that's exactly what I think Millet's argument is.

And perhaps bringing this bill full circle back to Silicon Valley, back to tech investing, people-- I have family members and others, they say, you've done well. Why are you still doing this? And it may sound a little cheesy, but I say the very nature of what we do, I think, is a public good.

And I think about it in this way. Human progress-- I'm not just talking venture capitalists. In fact, less about venture capitalists. I'm talking about risk takers. I'm talking about founders. I'm talking about the engines of the innovative system. In fact, the rule of law around bankruptcy was a pretty novel concept in this country.

But we wanted to make a deal. We were basically saying, if you're going to be the risk taker, if you're going to put your neck on the line to move our country forward, if it doesn't work out, we want to give you some protection so it doesn't ruin the rest of your life.

Because we were trying to create a system of incentives for people to take that risk. And so when I look at where we are today, one of the things that you saw in the empirical facts is the accelerating rate of capitalism, right? And it seems to me part of the reason for that acceleration is that systems compound upon systems.

These are non-linear, right? And so mobile compounded a lot faster because of the internet. Internet because of microcomputers. The cloud because of mobile and the internet. AI, all those things were preconditions to AI, right? You just made me think of something that-- if you look at what Deng Xiaoping did in China and how quickly-- and you've been over there and met with the founders.

I mean, and you've seen comments from Moretz and others. Just like, at the least, they're equally good. And arguably, in some ways, in some dimensions, better. Certainly harder working from the cultural standpoint. And that happened pretty damn fast, right? We used to say there was only Silicon Valley, like there's no other place like it.

And then China very quickly mimicked it, very quickly in the span of time. And it makes me wonder if you had, like, for say, inside of Russia, the type of embrace of capitalism and free trade that you did under Deng Xiaoping. You might see the same damn thing. People are certainly smart enough.

I think you're spot on. I was having a conversation on Sunday with Mike Milken. And he's starting the Center for the American Dream. And Mike is very, very concerned about move away from just free market capitalist democracy. And he said to me something that struck me. He said, Brad, when I travel the world, it dawns on me that Vietnam, everybody there wants to be an entrepreneur.

Everybody there is running hard after capitalism. In the Middle East, we see the same thing occurring. And he's like, I just want to make sure that we continue to underscore in this country that it is the thing that caused us to be at the top of the heap. It is what led to the progress.

And we need to protect that. Because like you said, you can't take it for granted. And that's certainly-- that's even more true if you look at the last 20 years. Like, American industrialism could have arguably been a post-World War II thing, with all the factories that were blown out.

But if you look at just the companies that lead our market caps today, they're all venture backed. And they're all started within the past 30 or 40 years. And most of them started by immigrants. Most of them started by people who didn't start with a lot, like the amount of economic mobility that we have in this country.

And so I would say that was a hell of a conversation. I've enjoyed it, like I always do. We've been doing these things for a long time. But why don't we leave it there? It's a good note to end on. That was a lot of fun. And until next time, BG2 is out.

Take care.