When are you coming to Miami?
Are you there already?
Yeah, I just got here.
We’ll have a big weekend.
I mean, you get a ride on someone else’s plane.
Mine’s been repossessed.
You can give me a ride.
I’ll have mine for at least another couple of weeks.
I love my commercial.
You know, I love my commercial.
Every fan of all in in this weekend startup stops me and takes a selfie.
I cannot tell you the love in Miami.
I sat down to have a meal outside.
Were you by yourself or you were?
I was by myself.
It’s eleven thirty.
I was like, hey, everything’s closed.
There was this one little place that’s open.
I kid you not.
I sit down.
Two guys come over.
We love the pod and I’m trying to eat my meal and they’re asking me questions and they want
to know where’s Friedberg’s introduction.
And I’m like, it’s so bad.
Well, I showed them the video and they were in stitches.
I was like, guys, there’s only like five people have seen this video and now it’s you too.
So the seven people, they were so over the moon.
We should never have cut that.
Well, we could play it now.
It was good.
It was incredible.
I say we just we just throw to it right now.
Is that a good plan?
And here we go.
And three, two.
This is like the nerd Olympics for Friedberg.
He’s like nerd stretching.
He’s having a nerd freak out right now.
You know what I’m most excited about that?
I don’t have to listen to Jason’s intros.
Oh, my God.
You’re on like nerd brawl.
That’s like nerd at all.
Take it easy, Dungeon Master.
This guy hasn’t been so happy since he rolled a 30 on the 30 sided die.
Oh, my God.
I’ve got a plus seven bronze sword.
Where does that come from?
Oh, from Dungeons.
I’ve never played.
You were playing League of Legends?
I’m going to just apologize in advance to the audience.
Here we go.
No interruptions, please.
In the voice of J-Kal.
Is there a frog in your throat?
What’s going on there?
He’s super loud and has nothing to say, but we keep him around because he has a producer.
We don’t have to pay.
One good investment in his 30 year career, but he wrote a book about it and tells all
the VCs to kiss his rear.
He’s one of a kind, will always come to your rescue when you’re in a bind.
He calls himself Mr. Calacanis, but we all just call him an anus.
Jason Calacanis, everyone.
Jason, welcome to the show.
Great to be here.
Great to be here.
Thanks for the kind intro.
Good to have you.
His words are incendiary and divisive, but only if you identify as a gender fluid progressive.
Otherwise to you, he’s a scholarly God fighting the great war against the rise of the woke
It’s the 17th most important guy from PayPal.
He’s back with the same political speaking tracks, the one and only Mr. David Sachs.
David, welcome to the show.
I think we need to work on some of your rhymes, but.
Yeah, we might need to tighten that up at workshop.
Maybe it gets better.
He drinks himself twice a week, but we’re still enraptured because his mink sweaters
are so sleek.
His monologues last most of the show, but he never talks anymore about IPO 2.0.
As he’ll tell you over and over, he drinks the world’s greatest wine, but commenting
on other topics is a bit below his line.
He’s Silicon Valley’s most renowned dictator.
Our friend, the verbal masturbator, Chamath Palihatpatator.
Chamath, welcome to the show.
Great to have you here.
Wow, that was brutal.
Oh, I’m not done.
We’re an increasingly notorious whack pack litigated by David Sachs, emceed by an investor
hack and soon to be canceled because of the performance of Chamath’s latest back.
We are the All In Pod, and you’ll never get this 90 minutes back.
I’m the sultan of science with an IQ of 103.
I’m taking the throne as this podcast’s new emcee.
Thank you, everyone.
I’m going to have to.
Man, I don’t want to read the YouTube comments on this one.
All right, we’ll scrap it.
No, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no, no,
you can’t spike this.
Well, I mean, it felt a little bit scorched earth to me.
I thought mine was fine, but I think these other guys are a little bit shell shocked
I went a little hard.
I actually wrote this for your for your birthday.
And then I decided to throw it in.
Okay, well, I guess maybe we save it for your birthday.
Yeah, you may want to do something funnier for my birthday.
I’ll be back next week with some actually funny intro material apologies to the audience.
Let your winners ride Rain Man David Sachs and instead we open source it to the fans
and they’ve just gone crazy with it.
Love you guys.
Queen of quinoa.
I’m going all in.
Listen, stocks and crypto have plummeted Tiger Coinbase, Shopify, Employee RSUs, meme stocks,
it’s all gone, everybody.
The world’s over.
So where do we start?
You guys want to start with crypto stocks?
Where do we even begin?
Should we talk about what happened when rates went to zero and how financial assets inflated?
And I think we talked about this during the pandemic, right when the pandemic was starting
I remember an early show we did where you and I talked about how it felt like we were
going into like the Roaring Rapids, right at like Magic Mountain or Disneyland, I kind
of described it like that.
Like, it feels like you’re going to a rushing river.
And there was just all this capital flowing so fast, like overnight, they were like, all
of a sudden, we went from this like, COVID standstill, to Oh, my God, this rush of capital.
And you could feel it, right?
All the businesses were all involved in started getting term sheets and doing deals.
And there were SPACs and transactions.
It was an incredible rush of capital.
But when, you know, the central bank made interest rates zero, and then banks could
lend out money at close to zero and still make money.
And then people could lever up assets.
And then those asset values inflated, and they could borrow more and keep, you know,
investing in more and buying more.
Ultimately, you know, we had bubble after bubble.
And we saw a lot of things that, you know, may not have necessarily been valued based
on a historical set of multiples or comparables or cash flow.
But really, it was just about, hey, if I invest x dollars, and someone else is willing
to pay y dollars for this asset tomorrow, I’m going to make money.
And, you know, suddenly, the friggin vacuum came out, which was like, let’s take all that
And so when interest rates got hiked, it was like all that money’s coming back out of the
And it was like this whooshing sound, like the airlock got opened, and all the cash came
And as a result, the bubble is just all deflated.
And it happened so quickly that it’s what was crazy to me was that for so long, everyone’s
been talking about how everything feels so overvalued.
So everyone was just waiting for the moment when the whooshing sound began.
And then everyone laid off all the risk.
And it happened so fast.
And it’s still happening.
People are still trying to unwind the things where they’re, you know, in huge positions.
But, you know, I think it really is just it really is this, this kind of incredible moment
where you see all the money get pumped in, it all gets rushed out just as fast.
And I think we’re all kind of like, you know, in awe at how quickly the response has been.
So maybe some context is helpful.
From 2018, up until the beginning, or not really the beginning of this year, but probably
last year, you could have calculated an incredibly tight correlation between the stock market
and the Fed money printer.
So the Fed is in control of how they can introduce dollars into the economy.
How do they do that?
They literally manifest money.
They don’t actually technically print it.
But let’s just assume for these purposes that they actually do print it.
And they literally take that money and they enter the market and they buy things with
And they’re giving you this newly created money that they just created out of thin air.
From 19 or from 2018, up until about q4 of last year, there was a point nine to correlation
between that and the S&P 500 going up.
What does that mean?
So if you look at a negative one correlation, that means that if something goes up, this
thing goes down, dollar for dollar, that would be perfectly negatively correlated.
If you look at something that has a zero correlation, that means it’s just random.
Whether one thing goes up and down has no influence on the other.
But a 0.92% correlation effectively means that for every dollar the Fed created, the
stock market was going up by that same dollar.
And that is literally what we had up until November of 2021.
Since the beginning of this year, till about yesterday, so I think the number is still
going up, probably by at least by a trillion dollars, we have destroyed collectively as
a society $35 trillion in global market value.
Now, to give you a sense of that, that’s 14% of all global wealth that has been destroyed
in basically five months.
And for reference, in 2008, when we went through, you know, a cataclysmic shock to the system
that threatened the banking infrastructure of America, and a potential contagion to the
world, that destroyed 19% of the world’s global wealth at that point.
So, you know, we’re approaching some really crazy heady moments in time where in terms
of the market correction and the value destruction.
The difference here is that the last time around, it was really about a handful of financial
institutions, and some very specific assets, right?
Mortgage backed securities, you know, some parts of the of the credit market, and then
a bunch of financial stocks.
And that was largely it.
This time around, as you just said, Freeberg, it’s literally everything that’s getting smoked,
there is not a place that you can effectively hide.
That has been safe, crypto smoke, the credit markets totally frozen, the equity markets,
NASDAQ is in a bear market, the S&P is basically flirting with the bear market now.
And I don’t really see any end in sight.
Meanwhile, we’re waiting for CPI to downtick.
Inflation hasn’t really done that.
It looks like consumer price index, how much stuff costs.
So that’s taking a lot longer than we thought to sort of roll over.
Separately, jobless claims are now starting to tick up, which means that companies are
beginning to affect layoffs because they feel this pressure.
So now you’re going to see an unemployment rate that starts to go up.
And then meanwhile, we’re fighting a proxy war in the Ukraine against Russia to the tune
of about, you know, $40 billion every sort of month or so when we open the paper and
decide to read about it.
So you put all these things together, it’s not clear that there is the momentum to create
a market bottom.
Real estate, Chamath, if you look at it, was a major compression in 2008.
Real estate held up, is holding up, seems to be holding up a little bit.
I don’t know how that long that’s going to last with mortgages going up.
So when you were talking about all the different categories, I was like, that’s the one category
that I guess hasn’t fallen yet.
Sax, what’s your take on this?
Yeah, I mean, look, we’re in a stock market crash that I think over the last week sort
of became a panic.
I mean, I think now there’s panic selling going on.
That’s not to say that it’s all oversold, but certainly there are names now that are
starting to become screaming buys.
But nobody has the capital to buy.
I mean, it’s easy to say, you know, in theory that you should be greedy when others are
fearful and fearful when others are greedy.
The problem is that everyone’s already fully deployed.
And then when the stock market crashes, they got no cash left to buy up new names.
And, you know, that’s one of the things that you’ve noticed in this downturn.
And I’d say especially with crypto is with all the other crypto downturns, there were
always, you know, the crypto accounts saying hodl or buy the dip or, you know, they had
the laser eyes going.
I don’t see any of that right now.
So this is just a route across the board.
It’s every asset class.
I think home prices, that’s coming, Jason, because like you said, mortgages are going
Inventory is going up.
So that’s a leading indicator.
People can’t afford the same mortgage they did before because rates are going up very
So, you know, sellers gonna have to drop prices.
And until they’re willing to do that, inventories go up.
That’s a little dance that happens in real estate is the sellers don’t want to accept
And they don’t have to sell because they’re living in it, as opposed to their crypto holdings,
which they’re not living in, and they’re not getting value from.
And frankly, I think the consumer in general, that’s the next shoe to drop here, because
right now it’s been, you had this sort of financial correction, you had this massive
asset inflation, and now the air has come out of the balloon.
But the consumer has generally been holding up pretty well.
Obviously, we had unemployment near 3%, very low, although the labor participation wasn’t
great, but the consumer was doing fine.
It was sort of holding up the economy.
Now, I think you’ve got a bunch of different factors are going to really hurt the consumer
over the next several months.
Like you said, interest rates going up means that home loans become more expensive, car
loans, any other, you know, personal consumption loans go up.
Credit card debt now has all of a sudden skyrocketed.
So, there’s an article on Axios on this, that the amount of consumer debt is surging, and
to this highest level of increase in over a decade.
So, consumers are turning to plastic to cover the soaring cost of everything.
And then because of inflation, that wages in real terms fell 2.6% over the past year.
Because of inflation, when you said that.
Because of inflation.
So, if you were to look at wages in real terms, people are actually making less money.
You give somebody a 10% raise, 8% inflation, it nets out to two.
Well, no, you’re giving them a 6% raise.
Oh, I’m sorry.
Or like a 5.6% raise or something like that against 8% inflation.
And net, they’re down 2.6%.
They’re down two, not up, yeah.
In purchasing power.
In spending power.
Sax’s point is like, I mean, the number was 60 billion of new consumer credit last month,
which is like something we haven’t seen in a very long time as consumers try and bridge
this gap to afford the things that they’ve gotten used to spending money on.
To jump up like that just indicates that we may be in the beginning of a consumer credit
bubble now, which is scary.
This is the question is what are the next shoes to drop?
So, you think about like what’s happened in the market so far, it’s mainly been multiple
Like earning season was pretty good.
It was amazing for some folks, yeah.
For some folks.
So, the stocks that got hammered were generally the COVID stocks.
It was the Pelotons, the Netflix, Zoom.
You know, you could like Coinbase and Robinhood with the day traders because people are laying
off that stuff.
So, basically the COVID stocks have been hammered, but the B2B stocks actually had really good
And yet, you know, the SAS index is down like 80%.
You know, the average SAS multiple, it was over 15 times, you know, last year on the
public comps, and now it’s down to 5.6.
So, the SAS companies have been hammered despite having great earnings.
So, now they’re B2B, they’re a little bit insulated from the consumer.
But what we don’t know is what happens over the next six months.
If we go into a deep recession, then do even the B2B companies start being impacted?
That would look like SAX, just to be clear.
You know, people maybe start canceling their Netflix or they don’t take that vacation.
That’s the consumer getting hit first.
A business that’s laying off 10 or 25% of their employees, which are starting to see
that contagion, they might also pull out their SAS bill and say, here’s 12 SAS products we’re
playing for, let’s consolidate down to eight.
So, there’s a SAS startup that sells, you know, six and seven figure deals into enterprises.
And they closed their deal with Uber the day before Dara’s memo came out saying, we got
to be really focused on cost cutting.
What Wall Street wants now is free cash flow.
We got to really sharpen our pencils.
They were like, shoot, good thing we got this across the finish line.
If it had been like two days later, it just would have been a much tougher process.
So, first, you’re right.
The companies that get impacted are the ones with exposure to the consumer, but then those
companies start sharpening their pencils and buying less.
So, the question is, how much are earnings now going to be impacted in the B2B space?
And what sort of recession do we have?
I think, like, recession now is just inevitable.
To Sharma’s point, you can’t have 14% of global wealth wiped out practically overnight and
not have that translate into a big recession.
Monetary velocity is going to slow dramatically.
The money circulating around is, you can feel the breaks happening.
You can feel the tightening.
People are just way poorer than they were six months ago.
Guys, just to be clear, we actually haven’t started to remove the money in the system.
So, the process of quantitative tightening, which is the Fed’s mechanism of removing liquidity,
is going to start now to the tune of about $90 billion a month.
But to run off all the money that they printed will still take three years.
So, we have to take about $3 trillion of excess capital out of the economy.
And so, if you add that $3 trillion as well, that’s just going to disappear.
To the $14 trillion, we’ve already, you know, or the 14%, the $35 trillion, sorry.
You know, you’re starting to touch numbers that are, you know, as bad as the GFC in terms of global wealth destruction.
You’re referring to the Great Financial Crisis, when you say GFC. 2008.
Unlike the GFC, this wealth destruction is touching a lot of normal, everyday folks in very broad-based ways.
And that wasn’t necessarily the case.
There were a lot of people that, unfortunately, lost their home.
But even that was still relatively contained to the hundreds of thousands.
Here, we’re talking about tens of millions of people owning every kind of imaginable asset class
who’s seen wealth destruction, you know, somewhere between 25% to 90%.
And that’s very hard to cover.
Yeah, but I just want to make the case, like people keep using this term wealth destruction.
And it was only wealth that was accumulated in the last few quarters, since we had COVID.
And we released all this capital and made interest rates zero and flooded the market with money.
So everyone kind of gets the money.
And then they’re like, hey, I’m worth a lot more.
And then all of a sudden, the free money is taken back.
And you’re like, oh, my gosh, I’m worth less.
I’ve been destroyed.
It’s, you know, it’s crazy.
The reality is, this was meant to stimulate the economy.
Money was released.
And the idea when you release capital from a central bank is that that capital flows its way into productive assets,
meaning businesses that can employ people that can create products that people want to consume.
And ultimately, it’s very hard to manage that when your only mechanism is to raise or lower interest rates and make capital available or buy bonds.
At the end of the day, a lot of that capital flowed into financial assets and inflated the value of those assets,
the value of stocks, the value of crypto, the value of bonds that we own, the value of startups that we all own.
And all of those assets, the value of the stock went up.
But the capital didn’t necessarily flow into creating new jobs, creating new businesses and creating new products.
I want to finish this one, because I think it’s really important.
And at the end of the day, if that capital didn’t really go in to create value, and it comes back out,
and all that happened was we had this kind of inflationary moment in terms of asset prices,
and we didn’t actually create new jobs and didn’t actually stimulate the real productive economy.
That’s where we have a problem with stagflation and where we are inevitably going to run into a recession.
And I think the biggest concern I have, let’s be honest, we’re in a recession right now.
This is the biggest concern I have, as I mentioned earlier, is this consumer credit problem.
A lot of consumers got used to the free money over the past two years.
And people took that money and they went and bought new cars, or they bought crypto or they bought anything or another NFTs.
And a lot of people got used to living a lifestyle that allowed them to spend in a way that they otherwise would not have been able to spend.
And then all of a sudden, the rug got pulled out.
And now everyone’s like, well, I want to keep living this lifestyle.
I want to keep spending this money.
I want to I had all this stuff taken away from me, shoot, what am I going to do?
And then they take on credit.
And the credit markets haven’t tightened enough yet on the consumer side that we may find ourselves in a really ugly consumer credit bubble.
Here’s a crazy statistic for you guys.
In the 2008 financial crisis, the median home price to median income in the United States was 5x.
Today, it’s 7x.
So people today own homes that are significantly more expensive relative to their income and earnings than was the case during the financial crisis that caused a massive housing bubble.
You’re missing a bunch of important data points here.
The most important thing that happened was we changed the way that we are allowed to capitalize mortgages and the borrow rates.
So that fundamentally is what drove that.
So, for example, you are not allowed, for example, to have a qualifying mortgage be over a million dollars.
At the end of last year, we changed those rules.
So if you X out those effects that allow the FDIC and all of these, you know, Fannie Mae and Freddie Mac and all of this financial gobbledygook acronym infrastructure that props up the US economy.
If you factor in those rules, I don’t think it’s as extreme as you’re describing.
What do you mean consumers have more debt relative to the value of their home?
Sorry, debt relative to their income than they did during the 2008 financial crisis.
That’s a fact.
Has nothing to do with the structural way the market works.
But like, what I’m saying is the market allows you to be that levered without actually getting foreclosed on or, you know, you’re allowed to get the borrow rates that allow you to do that.
All I’m saying is, it’s not like excess credit is being built up in the system abnormally by consumers.
It’s just that these products, again, are being structured in a way that gets people down.
And real estate is a very unique category because you have I buyers taking stuff off the market.
You have regulation not letting people build more.
So I would be very reticent to extrapolate what’s happening in real estate.
Yeah, I don’t think we have like a an issue in real estate, to be completely honest with you.
I think that we may have a looming credit crisis.
But the practical issue today is I think asset wealth destruction in the financial markets whenever that happens, generally tends to lead to what SAC said, which is belt tightening by companies.
Focus on maximizing short term free cash flow, which unfortunately, the way to cut that is by cutting OPEX.
And the way that you cut OPEX is by unfortunately, spending less on goods and services, which affects other companies and firing employees.
And I think what you’re going to start to see are a bunch of those things where these companies make these short term optimizations.
Then how that unfortunately impacts the consumer is what Friedberg said, which is that if the consumer was already living, you know, sort of at the knife’s edge and using a lot of credit to basically allow them to live a lifestyle.
That wasn’t sustainable, whether that meant not having a job or whether that meant, you know, vacationing and staying in Airbnbs.
All of that will come to an end.
Now you can say what is the canary in the coal mine?
And let me just give you one thing that hit the wire this morning, which will show you how bad the credit market is.
So there was a article in Bloomberg that came out that said, instead of Elon taking margin loans to fund his acquisition of Twitter, there is an idea being floated by Morgan Stanley to use convertible debt.
Now, I love this idea because I think it’s an excellent mechanism.
This was the, you know, when Elon had convertible debt on Tesla, that was, you know, one big escape velocity moment for me in my career in 2016.
So I believe in these products.
I believe that they work.
But the reason I’m bringing this up is that the what it said is I’ll just read this to you.
may have a 20 year maturity and include a feature allowing interest to be paid in kind at a rate of 14% a year.
If the single greatest investors cost of capital for debt in today’s market is 14%, I think you have to really start to question what the credit markets really look like for market clearing prices.
Because if that’s the price for a risk bearing asset, run by the greatest entrepreneur of our generation, there’s a bunch of stuff, Friedberg, to your point, that’s pretty mispriced.
I think one thing where that’s a silver lining here is we did build up 11 million job openings, labor participation is really low right now, even post pandemic.
People, if you ask this question, I think Chamath of like, how are people going to get out of to Friedberg’s point, the lifestyle issue, like they want to live this lifestyle is a pretty easy solution.
Go back to work, get a second job, start working again, we peaked, you know, in the 90s with something around 67% labor force participation.
And then we’re now you know, just right around 62.
This is a large number of people who could go back to work.
Now, you mentioned that slight tick up ever so slight in unemployment claims.
We’ll see if that goes up.
But I think the potential way out here is, is that it’s bought, meaning like, if you look now, the last three or four, right?
Unemployment claims readings in a row have largely showed that it’s floored.
And it looks like in the last couple of readings that it’s starting to tick up.
Well, with 3% unemployment, we’re kind of on a floor, you can’t possibly have less unemployment,
Unemployment is going up.
I think employment has peaked, unemployment is going up.
And it’s exactly what Jamal said.
Look, all of us in our board meetings last several months, really, since the beginning of the year, have been warning founders that the environment is changing.
Don’t assume that we’re always going to have a boom and the cash is always going to be there.
However, nobody’s taking the advice.
Well, because there’s been resistance because people don’t want to believe it.
And then in addition, it’s always like, well, how do you know it’s not going to bounce back, right?
And now I think after what’s happened, really, since April, and really in the last week or two, I think no one’s really saying that anymore.
Everyone understands that we’re in a new environment, and they just don’t.
They either have experience with how bad it’s going to be, or they don’t.
But everyone understands things have changed.
So every company that’s acting sensibly is freezing their hiring, putting a brake on the growth, slowing down their plans.
And that will absolutely translate into less job creation.
Yeah, we’ve we’ve really pushed that exact plan.
I used to sit down with our founders.
And in these board meetings, what we would talk about is the base case.
And then we would always talk about a blue sky case and a really bold case.
So three flavors of kind of like, kind of go and do what you’re doing.
Actually put a little bit more gas on it and you know, press the gas and then really go for it.
I stopped all of that.
You know, these last five months have been me and my founders basically saying, Okay, guys, what’s the extreme bear case?
What’s the bear case?
And then what’s the base case?
And what we are trying to figure out is how do we make sure that we can optimize for a contribution margin for profitability for cash flow?
And when that’s not possible, how do we minimize burn so that we can extend our runway as long as possible and show technical validation so that we can raise money on reasonable terms, not even great terms.
And if the boards of these private companies haven’t been doing that for the last five or six months, and the and the burn hasn’t dramatically changed, I think that they are, they’ve been a little derelict in their duty.
It’s a it’s a it’s you’re not doing a very good job as a board member or investor if you haven’t forced these conversations with your CEO.
And you shouldn’t expect the CEO to bring this to you in many ways, because it’s very hard for them with the with the focus that they have every day to put this front of mind.
But as Zach said, you have to do it as a director.
If you’re worth the salt at all, you have to do it.
But it’s been quite the opposite.
We saw with fast.com co was the opposite, right?
People were just not even considering it.
It’s just survival risk is on the table, you really have to act differently.
It’s kind of like the difference between a poker tournament and a cash game.
You know, like players behave very differently in a poker tournament, the players are much more conservative.
Because once you’re out, you’re out.
So if you lose the wrong hand, you’re busted out of the tournament, whereas in a cash game, you can just rebuy.
Well, we’ve gone from basically being in a cash game where people can just rebuy.
Maybe they won’t.
They could go out and raise more money.
Maybe it’s not the valuation they want.
Maybe it’s not as much they want.
But, you know, in a boom, you can always go raise more money.
Now, if there’s no more money available to keep funding your plan, if it’s not working, you really have to think about survival and you have to be more conservative.
You can’t let yourself bust out of the tournament.
By the way, I’ll say two things on that.
One, what you’re describing is exactly the condition that is now led to the fact that roughly one third of public biotech stocks are trading below cash.
So their entity value, the biotech industry as a whole, SYNBio in particular, but really biotech, about a third of companies now trade below their cash balance.
I’ll send you guys some links on this, Nick.
I’ll add it to the show notes afterwards.
And the reason is, yeah, 40% of them have less than 20 months of cash.
60% of them have less than two and a half years worth of cash.
And historically, biotech companies, they kind of run an R&D cycle to prove that their biotech product will work.
And if it works, there’ll be a pharma company that’ll swoop in and give them some money to go through the next phase of clinical trials.
Or they’ll do a secondary offering and raise more money to get through the next phase.
But because the capital markets are gone now for them, or the assumption is, hey, there’s not going to be any capital left, they’re still burning whatever it is, 20, 30, 40, 80, $100 million a quarter.
They’ve only got a few hundred million dollars in the bank.
And everyone’s like, hey, look, the odds of you guys actually, even if your technology works, even if your product works, the odds of you being able to get the funding to get through the next phase of clinical trials is much lower.
Therefore, the ascribed value of your business is negative.
And we’re seeing that across the board.
I started working in Silicon Valley in 2001.
That’s when I graduated from Cal, and I worked at an investment bank doing tech M&A.
And that was right after the dot com implosion.
Most of what I worked on was public companies that were selling for less than cash.
Today, we don’t talk about that over the last 20 years, because it just never seems to happen.
Well, it’s a phenomenal thing to happen, right?
I mean, you could basically what that means is, you could shut the company down and make a profit and still own the IP.
So that is what happened in the dot com area.
Yes, we saw we sold a bunch of companies.
I was on the banking side, representing the sellers, the private, the public companies, because there was no business, they were just burning money.
And there was no line of sight to making money or line of sight to raising money.
So the board said, you know what, we just got to get shut it down, this thing out, shut it down.
And then, you know, hey, what’s cheaper, shutting it down, what’s gonna make us more money, shutting it down and distributing the cash, or letting a private equity firm come in and shut it down for us.
And in a lot of cases, they sold these public companies to private equity firms.
Let’s say the company’s got 100 million in cash, they sold it for 60 million, private equity firm comes in, and they’re like, boom, boom, boom, everyone’s fired, this thing shut down, and they liquidated it, and they took, you know, made made a $20 million spread on that thing.
I will say on the on the flip side for private for private markets, and I think this is a really important maybe point for us to have a conversation about.
Over the past decade, as you guys know, there have been more venture money raised than at any time in history, the numbers have been going up every year, the number of funds total capital raised.
But at the end of 2021, if you look at the total funds raised and the total capital deployed by venture funds, we have a $230 billion capital dry powder hangover.
So there’s a quarter, there’s a quarter trillion dollars of cash sitting in venture coffers that they can call and write checks into.
So I think it provides a really interesting contrast that sets us up for a dynamic over the next few years on what’s going to happen in private markets.
Because you’re going to have the haves and the have nots.
The haves are going to have a lot of friggin money available to them because these venture funds need to be deployed over the next few years.
The have nots are the ones that don’t have proof points to a viable outcome in their business.
But the haves are going to have a lot of capital available to them with one caveat, with one caveat, which is valuation.
So what do you guys think will happen?
There’s two caveats.
In the contrast of everyone saying, hey, there’s no capital available, there’s no capital available.
That’s not true.
There’s more capital than has ever been available.
So how does it get allocated?
So the first thing is, to Jamal’s point, at what valuation and so there’s going to need to be disciplined, and they’re going to write the that money will go to the winners.
Other thing to remember is, during the great financial crisis, for about a year, maybe even two, many venture firms did not want to call capital from LPs, whose portfolios were crushed.
And LP said, I know we’re on the hook for this.
But I would appreciate it if you don’t make a ton of investments right now, because we don’t want to clear our already, you know, demolished portfolios, to then fund your venture funds.
So those are commitments, it’s not cash in the bank.
And those commitments only come from Harvard, Yale, CalPERS, Ford Foundation, whoever more or less on credit catering, if the GPS can ask the LPs for that.
And the last time this happened, and I don’t know if it will happen this time.
But I think you remember to Jamal, the LPs specifically said, Hey, pump the brakes.
Yeah, let me build on what you say.
In 2000, the more extreme measure happened with which is that most of these venture investors returned the money and just canceled and tore up the LPA.
Now, why would they do that?
Why would you tear up commitments for a quarter trillion dollars, it’s because your portfolio is trash.
Meaning, if you have made a bunch of horrible investments that you know, are now totally upside down, you have a responsibility to manage those investments to a reasonable outcome, and ideally even try to get some salvage value.
And so, you know, it’s very hard for you to look at an LP in the eye and all of a sudden say, you know what, I’m going to deploy this fresh capital.
And I’m in a psychologically good state of mind to do that well.
And I think that what history shows is that when you have these drawdowns, the money is made by new entrance, or fresh capital, which doesn’t have the legacy of a bad portfolio.
The returns are not captured by the same people.
And the reason is because they have the psychological baggage of a horrible portfolio or horrible marks.
So for example, there was a tweet, and I’ll send this to you guys.
This is from a guy named Matt Turk.
He said to put the depth of the reset in context, to justify a $1 billion value valuation $1 billion valuation, a cloud unicorn today would need to plan on doing $178 million in revenue in the next 12 months.
If you apply the current median cloud software multiple of 5.6 times forward revenue.
Now let’s put it in a different way.
If you’re a company that’s worth 10 billion, that means that you have to come up with $1.78 billion of annual recurring revenue for the market to give you a median multiple.
How many SAS companies and SAS wouldn’t sacks, you’ll know this, how many SAS companies even get close to 2 billion of AR are probably a lot less than the number of SAS companies that are worth 10 billion on paper.
So, you know, by the way, we should also talk about who’s the bag holder in that transaction, it’s the employees, and we should we should explain why that is in a second.
But just to build on what you know, Jason is saying, and free broke, what you’re saying is, in moments like this, I would ignore all of the dry powder and all of that stuff.
I think that there are a lot of venture investors today who’ve deployed way too quickly.
And if they want to have any reputation over the next 10 years, we’ll have to rehabilitate their portfolio.
Let me just say one thing, I saw an analysis from one of the biggest venture firms in the valley, over a 14 fund cycle.
So they looked at data from 14 funds.
And they showed that 40% of their capital was deployed in businesses that they were chasing valuation, meaning like the business wasn’t performing well, and they needed to bridge the company, or support it through a down round, or, you know, some other sort of situation where at the time, it was let’s support our portfolio
40% of their capital on that 40%, they made like 50% losses.
So they deployed money in a situation that was not kind of an accelerating successful, you know, up round kind of business, it was declining business.
And in that support, they lost half their money, the other 60%, they make like three x, right, so it kind of averages out that they make kind of whatever it is to two and a half x on the whole portfolio.
But I think it really speaks to the condition that a lot of venture firms may make the mistake around doing over the next couple of years, which is I’ve got all of these businesses that are suffering through down rounds or need supportive capital.
And I know it can get there. But that belief ultimately costs the LPS and costs the fund more. And it’s why we saw such negative return cycles happen after the.com crash.
How about this? Since 1994? Okay, just guess how many funds private equity growth venture funds even existed that are greater than a billion dollars. So this is over, you know, 30 years.
What do you mean?
How many funds do you think even existed over a billion dollars since 1994? To today? How many funds?
Like how many funds have been raised that are over a billion?
Individual funds or the brand names?
Yeah, since 1994. How many do you think there are?
Oh, you’re including private equity and stuff.
Oh, I was gonna venture. Yeah. Okay. Sorry.
Okay. So now of those 1276 private equity funds, or growth funds, or crossover funds, or your funds, how many do you think have actually managed to return more than 2.3 times the money 2.3 times?
10% 10% 5% 10% 22 of them.
It’s like under 2% under 2%. Wow.
So here’s the point that I’m trying to make. Yeah, investing is very hard. In an upmarket, everybody looks like a genius. All of these funds come up with all of their nonsensical ways of showing IRRs and all of these fake gymnastics. But the truth is in the data. And what the data says is that in the last 30 years, the minute you get over your ski tips at a billion dollars, very few people know what they’re doing. Very few.
It’s hard. It’s hard. The multiples compress as you get to bigger deals. And you can’t deny where the value is not deny this numerical truth. Yeah. So again, I go back to, you know, the person that’s always been talking about this, and who again, may be proven right yet again, is Bill Gurley. You know, everybody would make fun. Why is benchmark only raising $450 million? Why would they only raise $500 million? And they always were consistent.
Because over the last 30 or 40 years, over multiple cycles, we have seen that this is the best way to optimize both for return, yes, for mental clarity, and for making our LPS happy. Every variable was optimized at around 550 focus. And then you see 5 billion, 6 billion $10 billion funds funding, 5 billion, 6 billion, 10 billion $20 billion private companies. And I think what we have to do is put two and two together and realize that it’s going to be very, very
difficult sledding from here for a lot of folks. And when the venture or crossover investor has this mental baggage that they’re dealing with, they’re not going to be able to provide fundamentally sound advice to the CEO, they’re going to optimize for making that portfolio tourniqueting the bleeding in the portfolio, the CEOs will make a bunch of suboptimal decisions, it’ll probably lead to a bunch of layoffs, bad technology decisions, things slow down. And the cycle is reflexive in that sense. And so you know, we’re going to go through a few years
of sorting the chaos, down rounds, liquidation, preferences, nonsense, sacks will be
Yeah, so so look, I agree with that point that these mega funds are very hard to repay,
because they require you to have multiple winners, not just winners, but mega winners. So you know,
we’ve always kept our funds in that five to $600 million range where you really only need one
winner per fund to basically return the fund. But let me let me go back to this point about
explain the math of that you typically own 15 20% of a winner. So just
even less by the time. Right, exactly. So you know, if you own 10% of one decacorn,
that’s a billion dollars. And if it’s a $500 million fund, you’ve doubled your fund. But if
it’s a one or $2 billion fund, you haven’t paid back the fund yet. So that’s I mean,
this is how hard is it to hit a decacorn? Hard. It’s hard.
It’s hard to hit two. I’ve had two in a decade. Yeah, I’ve had two in the exact same time period.
You go back to this point about dry powder. So I think it’s actually important. So
this will be a little bit more of a bright spot. So in a weird way. So there’s a, I think,
stunning article in TechCrunch just two days ago, that said that Tiger Global, you know,
which the hedge fund, as of the end of April, the hedge fund had lost about 45%. And then may the
first weeks of May have been even worse. So who knows what they’re at now. But they had a
separate venture vehicle. And their history of their venture vehicles is that they raised
3.75 for a fund in 2020, then 6.65 billion in 2021. And then just this year, they closed a
$12.7 billion fund in March. Now, I think that fund was raised as early as September last year,
but maybe there was some money that still trickled in, and they finally closed it in March.
But basically, what this article said is that this $12.7 billion fund that they just raised
is already nearly depleted. It’s something like two thirds of the fund has already been deployed.
So this idea that they’ve got like a lot of dry powder sitting on the sidelines,
I don’t think they do. And then meanwhile, you know, the other big crossover funds,
D1, CO2, they are completely risk off. I don’t think they were ever as aggressive
as Tiger, so they’re not in as bad shape as Tiger. But they’re just basically sitting on
the sidelines till this thing sorts itself out. So basically, all of this capital that flooded
the venture markets, this growth capital that came in over the last couple of years, it’s gone.
I mean, that’s basically dried up. Why did it go so fast, Axe? What was
their thinking? Because you and I met with these folks, we saw them marking up our companies,
because you and I, you typically do a Series A, that’s your sweet spot. I typically do C into
Series A, you do A into B, they were coming in and marking up our in the B and C rounds.
What was their thinking? What was their mistake here?
I think the thinking was that we can create an index fund for pre IPO tech companies for sort
of late stage private tech companies. The only problem was and by the way, they did. If you could,
I think they did a good job sort of productizing that solution. I mean, if you send them your
numbers in a certain format and do a meeting, they were like a term sheet generator. I mean,
they spit you out term sheet in a couple of days.
Was that your original idea, Chamath? You had funding as a service at one point?
I did this thing called capital as a service, where you would send us your data, or we would
plug in to whatever you use, say it was Stripe, or Shopify, we would suck out the data, we would
run it against a bunch of models, we would do a few simple regressions, and then we would just
index you and then send you a term sheet. So we did do that all around the world. But we did it
on very small dollars. You know, we did it $500,000 checks, 250k checks, it was called
capital as a service, it’s still a phenomenally good idea. But you would want to cure that
business for probably 10 years. I would want it to do that on 10 years on my own money,
you know, 10 1520 3050 million bucks before I would even dare raise LP money around that idea
because it’s I mean, at that point, it’s the machines doing the work and you have to really
be sure your models are right. Yes, the question sort of what was wrong with it. I think that
the the thing that was wrong with it actually was just that the public comps were all wrong,
right? So they were modeling got it to the public valuation. These are wrong. Yeah.
Well, no, it’s look, they’re hedge fund guys. So they’re looking at they’re looking at the
public valuations, they’re looking at the last private rounds, and they see a spread a large
spread. And they’re like, we can arb this. So they go in with a massive amount of money,
create a term sheet generator, and they are the spread. The problem is that all the public
valuations we now know were inflated. I actually think they did a reasonably good job in creating
a great approach for founders who want late stage capital. If the valuations have been correct,
I think it would have worked. Here’s the problem. Right now Peloton and Coinbase are both their
market caps are trading at lower than their last private market valuation. So let that sink in.
Like, if you did that last private round, you’re underwater big time in those names,
where I don’t know, they were taking their signals from the public markets. And this is
the problem with the Fed, and the administration, and Congress basically flooding the zone with all
this fake money is that it distorts all the signals in the economy. And then people start
making investment decisions that don’t work. And then you have this massive correction.
How long have we been doing this? How long have we been overfeeding the market? It was obviously
happened under Biden and Trump. Did it go back to Obama or no?
Yeah, it started in 2008, nine with trouble asset relief program, which is basically a fund,
you know, to create market liquidity, essentially. But what it also did on the heels of the great
financial crisis was, we introduced comfort around this idea of quantitative easing, or,
you know, having what’s called the Fed put, you may hear that a lot, what does that mean,
which is that when market conditions get too, you know, stiff, or rigid or inflexible,
the Fed will generally step in with liquidity, typically into the credit market, never into the
equity market. But what that does is that that also still flows into the equity market. So
everybody behaves like there’s a downside price at which the Fed is guaranteed to act. And that
really started to be a bailout that really started to be in people’s psychology after the
great financial crisis. And then through the, you know, 2010s, we had several instances,
where we had that where we had moments of sort of like market volatility. And all along the way,
what we also had were academics that started to, you know, promote things like modern monetary
theory, this idea that, you know, money printing was a good idea. And so we had this, again,
very reflexive loop where, you know, anointed experts, you know, you know, did talk pieces and
thought pieces and books, and then pseudo intellectuals would parrot this stuff. And then,
you know, the government infrastructure would behave like this was a reasonable thing to do.
And it built on itself for a decade. So we’ve been doing this for 13 or 14 years now.
And now we’re trying to undo it and put the genie back in the bottle. And it’s proving much,
much harder than we thought, because people have unfortunately got addicted to the crack,
they’re addicted to the drug, they, you’re trying to take the oxy away. And that’s a
and people are going to go through withdrawal with really, really bad withdrawal.
Yeah, if you have a quarter trillion dollars of dry powder, let’s assume no one gives their
money back, and they don’t do stupid stuff like chase losing companies in their portfolio.
And they allocated in a smart way to winning companies. Does that not mean that we end up
seeing a significantly kind of outsized amount of capital going to a few highly successful
businesses, that will end up seeing this kind of supercharging of a small set of businesses,
as opposed to this rise of the unicorn, which is what we saw over the past, call it, you know,
eight, seven, eight years, and that you have this big bifurcation in the market, the VC market
starts to kind of say, Hey, you’re not making money, you don’t have a line of sight to making
money, you’re off the table. But the, you know, top decile get overfunded, and they become, you
know, kind of the next the next mega caps? No, yeah, I mean, it does not happen in this moment.
Well, so look, if we look ahead, two or three years, I can I just tell you why let’s take let’s
take the perfect company, which is stripe. Okay, so now $50 billion. Well, they’ve been funded to
a mega cap, right? I mean, $50 billion of horrible VCs who’ve made horrible decisions heretofore.
Knocking on the Colossus door saying, Can you please take my $50 billion? Because I’m trying
to be money good. Why do the Colossus want to take on this headache? Why do they want to flutter,
you know, mess set their cap table up with all these folks, and then at what price. So if you’re
sitting at the board of any really good, well run company, of course, you’ll take some bite size,
you know, amounts of very decisive capital in these moments, if you think you can market
consolidate or whatever. But I think the point that all of these companies are going through is
largely the same. If the best companies aren’t doing what we just talked about, I would be
shocked as well. The best companies are thinking, let’s batten down the hatches. And let’s not
distract ourselves. And so I’m not sure this is the moment where a really horrible VC who’s at a
terrible track record, who’ve just blundered through $5 billion is going to be able to put
in $1 billion to strike. What do you think, Saks? Let me speak to kind of the environment
that I think is going to happen over the next few years and then what founders will succeed.
I think you’re right, Freeberg, that the VCs are gonna become much more discriminating,
and there’s going to be a much more polarized outcome here for companies. I had a tweetstorm
that Elon actually gave a nice boost to by saying he agreed with it where I basically said, look,
startups with high growth and moderate burn will get funded through this downturn. Startups with
moderate growth and high burn will not get funded. So what’s going to happen is that the
sort of mediocre ones are going to… We’re going to get to a very polarized outcome very quickly
where I think a lot of founders think that if their numbers are just okay and not great,
then they’ll be able to raise but at a lower valuation, or they’ll be able to raise something,
but maybe not as much as they wanted. And what will happen is the middle cases kind of go away
in an environment like this, and everyone just wants to fund the best companies.
So certain things will become absolutely fatal for startups in this environment. One is obviously,
if they’re just not growing, they’re not going to be able to raise. And good growth really starts
in the early stages in terms of doubling year over year. Second, negative or low gross margins
are absolutely fatal. Nobody wants to fund businesses that may not even be real businesses.
And I would say acceptable gross margins really start at 50%. Third, cash payback. People want
to know that you can pay back your customer acquisition costs in a year or less. And then,
like I mentioned, the burn. A burn multiple of one is really ideal where you’re burning not more
than your net new ARR, but certainly not more than two. I think burn multiples over two,
where you’re burning $2 to add $1 of growth, that’s where I think companies start becoming
unfundable. So I think founders are going to have to pay a lot more attention to these
disqualifiers. But I think that for companies who meet the criteria, who have good growth,
low burn, good business fundamentals, they will be able to raise. And look, here’s what’s going to
happen. The crossover investors are washed out of the system. They’re gone. I mean, Tiger’s already
deployed all of its capital, and I don’t know when they’re going to be back. So the so-called
tourist money, basically the big investors who weren’t in the system a few years ago,
they’re basically going to leave the system. However, there will be the big traditional
venture funds will have large funds, but they’re going to deploy them much more slowly. These one
year pace of deployments, they’re going to stop. Back to three.
They’ll be back to three. Exactly. So just think about that. Even if you had the same amount of
money being raised and deployed, but it was happening over three years instead of one,
that would be a two-thirds reduction in the availability of capital in the system.
So who’s that going to go to? You’re not putting that in-
It’s going to go to the best companies that I’m talking about.
You’re not going to go to somebody who’s going to blow through it in nine months,
who’s playing every hand. You cannot play that way anymore.
Exactly. So what we’re telling our founders is number one, you got to lengthen your runway. The
days of raising a new round every 12 months are over. You got to plan on not raising for two to
three years if you can help it. And then you really have to sharpen your pencil and work on
these business fundamentals. And one thing you need to do is you need to have a realistic
conversation about, am I really able to raise another round in this environment with the
metrics I currently have? And if the answer is no, you need to cut your burn to give yourself
the time to fix the business. Fixing a business normally takes two to three years. So if you got
less than two years or even two and a half years of burn, and you have one of those disqualifiers
I talked about, you better cut your burn quickly to give yourself the time to fix those disqualifiers.
Yeah, I mean, I wish people we’ve been talking about this for a year, folks. And you know,
some founders just are not accepting the reality of the situation. And if you look at what happened,
we have a generation that’s never experienced a down market. And these down markets happen so
violently, that they think like people are panicking, you know, somebody made a joke,
like, Bill Gurley is called five of the last three recessions, you know, and it’s like,
well, I mean, we have scar tissue, and it’s that the the velocity of the downturn,
all those kids dunking on Gurley, well, guess who’s going to have the last laugh? I think
precisely I texted Gurley last night. He’s had the last thought. I literally dm’d him last night.
Listen, the water’s great right now I am doing deals back at six to $12 million in the seed space
with you know, 200k in revenue and real founders and discipline. Start investing again. It’s great
now. Because the deals are now taking I don’t know if you’re experienced in the sacks. But
the deals went from taking two, three days. Now they’re back up to four to six weeks. And we’re
having very thoughtful discussions. We’re meeting a third time with founders. We’re talking about
their go to market strategy. We’re getting to talk to three or four customers. I had founders
who said you can’t be in this deal if you want to talk to my customers. And that wasn’t one
founder. Multiple founders said if you want to talk to our customers, then you don’t get an
allocation. And I said, Okay, the thing to keep in mind, I won’t do the deal. But that was how
dysfunctional this was, Jamal. The thing to keep in mind is that all these late stage companies
are mispriced. Doesn’t matter whether you’re the bottom decile or the top decile. You are
massively mispriced. And there needs to be some correction between 30 and 70% on valuation.
How do you solve it? I have a point of view on that, actually, because
so look, there’s a major difference, I think, between a valuation multiple collapse in the
public markets versus the private market. It’s gone down. Look, the SAS valuation multiples
have gone down 70-80%. There’s no disputing that. Look, it used to be the public markets were
trading at 15 times ARR for the median SAS company and now it’s 5.6. So yeah, we’re talking about
two-thirds, 70-80% reductions. If it happened in the public stocks, it deserves to happen in the
private stocks too. Jamal’s absolutely right about that. And a lot of people aren’t recognizing that
fact. However, here’s the difference. The median SAS company is growing maybe 15 to 20%. When you’ve
lost 80% of your value and you’re only growing 15 to 20%, it’s going to take you a decade to
grow back into your old valuation. However, good private companies, not all of them, but the great
ones, they’re still growing 3x year over year. So if you’re able to grow 3x year over year,
and you do it two years in a row, you’re 9x where you were, even if the ARR multiple collapse 80%,
you can still get an up round. It’s not going to be the 9x up round, it might be a 2x up round.
I know how that’s mathematically true. But listen, if you’re a $100 million ARR business,
let’s just say you were able to raise at 10 or 11 billion. Yes, you’re mathematically right that
you know, 100 million times nine is 900 million. But I think it’s important to first say,
how many actual software companies are there that generate a billion dollars of ARR?
Do you remember when Salesforce first passed a billion dollars of ARR? We thought my gosh,
and then they said, So, this is exceptionally rare error. And I think that it behooves people
to understand that law of large numbers aren’t often violated. And so you know, before you go
and do that simple math and convince yourself that it’s possible, maybe you should actually
not I’m not saying that to you, sex, I’m saying that to the founder or to the boards,
maybe you guys should actually just go in and have somebody run a screen and say,
how many actual companies exist that have actually managed to generate more than a billion dollars of
ARR, especially in a moment where people are cutting back on spend? How does that happen?
So, yeah, look, I agree getting from 100 to a billion is really hard, you know,
billion dollar company supposed to do because in this math, they have to get to $2 billion of ARR
to be worth 10 billion. I do think a lot of random fast company that you and I have never heard of.
How do they generate 2 billion of ARR, I can tell you the handful of companies that generate 2
billion of ARR. There are some incredible companies today that don’t even yet, you know,
like look at an incredible company like unity. Incredible, the backbone of all, you know,
gaming and, you know, the move to 3d. This year, if they crush, they’ll do 1.3 billion.
Incredible business. It’s an incredible 35%. This went down 35%. It’s unbelievable.
It’s trading at four times revenue, guys. Right?
Some of these things are hard to believe, like open door has 2.3 billion in cash,
and a $3.7 billion market cap, enterprise value 1.4. And they I think they also have a couple
of billion in real estate, Coinbase 6 billion cash $12 billion market cap. So I guess in this
part in the discussion, even with all these headwinds, can we give the protective mechanisms
for employees? Because I again, I just Okay, good, good point. Let’s do it. Let’s do it.
When you start a company, and you’re a founder, you have you’re taking the most risk, you’re the
person with the idea, you should be justly rewarded for that. The way that that happens
economically in a company is you get founder shares, the basis of those founder shares are
effectively zero. And you’re able to do a bunch of structuring when you first start a company
that gives founders specifically some incredible tax advantages. You can, you know, do an 83 be
election, which is effectively you buying the stock, starting the clock on long term capital
gains, etc, etc. Then you have stock that you give to employees, they’re one of two kinds,
non qualified stock options and incentivize stock options, NSOs, and ISOs. And, you know,
those have different tax treatments. But again, you know, when you’re a very early employee,
you get a mixture of these things also hugely accretive. It has a very low basis,
you’re building value. But here’s what people don’t understand. When a venture investor like
myself or Jason explain basis, by the way, for people for basis, your your price of your stock
is effectively zero, you know, like a penny for it or something. Yeah, like the my stock at Facebook
costs like half a penny. Got it. You know, whatever. It goes public, it’s 15 $20, you get
the spread, got it, you get the spread. And you pay long term capital gains on that if you’ve
been able to not income tax. And and and shifted to long term capital gains. Okay. So now sax or
Jason or myself come and invest in your company. What happens? We actually don’t get equity,
we don’t get common stock, we actually get a synthetic form of debt called a preferred share.
Okay. And typically, the way that it works is when we invest in a company, and this is how the
entire venture ecosystem works. We actually create what’s called a preference stack, which
means we get an instrument that is senior to the common equity. Now, what does that mean? Well,
it means that if your business goes out of business, we get our money back first. We also
get an interest rate. And we’re able to convert all of that at some point, the magical moment
when a company goes public into common stock. And we give up our preferred rights. And we now
have the same instrument as everybody else when a company goes public. That’s the typical mechanism.
Why does that exist? By the way, the preferred shares, maybe explaining the why,
why do VCs need that protection? To be honest, I don’t know why it started. But it’s a historical
artifact of, you know, the 1960s and 70s. I think I know why it started. Okay, so
this got lawyered, because let’s say you start a company. And just to use some round numbers,
a investor wants to give you $10 million to start the company. And for 10% of the company,
$100 million valuation. If you didn’t have preferred shares, then the founders could basically
on the day after the money comes, they could say, hey, we want to liquidate the company,
we decide we don’t want to do this anymore. And they own 90% of the company. And they could
basically then distribute out the 10 million to all the shareholders, and they would keep nine.
And 1 million would go back to the investor. So that’s why lawyers came up with this idea of
seniority. So that okay, if you disband the company, with the investors money still in there,
it goes back first to the people who put it in the money. That was the idea.
And when the second piece was if the company gets sold for less than the cash put into it,
at least the people with the cash and get their money out first. So if it sells for 10 million,
you get your 10 million back or 11, you get 1 million after that.
So let’s just say Jason does the first million. So there now there’s a million of preferred,
then sacks does the series A and he puts in 10. Now there’s 11 million of preferred,
even if it’s at a much higher valuation. And then I come in and I give 100 at an even higher
valuation. So now there’s $111 million of preferred shares. Now, if the company goes
through all kinds of complications and mess, and let’s just say we have to sell it to somebody else
for $200 million. Well, guess what happens? The first 111 of it comes back to myself,
Jason and David, plus interest. So this is why venture investors have an incentive to pay and
set these crazy valuations, because they don’t really care what the valuation is, as much as
they care how much of all this preference is building. And do I rationally believe that the
liquidation value of the company is at least that much money. So if I think that Friedberg’s company
is worth at least $111 million, I’ll do it. And I add my 100. Now, why is this important for
employees? Before you join a startup, especially in this moment, I think it’s very important for
you to understand how much money have they raised? How much is this preference stack that exists?
And do you believe that the company is going to be worth much more than that? Because that’s the
only way that you’re going to actually participate in the equity. And we know now what the public
markets say. So if you go back to that tweet, you know, if it’s a 10 or an $11 billion company,
okay, well, you need to generate $2 billion of revenue. And if you’re at 100 million,
that means you have to 20 x the revenue for the valuation to be worthwhile for you to believe
that this valuation is real. So this is just a little guide for employees. I just think it’s
very important that you guys start to do the math and start to figure this out. Ask the hard
questions. How many shares are outstanding? How many preferred shares? What’s the overhang? What’s
my strike price preference stack? Yes, you know, how much is the total prep stack? How much revenue
are we generating now, you should go and do the work to figure out what the public market comps
are. Those are widely available. Hopefully somebody could actually just create a website
that helps you do this. But all of these things are going to be very important for you. Otherwise,
what will happen is if you join a company in this moment, at a fake valuation, and the valuation
gets reset, you can effectively assume your options are worth zero. So if that was a important
part of how you made the decision to join that company, you’re being somewhat misled in a moment
like this. And you need to have your own rational sense of what that company is worth. Conversely,
I think boards and CEOs have a real responsibility now to do the hard work of resetting this and
explaining it to their employees if they want to retain them. Because in a moment like this,
if you have a valuation reset, you don’t allow people to understand it and you don’t figure out
a way to allow them to participate in some incremental way. I think it’s going to be
very problematic for employee retention. You know, in those contexts, look, there’s a couple
of things that I always support. You know, if if you need to reprice the options, you know,
you can reprice the options and give employees the benefit of a new 49. So the company doesn’t set
the option price that’s set by an external 49A audit. But if that 49A goes down,
because of these factors we’re talking about, you can basically, the board can vote to reprice
everyone’s options. So at least they get the benefit of the lower 49A.
Explain what a 49A is, just broad strokes.
It’s basically, when stock options are issued, the law requires that the strike price of the
option be the fair market price. And because of some accounting shenanigans a while back that got
companies in trouble, it is now the case that companies don’t determine their own fair market
price. They go out and they get some external auditor to do a 49A audit, and then the 49A,
that gives you the fair market price. And specifically, it’s a fair market price of
the common stock, because what investors are buying is the preferred. Because of the dynamic
that Chamath is talking about, where the preferred gets paid back first, the common stock is worth
less per share, because it’s got this overhang. Typically a fraction, a fifth, a 10th, something
in that range is typically. So if the shares were worth a dollar for a preferred, the fair market
value of the common could be 5 cents, 10 cents, 15 cents, depends on if the company is going to
run out of money, how many months of runway they have, are they profitable. And so it is a fair
thing to do, but you have to know that. And in a down market like this, if you had massive
compression, boards need to look at that, founders need to look at it and say, hey, listen, if the
SAS multiples come down so much, well, our fair market value should come down that much. The fair
market value might be worth 50% less, 75% less, correct Sax? Yeah. So the way it works is that
when a company IPOs, you get rid of all the different classes of stock. Basically the
preferred converts to common in an IPO. One class of shares. Yeah. Yeah. Maybe you have like the
dual stocks of the founder can maintain control, but from an economic perspective, you basically
collapse into common stock. So when you IPO, common and preferred are the same. And so economically
they’re converging to one-to-one as the company gets more and more mature and heads towards an
exit. The earlier that you are, the riskier the company is, the more that the pref stack matters,
the more overhang that creates. But the benefit to employees is it creates a larger discount
on their strike price on the 409A. So that is the offsetting benefit. If the 409A goes down
because the markets changed, then the board can vote to apply a new 409A to the employees.
That’s a beneficial thing to do for everybody. So that’s something I’ve always supported.
The other thing is that if you’re in a turnaround situation where you’re actually worried
that the pref stack is larger than the value of the company. In other words,
more money has gone into the company than the company may be worth at exit.
Then what you need to do, because then there’s nothing for the employees,
there’s no incentive anymore. What you need to do is create basically an employee participation.
You create a corridor where you say, okay, 30% of any acquisition price for this company is going
to go to the employees. You create a management or employee carve out. Really, it should be an
employee carve out, not just management, but all the employees of the company should benefit from
an acquisition. Sometimes you’ll see boards be either unrealistic or stingy. They’ll be kind
of pennywise and pound foolish. They won’t create the incentive for the employees to get that over
capitalized company across the finish line. It can be pretty frustrating to see when that happens.
It’s a good time for employees to understand this. This is a giant reset that’s occurring.
I think there is some good news here. I think we have a lot more people who are going to go back to
work because they need to. That’ll be good for monetary velocity, fill these jobs, 11 million
jobs. I don’t know if we’ve ever had this. I think it’s a record, the number of jobs we’ve had,
and we’re bouncing along record low unemployment. Those two things could be what saves us,
could save us during this recession. It’s something distinctly unique about this recession
is job openings and low unemployment. We’ve never had a recession like this.
That’s fascinating in and of itself. For employees, and for companies, the new discipline
might be there’s not going to be four or five offers for every tech employee. If people are
going to cut 10% to 25%, this is the contagion moment. I think maybe just talking about
layoff contagion in tech and how that works, because Facebook’s on a hiring freeze,
and you’re starting to see the series BC companies all do 10 to 25% layoffs. Uber,
Dara said, we’re going to look at hiring as a luxury, it’s probably not going to happen.
The only person who said they were going to hire into this was Google, Sundar today said,
maybe as many as 12,000 people over the next couple years, couple 1000 a year.
And Apple, stunningly, I don’t know if you’re watching this. They have told people we’re one
day a week now, two days a week in two weeks. And then by the end of this month, May, there’ll
be three days a week in the office mandatory. The head of machine learning said, Yeah, that doesn’t
work for my team. And they said, Okay. And he said, Okay, we don’t have to do it. And they
said, No, okay, we accept your resignation. So I think even the mighty Apple with unlimited cash
reserves are saying, you know what, if we have to shed some people who don’t want to come back to
the office, that’s like a de facto layoff. So maybe talking about this contagion, because if
you’re a company that doesn’t lay off people, you’re going to look pretty weird in this market
to your investors, and they’re gonna be wondering why aren’t you laying people off? Go ahead,
freebrew. I feel like an old guy now been working in Silicon Valley for 20 years, 2021 years.
And I remember, like, you know, one, there was kind of this period of time when there was a
bunch of layoffs and a bunch of companies reduced headcount. And, you know, there were other
industries and people stayed employed. And then in the years that followed, like web to happen,
and people kind of came back. But what was interesting is like the tech industry, which
at the time was Silicon Valley, but is now fairly kind of, you know, well dispersed, attracted a lot
of people from other industries, right, it used to be cool to get a job in financial services or
investment banking out of college. And then all of a sudden, working at a startup was the cool thing.
And there are a lot of people that moved from New York in the last couple years to SF,
leading up to the most recent crash after the pandemic. And so you know, look, there is an
ebb and a flow in and out of this industry. I do think that this capital overhang, however,
this quarter trillion dollars of dry powder that’s sitting in VC coffers is going to be
significantly stimulatory in a very good way. I think it will create real jobs and enable real
progress. It’s not just about the companies that are on the brink of profitability, or the companies
that are profitable, trying to juice profits. If you take a step back, Jake, how you said something
earlier, that I thought was kind of a really important statement, which is like you’re
doing deals, right? You’re making investments in startups. I’m more excited than I’ve been in
years. This is my time. This is your time. It’s time to go. And so I talked earlier about how the
capital stimulants that came out from the Fed and, and the and the bond buying they were doing,
and so on, led to an inflation and a bunch of assets. And that capital ultimately didn’t find
its way into productive assets. But it’s not about all of that capital finding its way into
productive assets. If enough of it find its way into productive assets, productive assets, meaning
businesses that create something of value for customers and make money doing so, and as a result
can grow and create new jobs and create new areas of the economy. If that happens enough times over,
there is enough growth in the economy and enough new jobs that are created. That really rationalizes
all of the money that was friggin wasted on speculative nonsense over the past few years.
And I think the fact that we’ve got a quarter trillion dollars sitting in VC coffers more than
we’ve ever had, that’s a quarter trillion dollars ready to fund the next generation of technology
businesses that can build new jobs and create new areas of the economy, new areas of growth
that we’ve never seen before. And that’s what’s happened in the past.
How do you think a person let’s just say you’re playing poker, and you just get punched in the
face, seven rounds in a row, you’re stuck three buy ins. How does that person make that good next
decision? Now I will tell you three stories from my last week, because my last week has been filled
with these experiences. All right, sorry, go ahead. So let me I mean, let me just talk about the the
business of investing in the psychology of investing. So look at probably who has been
the most incredible performer this year is Ken Griffin and Citadel. And right underneath him is
this guy is the Englander at who runs a place called Millennium. And then you know, a close
third would probably be Stevie Cohen at SEC. Now, how do these guys run their business, they have
hundreds and hundreds of teams investing in all kinds of different things. And what they figured
out over time is how to dial up and dial down the volume of who’s performing. And what they have
realized is that when you go through a pattern of losing money, it is very difficult for you
to then make incrementally good decisions. And so they have a dynamic system that allows them to
move capital away from those folks who are psychologically not in a great place to do it
to move capital towards other folks who are, as a result, they are always winning.
And I just want you to react to that. Because I think there’s one thing that we can say,
oh, venture is a special thing. It’s not like anything else. I personally don’t think so
operating across the entire lifecycle. And I think that there’s something to be said,
and I saw it in 2000, folks who have lost a lot of money, make incrementally poor decisions. I
think why Jason is firing a little bit of a hot hand was he mostly let his companies get marked
up. And he was mostly frustrated the last couple years in valuations, early stage valuations,
lack of discipline, who’s operating effectively in slate, but I don’t think it’s a binary
condition. Chamath. I think generally what you’re saying is right. I’ll tell you the reaction I’m
seeing in the market. One last thing to add to your thing. And on top of that, there are only
seven or eight people who’ve actually made money in this entire market. Yeah.
Investors have done well, early stage investors have done
our first fund. That was nice. I’m in the black stacks. You know, girly. I mean, what about all
the other 1000s of people that raises distribute people don’t distribute shares. We’ve talked about
this a couple of times tomorrow. Like it’s so hard to make money. And you when you have a chance to
distribute I feel really good that some of these companies, you know, I have a Bloomberg at my
desk. And one thing that I look at every now and then is the ownership table of some of these high
flying stocks. And you’ll see some incredible things, which is these folks have held on.
And they are holding billions of dollars now of paper losses that they have to go back to
their LPs and say, our conversation, Mrs. Foundation, I know that you wanted to fund
cancer research. You know, I had $9 billion of gains, and now it’s two. Oops.
So look, I think what you’re saying generally is right. People are psychologically tainted when
they take a big hit in the face. Everyone has this experience. My observation over the past
two weeks, I’ve seen a lot of PMs and public PMs, portfolio managers, as well as private VCs,
all react to me in the same way when opportunities have kind of been discussed,
which is I’m sitting on my hands. I mean, there’s a PM I saw this week of a yeah, anyway,
I would say I’ve never seen him jarred. Like I’ve never seen him just shocked.
Like we were talking about something that was so obviously up his alley, you know,
such a great fit for him. But he is just not doing anything. And they’re worried about careerists now.
So no, I mean, I had I had a crossover investor told me told me that,
look, I think that things are oversold right now. This is an attractive time.
They won’t take an act.
But because it because look, if I’m right, that they’re oversold, and it goes up, great. I make
a little bit of money. But if I’m wrong, I’m not not just losing money in a row. I’m risking I’m
risking my career. I’m catching falling knives. Yeah. So why would I do that? I’m just gonna sit
and win the opposite right now. Yeah, guys, the same is true in VC. So I had several VCs this week,
who kind of shared the same point of view, which is at our partnership meetings. I don’t know what
you guys are doing sacks at your fund. But they’re like, at our partnership meetings,
we just cannot align on whether or not we’re paying the right valuation. And so we’re at a
standstill. We’re just waiting to see when the quote market settles out. And then we’ll make
decisions because I don’t want to be the guy in the VC context catching knives. But look, that’s
a near term psychological phenomenon. I think the reaction Chamath is everyone’s sitting on their
hands. But over time, it’s not I just told you the data for the last 30 years, only 22 out of
1300 funds have returned more than 2.3 times a billion dollars. It’s not near term. That’s
not the point I was I was trying to make earlier, which was there’s a quarter trillion dollars,
we got that point about the fact that there is going to be funding available. It doesn’t matter
if these guys are going to make money or not, or they’re going to make shitty investments or not,
there is going to be a stimulatory effect, all you need is one of the next trillion dollar
mega caps to emerge from the quarter trillion that’s sitting and there will be the entire
industry look fantastic. And for that business to transform the landscape of some party.
VC is not jobs to be created. But we’ve but we’ve never by the way, we’ve never seen that
in history. We’ve never had this much dry powder sitting on the sidelines. And this is where the
free money should go. It should go to creating new companies that create new jobs. And it is
it’s found its way there. And the trillions of dollars that have fueled crazy asset bubbles left
and right, some amount of it made its way into funding the creation of new companies that are
going to create jobs. And that is the good thing of what’s happened over the last couple of years,
despite the asset implosion of all these bubbly things that have happened.
Amazing. Shemot, I wanted to answer your question. So what do you do if you get punched in the face
seven times you’re running bad in a poker game? You know, if you look at Phil Helmuth,
or other people who, you know, go through that variance, I think, well, you take a break,
go for a walk around the pool, and you pick a different game. One thing I like to think about
is, hey, I’m going to play a better play better cards to start your hand, and maybe play in
position. And in the analogy here, playing better cards, you know, backing better founders and
better products, and then playing a position knowing we’re in the lifecycle of a company
value is created, and that goes to valuation. So I’m laser focused right now on just,
you know, world class teams that are running their business as well, and that I can invest in early.
And if there are founders out there, like who are trying to figure this out, and they’re not
getting funding, I think looking, I think you said this last week, so that maybe two weeks ago,
and listen, your last valuation last year is a great valuation this year. And if you had people
who wanted to invest last year, who couldn’t get in, going back to your $30 million valuation last
year, and topping off 3 million with the people who couldn’t get in, and you told them, you know,
I’ll come back to you when it’s 90 million, go see if they still want to put that bet in.
And then for the VCs are out there in the early stage, you know, making bets on sub $15 million,
sub $12 million companies in the seed round. If they’re focused on customers and product,
you know, got a couple 100k in revenue, it’s I think it’s a good bet. And I’m going to increase
our investing in those type of companies under 20 million under 15 million focus teams who
understand that the climate has changed. If you’re not taking the medicine, you have to
saxes excellent tweet storm, you’re DQ from funding, I think it’s very important that people
understand what sex said, if you do not accept the reality of VC who has lived through one,
two or three of these cycles is going to disqualify you. And they’re not telling you
why they’re disqualifying you. It’s just not a fit. Couldn’t get my partners around it.
You know, let’s keep in touch. Let me know how it can be helpful. The other thing is an entire
generation of investors have been coddling entrepreneurs. And in moments like this,
sometimes you need to actually have hard conversations. And if yes, I don’t know how
you tell that entrepreneur, listen, you need to be actually five days a week. In the office,
you need to do a 25% riff, you need to stop all the extraneous spend, forget the exposed brick
walls and the kind bars, we need to get down to just ones and zeros. That’s also an entire
generation of capital capital allocators who don’t know how to do this job in a moment like this.
They’ve never had those conversations. They’ve never had those conversations.
Just to build on Friedberg’s point, the idea that you would be at a standstill
about price in a moment like this, to me is shocking. If I mean, if I was an LP,
in that venture fund, I would write it to zero, there should be no intellectual standstill
whatsoever in a moment like this. Right? You know, we’re still investing is what the prices are.
Yeah, we’re still investing. It’s just that lower valuations should be no sandstone. Exactly. This
is the time to invest, Sachs, right? I mean… Yeah, I want to say something sort of positive,
because a lot of founders watch the show. It’s like, look, what Jason said,
if you need to accept reality, and if you don’t, you’re going to have a bucket of,
you know, very cold water dumped on your head when you got in fundraising, realize that you’re
not going to make it. And then, you know, all of a sudden, you’re repacking up shop very quickly.
So you got to get a reality check and understand. But look, great companies are built during
downturns. You know, PayPal was built during the dotcom crash. My company Yammer was built during
the Great Recession. Google, Uber… Totally. I mean, the list goes on and on. So
downturns are great times to build companies because the war for talent subsides. So it’s
so much easier to recruit people. There’s a lot fewer competitors getting funded. So there’s way
less noise in the ecosystem. The only thing that gets harder is fundraising. So you need to make
sure that your money lasts, you do the right things, you focus on business fundamentals,
you don’t DQ yourself. And if you do that, you’ll be fine.
You just brought up something incredible. I remember we raised money from Microsoft at a
$15.3 billion valuation. The Great Financial Crisis took hold, and Mark, to his credit,
reset the valuation. We were already profitable. So we didn’t necessarily need to raise that money.
But we I think we raised a billion dollars at like a $9 billion valuation. So we took a,
you know, 33 40% haircut, a down round, Facebook had a down round,
we padded our balance sheet, and we said we are now going to go and crush and to your point,
we were really able to compete much more effectively coming out of the GFC against
Google for talent and against everybody else in that moment. Yeah. And so if this is what
people like Zucker willing to do, you have to really hold people’s feet to the fire for founders
who are not him. What is the fast.co founder willing to do, you know, like, shut it down,
like, like, literally, there’s some founders, I find this very disturbing. But there are some
founders who are so unwilling to make the cuts or take the medicine that they would rather run
the fucking car into the wall, and hit the brakes, like hit the fucking brakes, save your company
live to fight another day. If you have six months of runway, get to 12 and try to live
raise your prices. You’re totally right. Every single company that hits the wall and goes out
of business that didn’t do a round of layoffs 12 months before was asleep at the wheel.
But they were texting and driving. They were texting and driving.
Yeah, where was the round of layoffs a year before they ran out of money that at least
gave them more runway? They didn’t even do it. They just assume they could go. David,
if you think about it, your series, your seed round was hard. Getting into Y Combinator was
hard. Your series a Okay, it was it was hard. You had to do 25 meetings, but you got a term sheet
your series B, you had five people offer your term sheets, your series D, C and D were people
begging you to take their money and saying name a price. So what does that founder think the next
round of funding is going to be each round became less work and higher valuations. And you know
what a generation also, not all founders, but there’s a group of founders who became better
at selling VCs on investing in their company than selling customers on buying their product.
You have to take the same focus you had of selling people on buying shares in your company,
and put that into your product, the actual service and raise your prices. So many people
are charging so little for their SAS product or software. And they’re like, I can’t make this
business work. And we say to them, if you doubled or tripled your price, would you lose? What
percentage of customers would you lose? And they say, we’d lose like 10%. And I’m like,
did you just you have a million in revenue, 2,000,010% off 2 million, you’ve got 1.8 would
you rather make 800,000 more and be break even right now. And there are two months, sometimes
founders just have this amazing moment. We’re like, Oh, yeah, I guess we could charge more.
And if we lost some customers, that wouldn’t be the end of the world, and we’d be profitable.
I think this speaks to the fact that, you know, it takes a very specific skill to be a very good
founder. You need a level of intellectual curiosity, you need some some moments to listen,
but at some moments to know just when to do what you feel is right. But it takes a lot of skill to
be an investor. And I think we’ve glossed over how hard that business is as well. Because the reality
is, if if if Michael Moritz were to tell you that you do it, you’d be hard pressed to not to not say
yes, of course, really told you to do that you would do it because you know, these are, these
are sort of the big the big names in our industry. But the reality is the fact that it’s not happening
also speaks to the fact that there’s probably there shouldn’t be a quarter trillion dollars
of funds that are probably stranded in the hands of really inexperienced allocators,
who are going to light it on fire for the most part, and they’re not going to have the courage
to sort of lead these. What happens? All you need is all you need is one.
Everybody should think about what I don’t know what how you phrase it to founder sacks,
but I say to them, when I invest in our companies, listen, when everything’s get really hard,
and you have a conversation that is the hardest conversation that’s making the most nervous,
that’s making you stare at the ceiling and grind your fucking teeth to your gums.
I want you to just call me. And I can tell you like, you know, not speaking out of turn here,
but you know, Travis called me once or twice on a Saturday and said, Hey, we’re struggling with x.
What do you think? And Travis knows how to run a business 1000 times better than me. But
being a sounding board and giving your founders permission to come to you when things are
fucked up, is critically important as an investor and being able to have an intellectually honest to
your point. discussion about the hardest issues is really what the job is, in my mind, what is
going to send this company off the rails? What is the big fear you have? And let’s just put it on
the table. And let’s as Travis would say, let’s have a jam session. Let’s jam on that until we
solve the problem. So if you’re suffering out there, you’re scared. You know, it’s got to be
an investor in your group who will have a candid discussion. If I had to give a punch list of
things, if I was a founder right now, here, here are the things that I would do is, I would sit
down and really look at your growth and your burn and have an honest conversation with your
co founder or with one or two of your trusted board members. And really say, what is the real
valuation of this business today? And what could it actually be? And if there’s a big gap between
that and where you’ve last raised money, the right thing to do is to think about in one bucket,
resetting the valuation, in a second bucket, making your employees whole, and in a third
bucket, managing your earn so that you extend your runway. I think if you could do those three
things, and take the hard medicine now, you will be much better off for it, you’ll be appreciated
by your employees, and you’ll have shown some real metal in a crucible moment to use a Sequoia
phrase. How do you guys think the market’s gonna settle out? Do you have any predictions on the
bottom? I will tell you a statistic. I think Michael Burry put this out yesterday. He did not.
He deletes his tweets every day. Very interesting character, by the way. But
he pointed out how from top to bottom, during the kind of 02 era, or one, you know, 2000 era,
and then during the 2009 era, you know, kind of those those big drawdowns in the market.
He looked at companies like Microsoft, JP Morgan, I forgot which others but highlighted that,
you know, on average, it took six times their total shares outstanding for them to go from top
to bottom, meaning that the shares ultimately turned over six x, the total, you know, diluted
shares out. And so far in those stocks, we’ve only seen half of the total shares outstanding
turnover since Pete. So his and he’s been making this case for, you know, kind of a few days and
a few weeks now, which is like, you know, the dead cat bounce day, where the market’s going to be
tanking for quite a while. And these days that are big updates, everyone’s trying to call the
bottom, he’s like, No, this is the dead cat bounce moment. And he’s like, if you look at kind of the
structural rotation that’s necessary for these markets to ultimately find their bottom, you
know, we’ve got several multiple still to go with respect to volume that needs to trade before you
find what the true market bottom is. So you know, it was a really interesting kind of insight to
this kind of statistical insight that he pulled together and put on Twitter, I wanted to see if
you guys kind of think that that might be the right way to think about it and how you react to,
you know, these conversations around where’s the bottom going to be?
Can I just pull up this one chart that kind of speaks to this. So this is CPI inflation versus
the Fed funds rate. So if you look at this, it goes all the way back to 1954. I shared it with
you guys in the chat. The the two have moved more or less in lockstep with each other,
which makes sense because the Fed raises the Fed funds rate in order to combat
inflation. So Fed funds and inflation sort of move in lockstep. If you look at what’s
happened over the past year, these two things have moved violently out of sync with each other.
You have inflation now going all the way up to 8%. Meanwhile, the Fed funds rate is only down
at like 1%. Even with all the rate hikes and the talk of rate hikes that we’ve had,
we’re only at a 1%, you know, Fed funds rate. Now, the expectation is it’s going to go higher,
the 10-year T-bull is over 3%. But the point is the Fed is in a really tough spot here because
it feels like we’re going into recession, which would normally mean you cut rates,
but then you’ve got inflation demanding that we jack up rates far more. And I think this is the
problem. And this is what’s going to be very tough about our current situation is if we go into
recession over the next six months, what does the Fed do about that? I mean, they don’t really have
much dry powder here. In previous recessions, like the GFC in 2008, I mean, interest rates were
around 5%. So, when they saw some to zero, they had some serious, you know, that was some serious
relief. Here, you’re at 1%. What do you do? You drop that to zero. And then meanwhile, inflation
still rampaging at 5%. This is what’s so hard about it. Then look at this other chart, which is,
this came from a blog post called the most reckless Fed ever. So, in this most reckless Fed
ever, they basically just took the Fed funds rate and subtracted inflation to get the real
Fed funds rate. So, the Fed’s funds rate net of inflation. And what you could see here is that
starting around 2018, 19, the real Fed funds rate started going negative and then very,
very negative to the point now where it’s basically a negative 7%. So, you know, why is that? Because
the Fed waited way too long to basically take away the punch bowl and start reacting to inflation.
You had Powell say a year ago that inflation was transitory, and then they didn’t react to it
till the end of the year. They should have stopped the QE right then and there,
and then gradually started raising rates instead of these violent moves that we’ve had this year
that are plunging the economy into recession that have caused the stock market crash.
Now, what did Powell just say a week or two ago? He said he doesn’t see a risk of recession
on the horizon. It’s like, what are you smoking? I mean, this is just like his inflation is
transitory comment a year ago. You’re wondering, like, do we have better data than the Fed chair
does? Because from where we’re sitting, we’re seeing a stock market crash, a panic and a
recession, and he doesn’t even see it. It’s like, denial is not just a river in Egypt. This is
crazy. Look, I mean, we call it a crash. But you know, some people might just say that investors
are violently reacting to the shifting tides on capital availability. But I will tell you,
I’ll say this one more time, because I think it’s so important. And it’s my kind of
prediction of the week. I really think we’re going to run into a consumer credit bubble here.
I do not think that consumers are going to slow down their spending or change their lifestyle
as quickly as investors are changing their investing style. We have seen investors in
public markets and private markets take massive corrective hits this week and last week. And
they’re changing their behavior and some of the stories we shared today. But consumers are taking
on more credit. They’re opening credit cards, they’re taking out bigger loans, prices are going
up 10% year over year for them. And so the concern is if we actually do hit a recession, and we don’t
see real wage growth, and the consumer credit bubble continues to grow, we’re going to face
a credit crisis, and call it nine to, you know, nine months to a year, where we’re all going to
wake up and be like, wait a second, how are consumers going to be able to afford all this
credit? Very simple example, end of the great resignation, that whole concept of like fun
employed, and I’m going to flip NFTs, and I’m not going to go to work. That’s out the window.
So people who’ve been enjoying it,
that there are there are more shoes to drop here. And I think consumer is one of them.
And maybe there’s systemic risks in the system that haven’t been flushed out yet.
And meanwhile, you’ve got a Fed chair in denial about what’s happening. And you got a President
of the United States, who’s more focused on what’s happening in Ukraine than what’s happening in the
United States. We are let we have Tweedledee and Tweedledum on this case, Biden and Powell are
going to go down as the worst President and Fed chair of all time. No, it is it is like the
anti Reagan Volcker combination. I mean, they’ve caused this problem.
First of all, that’s all long. I don’t know if I agree. It’s a longer conversation. I got to run.
But yeah, like, you know, I think we all spent a little bit of money, too.
We all want to blame someone. The reality is there was a massive leveraging that happened
going into 2008. And we got to work it out. We thought we were delivering. And I don’t think
we’ve been delivering since 2008. And all of a sudden, the chickens coming home to roost or
whatever the term is. And we’re all sort of waking up to the fact that wait a second flooded the
system with 10 trillion. We got money in the last two years. That’s the cause. It’s not and more
recently consumers. And also 14 years ago, it’s over 14 years ago. years, austerity measures in
long cycle here. But go, if you look back through time, roughly, if you look at like the average
mean p for the S&P 500, it can go down to as low as 3000. It could, but I think the reality is
there’s a Fed put somewhere in between here, because, you know, if we see the credit markets
really seize up, which we would if the equity markets continue to retrench, the Fed will be
forced to step in with liquidity and we back to where we were before. So, you know, I actually
think we’re probably close to a near bottom ish here 3800 ish. In the S&P 500. You’re actually
starting to see some of these early green shoots of a market bottom. What are those it’s when
the most heavily shorted stocks start to rip up, you know, sort of the gain stop game stop,
like rallies, and you’re seeing that actually today. So it’s a, it’s a really interesting day
when the market is roughly flat, slightly down. But some of these companies, you know,
a block percent, square five, 6%, 5%, even lift went up 5%. So this is the
back there was definitely some panic selling yesterday on the bottom. Yeah,
there was so much panic selling yesterday that the market’s bouncing up from that.
Look, the market is a leading indicator, not a lagging indicator. And so it’s it adjusts first,
and then the real economy adjusts after that. And the risk right now is the stock market is
telling us something about where the real economy is headed. And the problem is that the Fed and the
central government don’t really have the tools to fight the recession, because interest rates
are already so low. And, you know, Biden already spent all the money. I mean, they broke the glass
in case of emergency last year, they spent that last $2 trillion of emergency relief. When when
look, Larry Summers told him they didn’t need to do it. Remember that? Larry Summers told him it
would lead to inflation. Nobody I know no one wants to listen to Larry Summers. He’s like one
of those guys. You never want to do that. It’s correct. But Larry Summers was correct. The
administration did not listen to him. Larry, who I know very well, and a wife who I love,
is like girly as well. He’s he’s generally right in the end. And so I would just kind of,
yeah, you know, he was right. I mean, we do need to get back to the Clinton,
you know, moderate, like balance the budget, stop spending some austerity measures.
Like we can only work our way out of this. And I think what we’re going to learn from this is the
concept of free money, and printing money is not sustainable. And the concept of Americans not
going to work is not going to make the economy that Americans want to live in. I know this sounds
fucking crazy. But if you want to spend money, and you want to enjoy life, you got to work,
you can’t, we can’t have this kind of labor participation. We can’t have people flipping
NFTs for a living. That’s not work. You’re right, Jason. You’re right about that.
I saw this thing where there’s a there’s a new product implementation on Airbnb that allows you
to kind of like, you know, search by campgrounds or search by castles or by vibe, it’s vibe search.
And, and it’s a perfect encapsulation of this moment where there are folks who have all of
this flexibility, they’ve never enjoyed before, that their mindset, you know, especially if you’re
like a social striver, like you can signal that you’re different from everybody else by living
this lifestyle. But that works in a in a world where there’s lots of free money. And when that
free money gets taken away, I’m not sure that you’re renting castles to spend a week here in a
week there. Well, I mean, we all want to talk about UBI, I think it’s a very virtue signaling
thing to do. And it’s a very like world positive thing to do. Oh, there’s gonna be so much money
that we can just drop it from the heavens. And everybody’s gonna get a private jet,
everybody’s gonna get to flip their NFTs. And your board apes going to become worth a million
dollars, your Bitcoin is going to be a million dollars each. This is not reality, folks. Value
is created when you make stuff in the world, when you write code, when you build companies,
when you go to work, but it’s going to take a long time. I mean, at some point, maybe we’ll
have some energy source and you know, robots building everything for us. But we got to wrap
here. We’ll see everybody at the all in summit, there’ll be a bunch of stuff dropping do just a
couple of programming notes. Please, please, please, there are no more tickets. I’ve do not
try and crash the party. There’s gonna be security there. Everybody with a badge, we’re gonna be
checking the badges Chamath. Everybody’s got a photo on their badge, please don’t bring a plus
one. And please, please, please, please do not try to crash. Thank you. Love you. I love you. Talk
to you soon, everybody. We’ll see you next time on the all in podcast. Bye bye. Let your winners
ride. Rain Man David. We open source it to the fans and they’ve just gone crazy with it. Love you
should all just get a room and just have one big huge orgy because they’re all
like this like sexual tension that they just need to release
waiting to get