市场更新：宏观反复、大型科技股与初创灭绝潮

Jason Calacanis (00:00:00): Alright, everybody. Welcome to the all in podcast. We're back. Thanks to Friedberg and Sachs for moderating the show into the lowest ratings in its history. Chamath Palihapitiya (00:00:13): Hold on. Hold on. Please give the keyboard warriors that are their bot armies some respite here. They tried their best. It just ignored the best. Jason Calacanis (00:00:20): They just did. It's okay. David Sacks (00:00:22): I think the ratings in the last episode must be a result of Google down ranking us as a result of our honesty about not wanting to get more boosters Jason Calacanis (00:00:30): -- David Friedberg (00:00:30): You're on the brigadier Ukraine. Jason Calacanis (00:00:32): -- David Sacks (00:00:32): cause somebody at Google, some lower level functionary. to push a button Jason Calacanis (00:00:36): -- Push a button. -- David Sacks (00:00:36): to shadow ban. I mean, visibility filter us. Chamath Palihapitiya (00:00:39): It's everything except the moderation skills. Speaker 5 (00:00:41): No way Jason Calacanis (00:00:42): is the moderator turning it a Fox Sunday capital. Speaker 6 (00:00:46): Let your winners Jason Calacanis (00:00:47): ride. Rainman, David. Speaker 6 (00:00:53): And I said We open source it to the fans and they've discovered Jason Calacanis (00:01:01): The reaction I got from our COVID vaccine discussion was, hey. Pretty fair and balanced. Like, not in a in a joking Chamath Palihapitiya (00:01:08): way, but, like, actually, like -- Yeah. The warning on YouTube was pretty benign, actually. Jason Calacanis (00:01:12): Yeah. It's like if you want COVID information, click here. Thank you. Yeah. Okay. Let's talk about the market data. The fed raised 25 basis points. The market obviously has ripped since then. The jobs data This morning was crazy. We added 517,000 jobs more than 2 x December and well above the estimates of a 188,000 jobs. The Fed, I think, is starting to realize They can obviously impact inflation and slow down speculative assets, but they're having a very hard time with the labor market. Obviously, labor participation actually is growing. We've talked about that many times here. It's bumped up to 62.4%. We all know it peaked at, like, maybe 69% during the 2 1000 time period. Wage growth, though, continuing to slow. So that is some good news there. And, obviously, risk on assets are ripping the last couple of days. Tremath, what's your take on where we are with the market and the Fed's action, which people are starting to believe will be another 25 basis point hike and then maybe staying high for the rest of the year. Did you hear their comments? You think dovish What's your take on the market? Chamath Palihapitiya (00:02:22): I watched Powell's speech, and it was really amazing because In December, he was extremely hawkish. And he was basically like, listen, we're gonna keep rates higher. than you like and longer than you want. And that was pretty clear and the markets reacted. And then not but Jason Calacanis (00:02:43): 35, 40 Chamath Palihapitiya (00:02:44): days later, he essentially said we have 225 basis point heights left to go. and he's going to try to stick the landing essentially. And even though the rest of the language in his entire speech and the press conference if you read it in the absence of his body language, so if you just read the transcript, would seem very hawkish as well. But the reality was he basically capitulated. And then the market essentially said, okay. We're at the end of this thing. And we've talked about this before, but markets tend to bottom Jason Calacanis (00:03:16): 6 Chamath Palihapitiya (00:03:16): to 9 months before it's clear that you could have done this. And so we're a little bit off to the races in the short term. It's compounded by a couple of other factors. 1 is that at the end of last year, so many people were tax loss harvesting, which means if you had some gains somewhere else, You sold some things that were losing money so that you could net the 2 together. You saw a lot of stocks. Tesla was probably the poster child for this. Trade all the way down to like $108 a share and it's effectively doubled in the last 30 days. Right? So everybody tax laws harvested, everybody degrossed. Nobody was really owning anything. And then when Powell basically said we're mostly done, there's been so much systematic buying right now that nobody's really well positioned. To me, this is very similar and eerily reminiscent of the end of 2018 beginning of 2019. And if you guys remember, At the end of 2018 October, November, December, the markets just fell. And part of it was Powell's gonna raise rates inflations getting out of control, etcetera, etcetera. And then we got all this data that said China may be entering a real period of malaise and Powell capitulated. Again, trying to stick the landing. And long story short, he didn't. That was a head fake, and the markets just ripped higher. Then we went into the COVID pandemic and all of that stuff happened. So I think we're about to replay a little bit about at least in the next 30 to 90 days The pain trade is to go up. So that's probably where we're going. Jason Calacanis (00:04:48): Here's the fed fund rates chart from 2000 and into the 2008 recession. And you see just, you know, to Tremont's point in 2019 that little step up to 2%. and then this dramatic step up that we've been on up to four and a half or so. Sachs, is this where the Fed pauses you think they cut? And and what overall effect is this gonna have on venture capital and the start up market? -- which is super important to us. David Sacks (00:05:17): I think we're in the whipsaw economy here just a month ago. Sentiment was incredibly on the show we were predicting for the year that we were looking at the Fed funds rate going from 4 a half percent to say 5 a half percent to 50 point increases, the belief was that we were gonna have a recession later this year. I think that was pretty much consensus. And now 3 weeks later, you had a situation in which we got a couple of really good inflation reports. So all of a sudden, the consensus changed to, we're not gonna need to raise rates, you know, to Jason Calacanis (00:05:52): 5 David Sacks (00:05:52): a half percent. Maybe we only get 1 or 2 more quarter point rates, and the market just ripped on the belief that inflation was in the rearview mirror. The problem had been licked, and now we can just kinda move forward. And the Fed seemed to confirm that just yesterday with a quarter point rate increase. And now today, we have this wild jobs report with over half a1000000 new jobs the expectation was only a 100,000. And so now all of a sudden, people are wondering, oh, wait a second. Does this mean that labor cost are gonna, you know, go back up that the economy is overheating, and now the Fed's gonna have to raise more. So I would say literally from week to week, we're being whipsawed. between expectations of whether inflation has been conquered or not, whether David Friedberg (00:06:38): the economy is gonna have David Sacks (00:06:38): a recession or not. And I think probably where we're sitting at this moment is you'd have to say that the risk of inflation returning are slightly higher, but the Risks of a recession are slightly lower because with this kind of jobs report, better chance of having a soft landing here. Jason Calacanis (00:06:58): It's very hard, in other words, Saxx, to have a recession if people are employed. If people are employed and have 50 Chamath Palihapitiya (00:07:05): year Yeah. Jason Calacanis (00:07:06): 3.4%. David Sacks (00:07:07): Yeah. Exactly. So Jason Calacanis (00:07:08): 50 year low. David Sacks (00:07:10): Right. So I just think that we're in a highly volatile economy, and it's very hard to predict. the future. I'd say that relative to where we were a month ago, you'd have to say that the odds of us having a soft landing this year are quite a bit better than they were just a few weeks ago. Jason Calacanis (00:07:27): Alright. Friedberg. When we look at this employment picture, it does seem people are going back to work. seems maybe indicative of people blew through their savings. We talked about this. You've been harping on and on previous episodes. I've had people doing personal debt, buy now pay later, is a possible thesis here that people yoloed for so long, post pandemic, Coachella, vacations, etcetera. that maybe they withdrew their savings. It seems like we we've burned off a trillion in savings or something like that, and the debt's going up. So now people maybe need to go back to and they're finally capitulating and taking jobs. Do you think that's what's actually happening here? I don't know if I David Friedberg (00:08:05): classify that. I mean, there there's obvious a lot of this stuff is on the margin. the the one challenge, you know, Larry Summers has been harping on since last spring all the way through the summer and the fall. And you know, in multiple kind of interviews and publications he's done. He's ex US Treasury Secretary, obviously, brilliant economist that the US needs to have a 5 to 6% jobless rate for 5 years in order for us to really get to the inflation rate target of 2 to 3% or below Jason Calacanis (00:08:36): 2%. David Friedberg (00:08:37): And so, you know, the economists and the macro guys that are tracking their jobs report today are the I think the indication is we're not there yet and that the implication of a tight job market is wages go up and wages go up. Inflation goes up and because companies need to charge more because they have to pay more to get talent. and this obviously continues to support the escalatory spiral that drives inflation. So that's the the, you know, kind of downside to the jobs report today that I think a lot of folks are watching. Jason Calacanis (00:09:11): The Fed mentioned over and over again deflation. So any impact there Chamath, you think we're gonna see prices start to crater? And what impact would that have on the market? Chamath Palihapitiya (00:09:21): I think Saks is right. I think the the marginal risk here is is for this whip sign. So we have a period now which is dysinflationary. But the problem is if the stock market keeps going up And all of a sudden we have less restrictive monetary conditions, then we're gonna be back at the same place we were before, which is money sloshing around into all kinds of risky assets or more money. You know, there's still an enormous amount of money sitting on sidelines that has to come into the market now if this thing keeps going higher. So we're in a delicate moment. And if we reignite inflation because all of a sudden, more companies have more liquidity that they can tap, right, more money they can raise, more money as a result that they can spend Because we don't have this first inflationary cycle under control, there could be a risk that that we reignite inflation. And so then then they have to capitulate. The Fed has to capitulate again and start another hiking cycle. So I think it's a complicated moment. I think all of the smart money in Wall Street that I talked to up until this point, they forecasted like this period would be choppy. And the second half of the would be really robust and, like, you needed to be super long and things were gonna be incredible. And when I talked to them this week, they're like, oh god. We weren't positioned for this. We had no risk going into this. We're gonna be forest fires. There's a bunch of companies that are whispering that they wanna go public now. Jason Calacanis (00:10:50): Oh, really? Chamath Palihapitiya (00:10:51): The big banks have been calling around trying to book build quietly for some IPOs. And so If they try to kind of crack this capital markets open, I think there's again, the marginal risk will be that We do whipsaw. It sucks. Jason Calacanis (00:11:08): When you say book build, you mean trying to see if you'll get some early takers to buy equity in an IPO perhaps even in a company like Stripe that's been sitting on the sideline? Chamath Palihapitiya (00:11:16): So not Stripe. They're in a complicated moment. But when they called the book build, they basically say, hey. Listen. XYZ company, quiet filed, look at the s 1, what do you think? Where's the price? Blah blah blah. And they're trying to get an indication of whether you'd wanna be in the IPO So I think that there's a lot of those testing the waters that are now starting again. Jason Calacanis (00:11:37): Would there be an appetite in your Mind for an IPO in the second quarter of, like, a Stripe type company putting you know, I I don't know what the other candidates are, the lead candidates, but Tripe is the one people talk about most. Chamath Palihapitiya (00:11:48): The thing that we have to think about is, like, most of the market are not people. Right? Most of the market are computers and algorithms and ETFs. it's an extremely formulaic buying model. You have components of an index. Those represent certain percentages. You have to own those percentages to be relevant as that index. And so it's this reinforced buying loop as well as a reinforced selling loop. Right? So when things start moving, those folks have to just systematically move money in. All the humans know that. So the humans tend to front run all the computers, and they basically are the ones that sell into these guys. And then that's what inflates these prices. Similarly, on the way down, humans try to front run it by being short into that stuff. So we could see the capital markets open Even if we don't, it's actually the worst scenario because now you have all this money going into a fewer number of names. That sort of explains Facebook has doubled in in 30, 60 days. David Friedberg (00:12:46): Yeah. It was about Tesla. Chamath Palihapitiya (00:12:48): Tesla has doubled in 30, you know, 30, 60 days. A lot of the tech stocks, like high beta stocks that we are all, you know, helping to build, those companies have just absolutely ripped 60 to a Jason Calacanis (00:12:59): 100% Chamath Palihapitiya (00:13:01): These are not healthy and normal moves. And so the question is what happens if inflation somehow all of a sudden pokes itself back up. Right now, it doesn't look like it is, and Powell was clear, and it's true. We're in Jason Calacanis (00:13:13): a deflationary cycle. -- inflation 11 times during his Yeah. He and he's very racially outside his use of language. Yeah. David Sacks (00:13:19): That's why the market rips. I mean, basically, that was all part of a narrative where inflations on its way out. We've looked at that problem, and that's what the market was pricing in. And I think now the question is in light of today's jobs report is that actually true or not? Jason Calacanis (00:13:36): And I'm sorry. Disinflation not deflation, sir. David Sacks (00:13:38): Disinflation. Yeah. Jason Calacanis (00:13:39): Disinflation. I David Sacks (00:13:39): think, you know, one way one way to look at this is, Jay Hall, you showed the chart of the Fed funds rate. Another chart is the yield curve. Could we just pull up the yield curve for a second? This is the yield on US treasuries. on, you know, RT bills. And one way to look at this is as a prediction market of where the market thinks interest rates are going. because the Fed sets the rate for the Fed's funds rate, which is the overnight rate of lending to banks. But they do not set the rate of, you know, 3 months, 6 months, bonds, 10 year bonds and so on. The market does because the market trades those bonds and it imputes a yield that the market requires to wanna hold those bonds. So what's interesting is that if you view the yield curve as a again, as a prediction market, it tells you at any given time what the collective wisdom is of the market. Now this thing is fluctuating moving all the time. So that collective wisdom is changing. But where things are today, it's pretty interesting. It looks like what the market is saying is that within the next six months, the rate peaks at 4.75%. So, Nick, if you just wanna hold the the mouse on the 6 month dot, you'll see it's 4.76%. So Basically, the market is predicting we get maybe 1 more quarter point roughly, not much. And then if you go to the 2 year, it's at Jason Calacanis (00:15:04): 4.09, David Sacks (00:15:05): so a little over 4%. So what the market is actually predicting is that over the next 2 years, We're rushing to get a 50 basis point decrease from the Fed. And then if you go to say the 5 year or the 10 year, we're at 3 a half percent. So the market's basically saying that long term rates are gonna stabilize at 3 a half percent. We're not going back to the abnormal 0 interest rate policy or zerp that they have for 10 years, 3 a half percent will be the long term stable, you know, cost of money But you can see that the market, the prediction market thinks that the Fed has done enough to combat inflation because the Fed funds rate now basically is where the bond market thinks it should be. And in fact, the bond market thinks it's coming down over the next 2 years. Jason Calacanis (00:15:54): but coming down to what would be three and a half in a world that we've lived in for largely over the 14 years of this bull run, the majority of that was at close to 0 or 0. David Sacks (00:16:05): And that's why we're never going back to the bubble of 2021 where SaaS companies are trading at a hundred times ARR. We're gonna go back an environment more like a more normal one where valuations are more like the 2017 valuation, something like that. Speaker 6 (00:16:19): It's by the way. David Sacks (00:16:19): It's 3 a half percent is not a bad -- It's Jason Calacanis (00:16:22): still a great deal. Speaker 6 (00:16:23): Still a Jason Calacanis (00:16:23): great deal if you got your mortgage at that. Chamath Palihapitiya (00:16:25): If you listen to Buffet Buffet's teacher, this guy Ben Graham, In Ben Graham's book, the way that he would look at a stock and obviously look, things have changed. But the way that he would look at a stock is he would look at that risk free rate. he would double it. And then the inverse of that is the maximum price to earnings ratio that he would pay for a stock. Right? That's the trade off is If you can get more than 2 times the risk free rate, then it's worth owning a company. What that means is that if if you take 3 a half percent as a terminal rate, The right PE is around 14 for the S and P 500. Right now the S and P 500 trades at 22 times PE which would mean that we are 50% over value. Now that, again, that's a Benjamin Graham model, and I think the world has pretty cleanly moved away from it. But there's probably some rooting in that intellectual framework that's still valuable. To your point, David, it just reinforces that, man, we need to start to learn a new regime here because when rates are not 0, there's just a lot of excess that you can't support because the alternative trade offs for investors are plentiful and plowing money into a money losing startup becomes less attractive. Jason Calacanis (00:17:36): And to just give people some background, that's the intelligent investor was that book, I believe. And he was talking about value investing, which is, hey. What's the earning per share What's the ratio? What's the PE? And that's something that growth and momentum investing has been the opposite of. And and this is a could be think you wrote a blog post about this, Jamath. Sort of the regime change, if you look at the Googles, the Facebooks, the Apples, Amazon's is is a little bit of an exception here. those companies printed money. They had profits. They built up large cash reserves. If we look at the next cohort of companies, Airbnb, Coinbase, Coinbase, Ubers, etcetera, they focused on the top line growth, much like the Amazon, which was a very obscure approach. Correct, Ramoth, in in the history of this. Chamath Palihapitiya (00:18:22): Nick, do you wanna just throw up this chart? We did a little analysis over here, and it was just basically looking back 60 years of company formation. We looked at all of the 100 most valuable public company startups. and we index that to the 10 year interest rate. Speaker 5 (00:18:37): So what Jason Calacanis (00:18:37): are we looking at here, Chamath, with this chart? Chamath Palihapitiya (00:18:39): So, basically, we went back from 1960 onwards. So basically, you know, 63 years. And what this shows you is The 100 most valuable public technology companies, then the size of the circle here is their market cap. and then it's overlaid on top of the 10 year interest rate as well as gray bars for recessions. So what is this graphic meant to illustrate? Well, it Speaker 5 (00:19:09): just was for us to study, Chamath Palihapitiya (00:19:09): is there a correlation between the value of companies and what the interest rates were or what the economy was doing at the time. And to your point, Jason, the trend is pretty starkly made on this chart, which is that if you are a company that was founded in a period of austerity, You had the ability in general to build a much larger company, then that which was founded in a period of wealth and excess. Right? So when you look at when rates were sort of approaching 0 or were 0, there was a lot of really successful companies that are listed here in the in the light gray on the right But none of those things really represent the success that these other companies had. That's the first interesting takeaway. The second interesting takeaway though from this has nothing to do with rates per se, but it is that when rates intersect with the emergence of huge technology trends, So in the case of the 19 seventies, it was the PC revolution. In the case of the late 19 nineties, it was the Internet revolution. Those two things which required enormous progress in both physical infrastructures So atoms, as well as software infrastructure bits, when you put those 2 things together, those also created big companies. And so If you add that all up, the point is that whenever you see huge tectonic shifts in technology combined with periods of austerity that's when the gargantuan dollars are made. So in the 19 seventies, companies like Microsoft and Apple from the get go had to be profitable. Right? And in the absence of one very important round of financing that Amazon was able to close. the next big wad of companies were founded again in rising rates where they just had to get profitable or find a way to be positive free cash flow or have positive working capital. Faster than anybody else. So these are like really interesting trends that I think just say that as rates creep back up And if we can intersect that with some improvements in technology over the next 5 to 10 years that we've all talked about, It could be a real boon for startups and start up investing. Jason Calacanis (00:21:21): It would mean people are a little more resilient, a little more hardcore to use a term. Friedberg, what are your thoughts on this analysis by social capital? David Friedberg (00:21:29): It's interesting. I mean, I think there's probably Jason Calacanis (00:21:32): 2 David Friedberg (00:21:33): ways you could interpret this. 1 is in an era of says capital, all the capital gets competed away. And so you pay more salaries. You have it's harder to get high quality talent. you make a lower margin, etcetera, etcetera. It's much more kind of competitive on the ground. And then another one is just obviously kind of, like, evolutionary fitness when there's less capital, investors are more selective. I think what might make this era a little bit different than the past is just the amount of termed dry powder sitting on the sidelines right now. So the the the the total VC capital raised last year, I think, was a record high. That means there's a lot more cash that needs to kinda be deployed in the next 12 to 36 months than has ever been deployed in in the history of Venture. if that holds true. So that may be kind of a a counterbalancing effect here where it may take 3 years before that effect plays out. where there's more of a dearth of capital. It's certainly the case that institutional investors endowments, pension funds, traditional family office LPs and venture funds are making far fewer commitments this year to new funds. As I think we all know, and that tightening will play out in the venture funds that'll get raised for this vintage, the next vintage, and so on. And so maybe that that kind of evolutionary fitness concept to play out later. And sizing. And sizing. And sizing. I I think there's also this, like you know, we talked about this on our text stream. but the venture business of the last 15 years. Everyone since 2008, everyone's been trained and all the younger people that have come up and are now partners and running the firms on an environment of momentum investing rather than fundamental investing. And so there is also a question of how fit the investors are for a market space where valuations are flat or descending or the decision whether or not to invest is no longer driven by who else is investing and how much as the company growing and how much is their valuation going up, but it's much more about kind of the fundamental performance of the the the the business. Jason Calacanis (00:23:49): Does this match what you're seeing on the ground sacks? Are people being more dogmatic, pragmatic? Speaker 5 (00:23:55): Are Jason Calacanis (00:23:56): are the capital allocators really sharperating the knives. I'm looking at these businesses a different way. Does it actually hit the streets? David Sacks (00:24:04): Yes. There's a record amount of money venture capital has raised over the last you know, a couple of years, but it's gonna be deployed much more slowly and carefully over the next say, 3 or 4 years than it was over the previous few years. So divide that amount of money by 3 or 4 because the pace of deployment is gonna go way down. And so, yeah, I think people are gonna be more careful than they're gonna take longer to make decisions. I think it's gonna be much, much harder for new funds to get started. all of the, you know, hype around, you know, solo capitalists and, you know, all these, you know, seed funds and micro VCs and all this kind of stuff. I think a lot of that's gonna get washed away, I think, in hindsight. A lot of that was a product to the bubble And, yeah, I think you're gonna be in for a period of some retrenchment in VC. And I think that's good. I mean, I think to the point of Chamath study, that, you know, that the counterintuitive finding in his study was that great companies are created during times when we're not in a bubble and and capital is sloshing around everywhere. But when you're in a environment of moderate capital availability, And I think the point is that we all have to be under some stress. Right? That's what evolution requires is, you know, if an ecosystem or an organism is not under stress. They have no pressure to evolve and become fitter and compete. And I think that's what makes our industry and our ecosystem very adaptive over time is that it's constantly you know, it it does face survival pressures. But over the last several years, all the survival pressures were were taken away because anybody could raise money. And -- There was always another Jason Calacanis (00:25:49): bridge available. There was always some extension, and there was no -- Some convertible -- -- to be done. Speaker 5 (00:25:55): Right. Jason Calacanis (00:25:55): There was no reckoning. You know, a lot of these companies just seem to you know, get another 12 months of runway, another 12 months of running. -- David Sacks (00:26:02): learned so many bad habits during that period of time and so much entitlement and excess built up in the system during that time. And I think now we're we're seeing that a lot of that is working its way out. I mean, just look at the Facebook results the other day. Speaker 5 (00:26:18): So Jason Calacanis (00:26:18): Facebook just -- Let's David Sacks (00:26:19): talk about Facebook as an example because -- Yeah. Jason Calacanis (00:26:21): -- David Sacks (00:26:21): here you have a company where the stock over the past year had been pounded. It was, like, down over 50%. And the market did -- -- bucks Jason Calacanis (00:26:29): a share. Yeah. David Sacks (00:26:30): Yeah. Did the market did not like its answers? around the capital investments it was making. And then Brad Gerson, our friend wrote that letter encouraging them to get much more efficient. And then they did that And they basically started doing some rifts and basically just getting much more efficient in what they're doing and specifically taking out layers and layers of middle management. I mean, that was really the big thing. So they kinda took a page out of Elon's book in terms of what Elon had done on Twitter. I mean, not nearly to that extent. because I don't think they needed to, but they targeted this idea of we have too many layers in the company, too many mid level managers, and the stock ripped just was it, like, up 20, 25% -- Yeah. In a day. -- and they're Jason Calacanis (00:27:11): up to I actually bought it based the day they had the layoffs, I put in a buy order and it was closed at $94, and now it's at a 193. And FedEx of all places is laying off 10% of its offers officers and directors So the idea now is, hey. In the senior ranks, what is the inefficiency there? How do we get -- Well, more doers, more people who actually are building Speaker 5 (00:27:39): or operating the companies to take the reins and get Jason Calacanis (00:27:39): rid of this, as you're saying, middle management this waste that companies have. Let me David Sacks (00:27:48): tell you let me tell you specifically the problem that builds up in these companies is that everybody wants to be a manager. And so you you can't just come at this problem by saying we're gonna increase the number of reports that each manager has from 5 to Jason Calacanis (00:28:00): 10. David Sacks (00:28:01): That doesn't work because let me tell you what happens is that every individual contributor who's a star thinks that their career advancement requires them to Speaker 5 (00:28:08): manage a team. So what happens is David Sacks (00:28:08): you take that star IC and then you create a team around them. So that person then hires 5 people to manage. And those five people are not Speaker 6 (00:28:20): in store. David Sacks (00:28:20): yeah, they stop working, they just start managing. Well, maybe you get, like, 20% more production out of that six person unit than you would have just out of the star. but you're spending five times more money. So it makes no sense. And the problem is it cascades. So, you know, that IC becomes a manager they hire 5 people, then those 5 people, one of them is a star and says, well, I wanna be a manager. On all the organizational pressures to keep building more and more teams, and more and more layers. Jason Calacanis (00:28:48): Here's the quote from Mark Zuckerberg to illustrate your point from a recent all hands meeting. I don't think you want a management structure that's just managers managing managers managing managers managing managers managing managers managing the people who are doing the work. David Sacks (00:29:01): Yes. It's the problem of infinite delegation. Every, like, star, builds a team around them to delegate the work, but then they hire a team to delegate the work too. And pretty soon, the most junior interns in the company are doing all the work and all the best people are just managing. So it's it's actually a huge problem. And I think that I'd say that a lot of CEOs don't quite understand the problem because they think that all they have to do is increase the number of reports that managers have. It's not you also have to reduce the number of layers in the company. And and and just the ultimate example of this just to put a point on it was at Twitter, what we saw is that when Elon went in, to basically do a riff at Twitter. The first question he asked in the engineering department is who's checked in code? And they looked at the code repository, and over Jason Calacanis (00:29:48): 50% David Sacks (00:29:49): of the engineering department had not checked in code in months. And you wanna know the reason for that is because the the engineers were told that if you wanna be a manager in this company, you don't code. Managers don't code. Only IC's code. and no one wants to be an ice no one ambitious wants to be an IC, they all wanna get promoted. So it all gets Jason Calacanis (00:30:08): -- Explain what an Chamath Palihapitiya (00:30:09): ICE is. Jason Calacanis (00:30:09): -- David Sacks (00:30:10): this individual contributor. Yeah. So the whole thing turned upside down because of this idea that, again, ambitious peer won't be managers, and managers don't do the real work. Jason Calacanis (00:30:19): It's a cowboys who don't know how to ride horses. It's like it's a dangerous precedent to set. What what are your takeaways, Chamath, from what happened at Facebook when you look at it, and the pressure that was put on the ripping of the stock, even though they're down 2% year over year in terms of advertising revenue. Chamath Palihapitiya (00:30:38): there's a a guy on my team sent me this chart. He did a pretty detailed technical analysis of Facebook. Nick, can you please Put that image up there. So, basically, this this shows the -- This is really technical. This this is the first time Facebook mentioned the word metaverse in q2 of Jason Calacanis (00:30:56): 21, Chamath Palihapitiya (00:30:58): on the earnings call, they mentioned it 20 times. And the gray line here is the stock price. So as they kept mentioning it, the stock price just you know, reactivative. But qq4of22 was the first time that the word efficiency exceeded the word metaverse. and you saw and you saw the stock price rip up. So what's happened at Facebook is really interesting because it I think it transitioned to what's generally called an ex growth company which means that people are now looking at a business that has essentially gotten to its peak size and now what they're looking at is its ability to generate cash flow. The cash flow generation or cash flow yield of the business is like 3 a half percent. But they're making enormous cuts both in CapEx as well as headcount over time. They're getting their expenses under control And all of that should drive up their cash free cash flow yield. And so I think why people got very excited is there are very few x growth stocks that you can own that can just compound and crunch ginormous amounts of money. And these are in an incredible position to do it, you know, more than a 100 plus $1,000,000,000 of revenue. And if you get these costs under control and get efficient, get the employee base down to 30 or 40,000 over time. This is a thing that just spits out just ginormous amounts of cash. And so Jason Calacanis (00:32:23): So back to value investing and Warren Buffett, that means the earnings per share go way up. Chamath Palihapitiya (00:32:27): Yeah. You know, like like, the Facebook PE is quite modest actually. Now I actually put back in stock based comp. And its PE is about Jason Calacanis (00:32:35): 11. It's still reasonable. Chamath Palihapitiya (00:32:37): If you go back to the to the Ben Graham analysis, This is a company that perfectly meets that criteria of like you can buy it at a PE that's basically two times the risk free rate. And So I think it's an incredible stock now that you can own. Because if they keep grinding out all of these kind of free cash flow gains, man. They'll they'll just they'll stop enormous amounts of money. They've already announced the $40,000,000,000 buyback. You know, the thing to keep in mind is Apple had a moment like this. And when Apple went x growth, they did the brilliant thing which is they said we're gonna borrow heavily And we're gonna return cash. I may have posted this in the group chat to you guys. By 2025, Apple will have exceeded Jason Calacanis (00:33:20): $1,000,000,000,000 Chamath Palihapitiya (00:33:22): of cash distributions. I mean, that is just nuts Jason Calacanis (00:33:27): Is that include buybacks in cash distribution system? -- Chamath Palihapitiya (00:33:30): in dividends. And so Facebook now, you can credibly see a path where Facebook could chunk out. 100 of 1,000,000,000 of dollars of of total shareholder value returned over the next 4 or 5 years. And so, you know, for value investors it's somewhat of a kind of a no brainer. I mean, nothing's a no brainer, but Jason Calacanis (00:33:49): -- Chamath Palihapitiya (00:33:49): Yeah. -- really, really attractive value fundamentals right now. Jason Calacanis (00:33:52): I mean, you did see Warren Buffett buying Apple. I think it's his largest position. You're gonna see him probably do the same with Facebook. There was an interesting mass extinction event tweet that went on that's related to all of this, Tom Laverio, a GP general partner at IVP, which is a venture firm, tweeted the following thread. There is a mass extinction event coming for early and mid stage companies late 2324. They'll make the 2008 financial crisis look quaint for startups below. I explain when, how, and why. And we'll start to offer some detailed advice. Basically, 45 45 early stage start ups, he claims have less than 12 months of run according to a q 4 survey of 450 fanures by January Ventures. He sees Late 23 24 when this will all come home to roost Mark Suster from upfront Ventures, friend of the pod, reply with the following precisely our internal analysis 5000 seed, 2,500,000 raised or above, a, and b companies, those are 3 different categories funded in the last 4 years. We estimate 50% will go out of business. Loss ratios in the last 7 years have been artificially low due to excess capital as we just discussed previously with the never ending bridge. Chamath Palihapitiya (00:35:05): We've talked about this before. If you look back over 40 years of venture capital, the average top quartile fund distributes 1.6or1.7x the capital they raise. even though now we've gone through a period where people have shown these unbelievable markups. Right? TVPIs, the total value. Right. A paid in capital. Distributions have not really budged that much. Distributions are still modest. They're below 2 x. And so We have to go through what's called mean reversion. Right? We have to go back to the historical average, which means that A 50 to 60 percent mortality rate seems pretty reasonable. By the way, in the dot com bubble, that's what we went through. You know, in 2001, 1005. We had a 50% mortality rate. Jason Calacanis (00:35:48): At the seed stage, I mean, you kind of expect 70% to go out. Series a, maybe a little bit less. Freeport, what are you seeing on the streets? You're investing in startups. David Friedberg (00:35:57): Yeah. Look. I I think that there's Jason Calacanis (00:35:58): -- Is there an opportunity, by the way, also in here? So what are you seeing? But is there an opportunity in this group of this cohort of companies which seem to be upside down and or in -- Yeah. -- a tsunami right now. David Friedberg (00:36:09): This cohort of companies, I think, generally is overburdened with feature orientation and short termism, more than you would see in an era of reduced capital rather than excess capital. And what I mean by that is a Chamath Palihapitiya (00:36:27): lot of David Friedberg (00:36:27): companies built a business or built a product that allowed them to show traction in the market faster And typically, those products that are easier kind of paths to market end up being features, they don't end up being platforms. So it's very hard to become a big business or to become a scaling business or to differentiate in a competitive market. That's a general that's a very general statement. But I think, you know, when you miss out on the platform play, you start betting as an investor on a lot of the derivative plays that look like the real big company, look like the platform. And you think about how many companies try to look like some iteration of Stripe or try to look like some iteration of Uber or try to look like some iteration of, you know, name your big kind of behemoth. And as a result, you get all these sort of feature ish platform plays that have maybe a niche or some kind of, you know, narrow kind of market opportunity. They got funded. Those those businesses obviously aren't gonna have the same valuation multiples of the winners in the market, And now and they burnt a lot of money to demonstrate growth because so much of investing over the last 15 years has been momentum investing. And so they they try to grow, then they try to get a higher valuation. Investors plan more money in. Now the problem is that so many of these series, B, C, D, and E companies have a true market value. They're not a value less company, but the true market value of them is probably less than the total preference stack of the capital that's gone in. So they're worth Jason Calacanis (00:37:52): let me yeah. Yeah. David Friedberg (00:37:53): So so I'll just make sure people understand that. I'll just describe it. Yeah. So when investors invest, they have preferred stock. So they have a right to get their money back. So they, let's say, a 1 x liquidation preference, they invest a $100,000,000. The company is worth 300. They own 25 percent of the company after they invest, but they have a right to that $100,000,000 first before common shareholders get paid. The problem now is that a lot of those companies may be worth less than the 100. They're not worth 400 anymore. They're worth a Jason Calacanis (00:38:20): 100. David Friedberg (00:38:20): And you can see the play out in the public markets with that that dataset I shared with you guys a few weeks ago, over 2 thirds of companies now that have gone public since 2020. are worth less than the capital that they have raised as in the venture market. So if they were still private, they would be worth less than their preference stack. And that's where these companies start to unravel because now the investors have to totally recap the company. The founders don't wanna have all of their common wiped out. Now they own nothing. And there ends up being a very ugly scenario that happens with the board at that point on how do we wind this thing down? How do we recap it? What's gonna happen? And that's usually where everyone starts to run for the hills. The founders 1 or more, the founders leave and Speaker 5 (00:39:00): so on. Frederic, I have a I have a question for you. Chamath Palihapitiya (00:39:02): So you mentioned this earlier, which I think was a really important point, but we didn't really touch it. do you think there's gonna be a reckoning inside of venture firms about recalibrating general partners? 100%. I mean, look, And why? Sorry. Just explain why. Why? David Friedberg (00:39:17): So I think what's happened is over the last 15 years, to become a successful venture investor, you've gotten into the hot deals. The deals were and and the hot deals, the valuations are typically climbing up. And, you know, when the valuations climb up, that's an indicator that the company is doing well. and you should invest. That's been the model for operating in the last 15 years. But the truth is that maybe just because the valuations have gone up and more money has gone in, doesn't necessarily mean that that's a great business, or as Shamak points out, that you ultimately get a positive net return on that investment down the road. And that window is now closed. So the the the the investors that have been trained this is such a generalization. And I hate saying it because we have so many good smart friends at Work Adventure. But generally speaking, there are a lot of folks who have come up who have been trained on this momentum investing model. And it's it's like it's like day trading. The stocks are going up. Let's all put money into the stock going up. instead of having a more fundamental approach to is there a real cash generation potential and scalability and platform ability of this company And as a result, you're gonna have to see, I think, the junior partners that have come up and done well in this market. Chamath Palihapitiya (00:40:23): Can I throw David Friedberg (00:40:24): money at this point? Jason Calacanis (00:40:25): Well, they're they they've they've done well on paper, but they haven't done well on distribution. So maybe that Chamath becomes the -- Chamath Palihapitiya (00:40:31): Well -- -- so Jason Calacanis (00:40:31): you decide who's a good venture capitalist. which of these companies actually returned capital at a peak market? Chamath Palihapitiya (00:40:36): Well, I think Friedberg is really onto something, and he mentioned this before. So I got curious about this, and I went into pitch book. And my team and I looked at all of the people, the humans in our business, that have generated more than a Jason Calacanis (00:40:51): $1,000,000,000 Chamath Palihapitiya (00:40:52): in distributions on a given deal. And there's 20 that have done that in our industry. Like, there's people that have made 100 of 1,000,000 of dollars once or twice, but there's 20 people that have made more than a $1,000,000,000 more than once. Okay? And if you look out, a single one came up through the ranks as a pure engineer or product manager. Speaker 6 (00:41:09): Right. Chamath Palihapitiya (00:41:09): Everybody, to a 1. is extremely commercial in their background and their operating experience. Very few percentages of them were actually founders. a huge percentage of them were trained in banks and other places. So non traditional, quote unquote, roles for what this current crop of GPs look like because we went through a phase where if you were a VP of product or a VP of design or a VP of engineering at a well known start up, That was the most obvious onboarding into a venture firm. But if you just look back at the data, that cohort of people has actually never made money. Again, according to PitchBook, Jason Calacanis (00:41:47): That's fascinating. Chamath Palihapitiya (00:41:48): And that's a really fascinating, counterintuitive takeaway, which is that and and by the way, what's what's so interesting about that is Pat Grady, I think, had a tweet. and it just sums it up so cleanly because he just hired somebody from Co2 and the tweet was something to the effect of this guy is the most commercial guy we've ever seen, something like that. And I thought that was so interesting because that is exactly what our heuristic analysis of this data was as well. commercial people in Venture are the ones that make the money. Jason Calacanis (00:42:17): So you look at a Fred Wilson, Michael Maritz. David Friedberg (00:42:21): Danny Wilburley, Phil Gurley. They were investment analysts Chamath Palihapitiya (00:42:24): I can show you the list. Jason Calacanis (00:42:25): -- David Friedberg (00:42:25): markets before they became venture investors or Mike Moritz, who was a Speaker 5 (00:42:29): who was a Jason Calacanis (00:42:29): A journalist, yeah. Which is a journalist is just It's another if you're a good journalist, it's another way for analyst. Yeah. Chamath Palihapitiya (00:42:35): It was really, really interesting looking at that list. So, like, you know, there are people in there, like, Jim Gett's Alfred Lin, Danny Reimer, Jan Hammer, Fenton. So if if you look at all of these folks that are just tier one people and we know all of them, the one common thread amongst all those folks is that unbelievably commercial And so Jason, in a moment like this where you have to really hold the entrepreneur's feet to the fire or be their partner to make extremely hard decisions, You have to have the ability to be respected by them in those moments where you can force a very difficult decision. And then separately, if you have to basically force liquidity so that you prioritize your limited partners, how do you do that while still managing the relationship with the entrepreneur? How do you know that you just need to cut your losses and get out? These are very difficult trade offs that I think folks haven't been trained in doing to David's point. So It'll be really interesting few years to see how these organizations Jason Calacanis (00:43:32): I think this goes this goes to Saks's point about, hey. The ecosystem, if it's hard, If it's contankerous, if there's sand in the oyster, it could make the pearl. If you have a, you know, a congenial relationship with, you know, your Manager VC and everybody's champagne and caviar and and and high fiving, maybe that's not as good as having a Bill Girly, a Michael Morrish, and having a a foil maybe who is putting pressure on the management team. Hey. We need to hit these numbers, Friedberg and then sex. David Friedberg (00:44:02): Yeah. Look. I think one one counterargument here, maybe, that there is this frigging tidal wave of AI Companies And there is this incredible amount of lubricant in the dry powder that's sitting on the side of the of the market right now that all these venture funds raised in the last 2 years that is gonna lubricate all these AI companies into every vertical in every market. So every company is wrapped up in an AI cloak like a magic invisibility cloak. Every AI company's got an AI hacked and a badge and a tattoo now or every company is being rewritten as an AI company. And the money wants to find its way into AI, and it wants to rewrite industry with every industry with AI. So I think similar to what we saw with mobile, and the social web, you know, going back 10 or 15 years, we're seeing kind of this AI wrapper and this AI technology enabler rewrite the possibility of every vertical, and the VCs have capital more capital than they had 15 years ago or 10 years ago or even 7 years ago. So there is this counter narrative, which may be that the game the game goes on. The band continues to march on. The current crop dies out. but there's immediately a new crop waiting right behind it. Or what happens is the herd dies and everyone runs to the back of the earth and gets recapitalized, because I can tell you every startup I know that's not going well, everyone's talking about leaving to go do an AI company. And the venture firms are ready to write money. Chamath Palihapitiya (00:45:24): I think you're I think you're right about that. I think the question is, the actual person making the check, will they be more or less likely? Speaker 5 (00:45:32): And at least what history would tell you Chamath Palihapitiya (00:45:32): is that We've hired an entire generation of people that and this is clear. Do not map to the people in our industry that have actually generated returns. So you're right. They may take this money and misallocate it into these companies that are just, you know, rebranding themselves. But that just goes and further proves that there is a type of person that hasn't been recruited into these venture firms yet, That was the 1st generation that made all the money. Speaker 5 (00:46:03): I David Sacks (00:46:03): think it's always been the case that there is some difference between the background of the VCs and the backgrounds of founders. I mean, you guys mentioned Gurley and Maritz. Like we said, Maritz was a journalist who had written a book about Apple. He wasn't technical per se. And Gurley was an investment analyst on Wall Street before he then made the transition into VC. And that yeah. As we both know, they're like legendary VCs. You know, I think that what you wanna see in a VC see. I think the background matters a little bit less than, you know, like, how curious are they? How good are they about learning a new area, how good are they at being like a heat seeking missile? I mean, basically, just like zeroing in on, like, what is the hot space and specifically what is the best company within that space and somehow figuring that out. Being able to assess a founder, you know, that's like a very subjective thing. So I think there's lots of qualifications that you wanna see in a VC. Now at the same time, I do think that if AI is the next wave, and the next sort of platform opportunity as we all think it is. I do think that places more of an emphasis on technical skills. And I was I was literally just having this conversation a craft that, gee, maybe the next hire we should make a craft should be someone who's really deep technically. so they can, you know, help go deeper on technical due diligence of AI companies. Chamath Palihapitiya (00:47:34): They've never made money. David Sacks (00:47:36): What's that? Chamath Palihapitiya (00:47:37): They've never made money in the history of our business. David Sacks (00:47:39): Ew. Chamath Palihapitiya (00:47:39): Those people. That ARC type of hire has never done it on behalf of -- Well Jason Calacanis (00:47:44): -- Chamath Palihapitiya (00:47:44): LPs or GPs. David Friedberg (00:47:45): Biotech and life sciences they have. But what kind of hire? Jason Calacanis (00:47:48): -- David Friedberg (00:47:48): investors usually pay attention here. Jason Calacanis (00:47:49): -- saying a technical hire who worked in the trenches at a company is not as fit, know how to get Chamath Palihapitiya (00:47:54): in the past. has not in the Jason Calacanis (00:47:56): past gotten DPI, whereas somebody who is more commercial able to analyze a business David Sacks (00:48:01): per commercial -- The ideal person is Jason Calacanis (00:48:03): gonna be able to get returns David Sacks (00:48:04): Right. Right. So so look. I think, you know, the ideal person would be someone who's formerly a great investor, but also has some technical background and some technical chops. We also have a team approach at Kraft. So if you have someone who's very technical, they can just diligence the technical aspects of the deal. Somebody else can be responsible for you know, making an assessment of the founders. Chamath Palihapitiya (00:48:23): How we've solved this is we have a group of third party individuals that we work with that we keep on retainer that we compensate. And whenever we need to do deep technical diligence, we partner with them to do that work with us. And what it allows us to do is get the best of their technical thinking without also putting them in a position of trying to adjudicate whether this company is good or not. What I'm trying to understand is What is this technical edge? And can I understand the boundaries of that? But I I still keep the investment decision to myself and my partners because otherwise, The difficulty is, in my experience, deeply, deeply technical people are extremely good at diligence, but generally are for at making investment decisions because there's a part of their brain that flips on, which is like I could do it better or I could do it this way or I could do it that way. And I think like that anchoring bias can be very dangerous. And you you almost want to be a little dumb down from that depth of knowledge because you either find everything that is like not worth doing and then you can miss a market or you miss the thing that is good enough because you're like, oh, well, I would have done x, y, and z in a different way. So we kind of, like, use them, but we keep them at arm's length so that they never feel the pressure of having to actually decide on our behalf how the money should be spent. Speaker 5 (00:49:42): Yeah. David Sacks (00:49:42): I mean, that's interesting. Jason Calacanis (00:49:43): Yeah. The number one thing we're doing at this early stage is tracing our founders. I know this sounds crazy. on accounting best practices and pricing best practices. And we literally have founders who have never made a plan. I'm talking about at the Seatsage, who don't know accounting. And so we are running 4 seed stage startups, and I'm kicking myself that we didn't do it 2 years ago or 3 years ago. But better late than never on how to just maintain their books and understand operations. And the the operational lack of discipline in the market I'm seeing series a and series b companies that literally don't understand their own accounting. And so when we start talking to their accountants, there is a huge gap between what the accountants think of this business and what the founders think of these businesses. And founders think they have more revenue than they have or less revenue, they really don't even know how to calculate their runway in an honest way. And so there is back to your point, Chamath, about on the on the venture side of the business, a lot of product focus, a lot of operational focus, there's not enough focus on just the bottom line. Chamath Palihapitiya (00:50:46): The reason that happened is is what Friedberg said before, which is like somebody would build something, there was a little bit of momentum. And you would have to go and present these bonafides to these entrepreneurs to get into the deal And so vent what venture firms thought was the right bonafide to present as, oh, I built X Y Z product at this other company. Jason Calacanis (00:51:04): Right. Chamath Palihapitiya (00:51:04): And they thought that that edge could get you into a deal. maybe, but it could turn out that that was the wrong company to be in in the first place. And so you just missed an entire generation of value creation because it happened sort of off piste -- Off the trail. Jason Calacanis (00:51:19): Like -- Yeah. You really do need to understand fundamentally because we're talking about public markets here. the Facebook analogy, what is the ultimate earnings? What is the ultimate cash that is going to get thrown off this business? And and that's what the whole industry needs to I think pivot to and just that needs to be the operating principle. Chamath Palihapitiya (00:51:39): Do you guys know how much money? Facebook, Amazon, Google, and Microsoft raised combined total before they went public? Jason Calacanis (00:51:46): That's very small. I mean, Google is minuscule. Chamath Palihapitiya (00:51:49): Less than a quarter $1,000,000,000. Unbelievable. Jason Calacanis (00:51:51): Yeah. All -- The inefficiency is extraordinary. And then on top of this inefficiency, I don't know if you're seeing this. Chamath Palihapitiya (00:51:55): They were all profitable when they went public. Jason Calacanis (00:51:58): On top of all this inefficiency is a dependence on venture debt. I don't know if you're seeing this, Saks, but the amount of focus on adding debt to unprofitable companies over the last 5 years has been just extraordinary. I I don't understand what I've David Sacks (00:52:13): never understood the venture debt model or really how it works. I feel like it's a category that doesn't make any sense. Jason Calacanis (00:52:19): Say more. Speaker 5 (00:52:20): I David Sacks (00:52:20): mean, the the well, I mean Jason Calacanis (00:52:22): Explain it to people what's happening. I don't David Sacks (00:52:24): really understand how it makes sense for lenders or for founders, to be honest. I think the whole industry doesn't make any sense. For founders, I don't like it because the money has to be paid back. Right? It's debt. So founders take in this venture debt's thinking like it's an equity round but without dilution or with some warrants. And they don't realize, wait a second, we gotta pay this back in a year, a year and a half out of the next round they do. But that creates an overhang on the next round because the new VCs coming in they want their money to go into the company not paying off a bank. So it actually makes the next round less attractive. The other thing about it is that the lender is not getting an equity reward, so they don't wanna take equity risk. They may be getting a nice you know, coupon. I might be getting 9% or something like that, which sounds high for debt, but they're not taking true equity risk in the company. So the last thing they wanna do is be your last 6 months of runway. Right? They wanna be your 1st 6 months of runway and then and then get paid off on the back end. And I think a lot of founders think, oh, I'll take this money and it'll extend my runway from 18 months to 2 years. But what will happen in that last 6 months is all of a sudden, the bank will come to you and say, no. No. No. No. Like, you have this or that material adverse condition. It's called a knockout. And there's all these, like, terms that founders don't understand because it's highly legalistic -- -- covenants. And so all of a sudden, the founders find themselves with a lot less flexibility in that last 6 months to a year. Either a covenant gets triggered that makes them pay back the money immediately or their business flexibility goes way down because they're consulting with their bank about everything. Jason Calacanis (00:54:09): All of this is coming home to roost right now. David Sacks (00:54:12): I think it's a terrible deal. for founders. And I think that even for the lenders, I mean, I guess I assume that these banks know their business better than I do, but But I I I think that the reason I don't trust it as a category from you know, from a lender point of view or from, like, an investor point of view is that all the data about defaults over the last 5 to 10 years happened in this free flowing 0 interest rate environment. And so the startup mortality rates were artificially low because it's so easy to raise. So, yeah, venture debt makes sense in an environment in which founders are generally able to raise the next round and then pay back Deventure debt. But let's say that that that tweet storm you you mentioned, Jason, can you bring that back on the screen? I actually think this tweet storm is basically correct is You know, I've referred to on this show before that I think one of the things that built up during this bubble is latent startup mortality. so many startups that should have died from not being able to raise next round lived because they're able to raise money. And what this tweetstorm is predicting is that the second half of 2023 and then 24, you're gonna have a huge crunch where all these companies have to go out and raise. They've been waiting. So they're all gonna get to the point where their cash is so low. They have to go out and raise. And now all of a sudden, they're gonna be confronted with a new conditions. Jason Calacanis (00:55:36): I wonder how many of them have venture debt as an overhang. And that was it. David Sacks (00:55:40): Those ones yeah. And and they're gonna find they have less runway than they thought because Again, those banks, you know, they are gonna try and collect the debt before the start runs out of money. Not, you know, when it runs out of money. Jason Calacanis (00:55:53): Catch 2 falling knives. David Sacks (00:55:54): You basically Exactly. So so look. I just wonder I what what I what I don't trust is whether the the Return models on venture debt that were created over the last 5 to 10 years will be a good predictor of what the returns will be in the next 5 to 10 years when a lot of the mortality that shoulda happened in the past now happens in the future. David Friedberg (00:56:15): Well, I Jason Calacanis (00:56:16): mean, then and, Zach, correct me if I'm wrong here, but I'm also starting to see really gnarly term sheets, people foreclosing on businesses, people offering, like, literally had a term sheet come in. Like, we're gonna forgive the last note and take this business over for a dollar and everybody gets wiped out. The amount of bad feelings that you have to go through. Even if the there is a core business to Friedberg point earlier, hey, they raised a $100,000,000, but there's a $50,000,000 business in here that people would love to invest in. who wants to go through the hand wringing, the negotiation, the toxicity of a recap? It's an extremely hard process to go through? Are you going through any recaps right now, Zach? And what is the -- David Sacks (00:56:55): Not yet. -- the approach of Jason Calacanis (00:56:56): the firm in terms of dealing with these kind of situations? Do you even wanna start that discussion up, or is it too painful? David Sacks (00:57:03): Well, we're not Jason Calacanis (00:57:04): For a new company, not one you're already in. David Sacks (00:57:06): We're not at the I don't think for most of our companies, we're at the recap of restructuring We don't talk about the ones that aren't going well. People still have a fair amount of cash in the bank. And we've been beating the drums for Jason Calacanis (00:57:16): literally, you are -- -- opportunities. A new opportunity comes to you. It's one of these overhang companies that wants to restructure. Would you even engage that, or is it just too hard? Chamath Palihapitiya (00:57:23): I looked at 7 at the end of last year, and I tried to reprice 3 of them, and every single one was able to get a convert done away from us. David Sacks (00:57:33): Yeah. So, I mean yeah. I mean, that the Jason Calacanis (00:57:35): -- Chamath Palihapitiya (00:57:35): We tried to find a market clearing price for this equity, but nobody wants it to David's point because there's too much money on the sideline. and people are willing to give them a lifeline that doesn't force them to come to hard terms with what the reality of the moment is. David Sacks (00:57:49): Yeah. I I agree with that. We're not quite there yet. And and I think the the reason why that that tweet you posted got some traction is it's saying, listen. The crunch is gonna happen second half of twenty twenty three and twenty twenty four. That's where you're gonna see the down rounds. That's where you're gonna see the restructuring, the recaps, and all the rest of it. And look, I'm sure, like, every VC firm's gonna be a player in that. But, yeah, it's gonna be a lot of missable work Speaker 6 (00:58:16): for -- -- when Jason Calacanis (00:58:16): you're gonna see -- -- David Sacks (00:58:17): founders and and Jason Calacanis (00:58:18): these -- -- people's true colors. When when when you have to recap a company and -- Yeah. -- David Friedberg (00:58:22): this way, you Jason Calacanis (00:58:23): can really start to see. Chamath Palihapitiya (00:58:24): How crappy it was in 2003 to be here. Remember 2003? Central. Jason Calacanis (00:58:29): Oh my god. David Friedberg (00:58:32): Oh my god. Yeah. There is I'm Jason Calacanis (00:58:34): lucky to raise 500 k on a $3,000,000. Chamath Palihapitiya (00:58:36): Oh my god. Like -- 2004? Like, what a brutal year? David Sacks (00:58:40): Yeah. And there's gonna be a lot of that. I think the next 18 months or let's say the next 2 years, there's gonna be pretty rough for a lot of companies. And it's just that they didn't cut enough. I mean, we've been beating on the drums for a year for companies to lengthen their runway. and some did to some extent, but many didn't do enough, and they're gonna get caught in this crunch. Can we just go to that chart that Brad put out? I think that what a lot of founders don't quite understand still is that things are just never going back to 2021. I think a lot of founders listening to the top of the show where we're talking about inflation's under control. They see the market rally. Facebook's up 25%. they may be thinking, okay. We just have to weather the storm for 6 months or a year, and then everything's back to normal. And I think what's important to understand is that the market did bottom out about a month ago and is up pretty nicely. If you see here, this is the SaaS index. It's the median enterprise value divided by next 12 months revenue. And it was really beaten down about at the end of the year. At the end of last year, coming into this year, you were yeah, it was like it was like 4 to 5 x multiples of of next 12 months revenue for SaaS Companies. That's all the way up to 6.1 now. So you're talking about 20 to 50% rally for a lot of companies which is huge. We're still below the long term median which is just under 8. Okay? But what people need to understand is that even if we revert all the way to the mean of a, which I think at some point we will, that's still well below the bubble of 21 where they got to 16. So even if things continue to inflate, valuations will still never quite be where they were in 2021. And Jason Calacanis (01:00:26): -- If you think it's getting back to 12 or 16, Speaker 6 (01:00:30): it's not happening. Fetch is not happening here. David Sacks (01:00:32): For high growth companies, For high growth companies in Jason Calacanis (01:00:36): 2021, David Sacks (01:00:37): you were in the public markets, you were seeing multiples of 30 to 35 times. now those companies are maybe at 8 to 10 or 12. I Chamath Palihapitiya (01:00:45): think the reliable way that we can look at this for the future is that We're never going to see these kinds of multiples again unless rates are 0 and all kinds of tourist capital need to find a home to escape 0% returns in every other asset class. But if even the safest asset class now will give you three and a half Jason Calacanis (01:01:08): 4%. Chamath Palihapitiya (01:01:11): This is probably the new normal for quite a long time and we're gonna be back in that early Jason Calacanis (01:01:16): 2000 Chamath Palihapitiya (01:01:16): kind of mindset which takes A lot of hard work to build value around. Speaker 5 (01:01:22): We David Sacks (01:01:22): talked about the sort of whipsaw economy. And and there's a lot of mixed inflation data. I think founders need to understand that there's a bifurcation. What's happening in the tech ecosystem is not necessarily what's happening in the overall economy. The tech ecosystem is clearly going through a reset and a recession. Job cuts are now the rule. Valuations are much lower. whereas in the overall economy, we saw a job support today of over 500,000 new jobs. So the fact that matter is that even if the overall economy avoids a recession. That doesn't mean that things are just gonna bounce back. Jason Calacanis (01:01:59): Tech is a depression slash recession. Best cases, recession protect. David Sacks (01:02:02): Tech is a boom bust cycle. and we had a phenomenal -- Yeah. Jason Calacanis (01:02:05): -- 10 David Sacks (01:02:05): years of boom. Now we're in a bust. And so I would just, like, tell founders, you know, look, it's good if we have a soft landing in the economy. I wouldn't assume that that's gonna happen. I still think there's a really good chance of recession later this year. But it almost doesn't matter for you. What matters is your business and the capital availability for startups which is fundamentally different and will remain different than it was in Jason Calacanis (01:02:32): 2021. Friedberg, you're talking in the chat about Adani enterprises and Hindenburg doing this short research and publishing it. Stock has just absolutely gotten clobber. They were trading at gosh. 41100 was the 52 week high. And this thing has just cratered in the last 5 days. David Friedberg (01:02:54): I mean, I think the Jason Calacanis (01:02:55): Explain what's going on here. David Friedberg (01:02:57): Well, I mean, the story that the conversation I thought it would be interesting for us to have is the role that these short seller research analysts play in driving efficient markets by identifying perhaps things that the market broadly is missing, particularly Given that a few weeks ago, we were all kind of talking about the FTX debacle and how no one was doing their diligence and no one was digging in and no one was kind of revealing publicly what was going on inside of that business that ultimately caused significant losses. You know, the claims made by Hindenburg is that this company, Adani, which is founded and run by a guy named Gautam Adani. He started the company, like, I think 30, 35 years ago, and he's built this thing into this you know, the sprawling empire as people would say where he owns ports. He owns mining companies. He owns Energy Transmission Businesses. He's got a whole green energy business, and he's taken a bunch of these companies, and he's floated them publicly. So they're all kind of publicly traded. there's some degree of interrelatedness between all these businesses. It reminds me a lot of I don't know if any of you guys remember, I keep the Tista out of Brazil. You guys remember this guy? Where, you know, he kind of built the sprawling empire, very kind of broadly diversified industrial conglomerate with you know, lots of different kind of segments and used a lot of leverage, a lot of debt to grow the business, and a lot of interrelated inter party transactions And ultimately, the whole thing kind of came crashing down and that the Sedani business, it's super technical and super complicated, all the kind of accounting shenanigans that Hindenburg is claiming has been going on and capital markets shenanigans that they're claiming have been going on with this business. But there kind of report, which I think is, like, 400 pages long, has caused the response as 400 pages. The response is long too. Yeah. And then the markets shrugged off the responsibly, but didn't really care, and they kept kept selling the stocks off. David Friedberg (01:04:55): So there's, like, 7 or 8 publicly traded companies, all of which are just getting decimated. look, I don't have any strong opinion on this business. I, you know, I kinda skim through the thing. But, you know, it really made me question, like, how such a big call it accounting or capital markets fraud, if it really is that, can go on. And how much of a role, these sorts of players play in the market. Whether you guys think that this is a good thing in the market to have these short seller reporters out there, you know, doing this analysis, publishing it. Jason, by the way, you called out Nick Nicola Nicola, the the electric car company. As you know, Hindenburg put out that Nikola report Yeah. Stock tanked. Right? They claimed it was all fraud, etcetera, and then the thing got destroyed. Jason Calacanis (01:05:37): Trevor Melton got convicted again. David Friedberg (01:05:39): Right. And so, I mean, I guess, do you guys think that these guys have a have positive role net net in the market in kind of identifying and calling out this stuff because we all have friends that are on the wrong side of short sellers and They complain about it, and it can be really difficult to grow Chamath Palihapitiya (01:05:52): and build a business when people Elon had these guys literally claiming he was running a fraud for years years, and it was an intense amount of scrutiny because when the track when the stock was less profited, when we were in it in 2015, 2016, and 17, that was the constant refrain. And Elon was constantly batting back folks like this who would make claims. And the way that these guys are allowed to operate is because use the first amendment and say we have the right to say this stuff. I think that shorting falls into 2 buckets. One is you use it as a hedging instrument. So when we talk about spread trades like long Google, short Facebook, or long Facebook, short Google, you should be allowed to short. I think that's a very reasonable thing to do. I think the the question is if you were on the inside of a company and you say X Y Z is happening, for example, Trevor Milton, and it causes the stock to go up and it turns out to be fraudulent, he's held accountable. The question is, should there be the same Responsibility for people on the outside who if they have enough distribution can say the exact opposite of X Y Z is happening. In this case, X Y Z is not happening. which then causes the stock to go down because what the business model of these short sellers is write a document It looks very polished and very credible. Put on some positions, then put the document out. If the stock goes down, you close it out. In my opinion, I think that short sellers are really important part of a well functioning market or the ability to short. But what I would like to do is take an extra step which is You should hold these folks accountable the same way you'd hold an insider accountable which is almost to the effect of like when you put up the screed If you make money from it, it should sit in escrow and the SEC should actually adjudicate whether it's true or not. Chamath Palihapitiya (01:07:38): So in the case of Hindenburg and Nicola, They shorted the stock, they put out a report, it turned out they were right, all that money is completely well earned. Now what if this Adani thing turns out to be not true? or true. Nobody knows right now except 50% of the market cap has already been wiped out. So that's where things I think are in a bit of a gray area. The last thing I'll say is that If you look at it in the developing world, there's a very great line between some of the leading entrepreneurs in these governments because these entrepreneurs are doing the work of some of these governments. Whether it's Iquepatista in Brazil in one moment, right around natural resources, or Adani and Ambani in India or a lot of the people that that made a lot of money in China or the people that are making money in in developing markets, Turkey, Russia, etcetera. The government uses very talented entrepreneurs to go and concentrate capital to develop infrastructure progress. We did that in America in the 1800 as well. So that's where I think, you know, you have also balance it because his response was basically like this is an attack on India. And in a way, you can see where he's coming from. Right? Because he's building ports and roads and bridges. And he's like, without this stuff, how is India supposed to even exist in the 21st century? That's a reasonable claim. So I agree with you, Freebrook. I don't know whether the report is right or not. But this extra step of actually having the SEC actually tell us what the answer is, I think, would be a very important improvement to how this kind of stuff works. Jason Calacanis (01:09:06): The other improvement that the SEC has been proposing in rule 13 f dash 2 is that people would need to disclose their short positions -- Right. -- this proposed rule would require institutional investment managers. I'm reading from the FCC website managers exercising investment discretion over short positions, meeting specific specified thresholds to report on the proposed form SHO information related to end of month short positions and certain data that could affect you Speaker 6 (01:09:36): in such Jason Calacanis (01:09:36): short positions. -- David Friedberg (01:09:37): no brainer. That should absolutely pass. The commission would Jason Calacanis (01:09:40): aggregate the resulting data by security, therefore maintain thereby maintaining confidentially of the reporting managers. Yeah. and publicly deciding the data to all investors. This new data would supplement the short sale data. David Friedberg (01:09:51): I think this relates to overlanding. -- stock. Right? I mean, this is less about, like, who's doing what. and it's much more about are we kind of creating critical fail points in the system by seeing over leverage and overlending in certain -- Well, Jason Calacanis (01:10:03): there should also be some rules about the spreading of fear, uncertainty, and doubt. That FUD, that happened with Tesla Q, I mean, paradoxically, you know, thousands of No. Chamath Palihapitiya (01:10:15): But people but but that's not an example. That's that's an example of people essentially lying in public -- Yes. Jason Calacanis (01:10:21): -- Chamath Palihapitiya (01:10:21): to try to get the stock to move. And Tesla's not a fraud, that's a real company. I mean -- But there was a real Jason Calacanis (01:10:26): -- -- car of the year while this was going on. Chamath Palihapitiya (01:10:28): But there was a real human cost to that company. Right? To employees that got spooked, to partners that may have gotten spooked. The pressure you know, we saw this. The pressure on Elon in those periods of time. And he was like on the knife's edge where there was the potential where the company may not have been able to finance its cash flow needs because of those Tesla queue guys. And so It's not to say that the Tesla queue guys can't say it, but they should be forced at some level to prove it if you can create crazy stuff. I posted a link, by the way, for anybody that's interested in reading this There's a person called Carson Block who's being investigated. Yes. Because he may have pushed the boundaries of how short sellers do this. It's a really a fascinating read in the Atlantic for anybody who wants to read it. But this is sort of where the short selling thing can a little bit go array And it's the title of this is the man who moves markets. And it's it's quite a quite a really interesting read if you're interested in in how all of this stuff works. Jason Calacanis (01:11:22): Alright, everybody. That's the all in podcast for February 3rd 4th. For Saks, Friedberg and Chamath, I'm Jake Howell, the world's greatest monitoring. We'll see you Chamath Palihapitiya (01:11:31): next bloody boys by now. Speaker 6 (01:11:34): We'll let your winter ride. Speaker 5 (01:11:37): Rainman David Saturday. Speaker 6 (01:11:41): And I said -- We open source it to the fans, and they've just gone crazy like that. besties are gone. Speaker 5 (01:12:04): We should all just get a room and just have one big huge ordeal because they're all just useless. It's like it's like sexual tension that they just need to release them out. David Friedberg (01:12:13): You're the beep beep. What? Speaker 6 (01:12:15): You're a David Sacks (01:12:16): beep beep David Friedberg (01:12:17): beep. What? Could beep beep. Jason Calacanis (01:12:18): Where did you get Murphy's r Speaker 6 (01:12:20): all in.