All-In with Chamath, Jason, Sacks & Friedberg - E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning

All right, everybody, welcome to the All In podcast. We’re back. Thanks to Freeberg and Saks

for moderating the show into the lowest ratings in its history.

Hold on, hold on. Please give the keyboard warriors that are their bot armies some

respite here. They tried their best. They just did. It’s okay.

I think the ratings of the last episode must be a result of Google downranking us as a result of

our honesty about not wanting to get more boosters. Saks, you’re on the Brigadoon track.

Because somebody at Google, some lower level functionary, to push a button.

Push a button. To shadow ban. I mean, visibility filter us.

It’s everything except the moderation skills of the two Davids.

Yeah, no way it’s the moderator turning it into Fox Sunday.

Can’t be that.

The reaction I got from our COVID vaccine discussion was, hey, pretty fair and balanced.

Not in a joking way, but actually.

Yeah, the warning on YouTube was pretty benign, actually.

Yeah, it’s like, if you want COVID information, click here. Thank you.

Okay, let’s talk about the market data. The Fed raised 25 basis points. The market

obviously has ripped since then. The jobs data this morning was crazy. We added 517

jobs, more than 2x December, and well above the estimates of 188,000 jobs.

The Fed, I think, is starting to realize they can obviously impact inflation and slow down

speculative assets, but they’re having a very hard time with the labor market. Obviously,

labor participation actually is growing. We’ve talked about that many times here.

It’s bumped up to 62.4%. We all know it peaked at like maybe 69%

during the 2000 time period. Wage growth, though,

continuing to slow. So that is some good news there.

And obviously, risk on assets are ripping the last couple of days.

Tramont, what’s your take on where we are with the market and the Fed’s action,

which people are starting to believe will be another 25 basis point hike and then maybe

staying high for the rest of the year? Did you hear their comments? You think dovish?

What’s your take on the market?

I watched Powell’s speech, and it was really amazing because

in December, he was extremely hawkish. And he was basically like, listen, we’re going to keep rates

higher than you like and longer than you want. And that was pretty clear. And the markets reacted.

And then not but 35, 40 days later, he essentially said we have 225 basis point hikes left to go.

And he’s going to try to stick the landing essentially. And even though the rest of the

language in his entire speech, and the press conference, if you read it in the absence of

his body language, so if you just read the transcript would seem very hawkish as well.

But the reality was, he basically capitulated. And then the market essentially said, okay,

we’re at the end of this thing. And we’ve talked about this before, but markets tend to bottom

six to nine months before it’s clear that you could have done this. And so we’re a little bit

off to the races in the short term. It’s compounded by a couple of other factors.

One is that at the end of last year, so many people were tax loss harvesting, which means

if you had some gain somewhere else, you sold some things that were losing money so that you

could net the two together. You saw a lot of stocks, Tesla was probably the poster child for

this trade all the way down to like $108 a share, and it’s effectively doubled in the last 30 days.

Right? So everybody tax loss harvested, everybody degrossed, nobody was really owning anything.

And then when Powell basically said, we’re mostly done. There’s been so much systematic buying right

now that nobody’s really well positioned. To me, this is very similar and eerily reminiscent of

the end of 2018 and beginning of 2019. And if you guys remember, at the end of 2018, October,

November, December, the markets just fell. And part of it was Powell’s going to raise rates,

inflation is getting out of control, etc, etc. And then we got all this data that said China

may be entering a real period of malaise. And Powell capitulated, again, trying to stick the

landing. And long story short, he didn’t. That was a head fake, and the markets just ripped higher.

Then we went into the COVID pandemic, and all of that stuff happened. So

I think we’re about to replay a little bit of that, at least in the next 30 to 90 days,

the pain trade is to go up. So that’s probably where we’re going.

Here’s the Fed Fund rates chart from 2000. And into the 2008 recession. And you see just,

you know, to Jamal’s point in 2019, that little step up to 2%. And then this dramatic step up

that we’ve been on up to four and a half or so. Sachs, is this where the Fed pauses,

you think they cut? And what overall effect is this going to have on

venture capital in the startup market, which is super important to us?

I think we’re in the whipsaw economy here. Just a month ago, sentiment was incredibly negative.

On the show, we were predicting for the year that we were looking at the Fed Funds rate going from

four and a half percent to say five and a half percent to 50 point increases. The belief was

that we were going to have a recession later this year. I think that was pretty much consensus.

And now three weeks later, you had a situation in which we got a couple of really good inflation

reports. So all of a sudden, the consensus changed to, we’re not going to need to raise rates,

you know, to five and a half percent, maybe we only get one or two more quarter point

rates. And the market just ripped on the belief that inflation was in the rear view mirror,

the problem had been licked, and now we can just kind of move forward. And the Fed seemed to confirm

that just yesterday with a quarter point rate increase. And now today, we have this wild

jobs report with over half a million new jobs, the expectation was only 100,000.

And so now all of a sudden, people are wondering, well, wait a second, does this mean that labor

costs are going to go back up, that the economy is overheating, and now the Fed’s going to have

to raise more. So I would say literally from week to week, we’re being whipsawed between expectations

of whether inflation has been conquered or not, whether the economy is going to have a recession

or not. And I think probably where we’re sitting at this moment is, you’d have to say that the

risks of inflation returning are slightly higher, but the risks of a recession are slightly lower,

because with this kind of jobs report, better chance of having a soft landing here.

It’s very hard, in other words, Sachs, to have a recession,

if people are employed, if people are employed.

Especially when you’re down to 3.4%. Yeah, exactly.

50 year low.

Right. So I just think that we’re in a highly volatile economy, and it’s very hard to predict

the future. I’d say that relative to where we were a month ago, you’d have to say that the

odds of us having a soft landing this year are quite a bit better than they were just a few weeks

ago. All right, Freeberg, when we look at this employment picture, it does seem people are going

back to work. Seems maybe indicative of people blew through their savings. We talked about this,

you’ve been harping on and on, previous episodes, I’ve had people doing personal debt, buy now,

pay later. Is a possible thesis here that people YOLOed for so long, post pandemic,

Coachella, vacations, etc. That maybe they whipped through their savings,

it seems like we’ve burned off a trillion in savings or something like that, and the debt’s

going up. So now people maybe need to go back to work, and they’re finally capitulating and

taking jobs. Do you think that’s what’s actually happening here?

I don’t know if I would classify that. I mean, there’s obviously a lot of this stuff is on the

margin. The one challenge, you know, Larry Summers has been harping on since last spring,

all the way through the summer and the fall. And, you know, in multiple kind of interviews and

publications he’s done, he’s the ex US Treasury Secretary, obviously, brilliant economist,

that the US needs to have a five to 6% jobless rate for five years, in order for us to really

get to the inflation rate target of two to 3% or below 2%. And so, you know, the economists

and the macro guys that are tracking their jobs report today are the I think the indication is

we’re not there yet. And that the implication of a tight job market is wages go up and wages go up,

inflation goes up and because companies need to charge more because they have to pay more to get

talent. And this obviously continues to support the escalatory spiral that drives inflation.

So that’s the, the, you know, kind of downside to the jobs report today, that I think a lot of

folks are watching the Fed mentioned over and over again, deflation. So any impact there,

Chamath, you think we’re going to see prices start to crater? And what impact would that have

on the market? I think Sachs is right. I think the the marginal risk here is is for this website.

So we have a period now which is disinflationary. But the problem is, if the stock market keeps

going up, and all of a sudden we have less restrictive monetary conditions, then we’re

going to be back at the same place we were before, which is money sloshing around into all kinds of

risky assets, or more money, you know, there’s still an enormous amount of money sitting on the

sidelines that has to come into the market now if this thing keeps going higher. So we’re in a

delicate moment. And if we reignite inflation, because all of a sudden, more companies have

more liquidity that they can tap, right, more money, they can raise more money as a result

that they can spend. Because we don’t have this first inflationary cycle under control,

there could be a risk that that we reignite inflation. And so then, then they have to

capitulate, the Fed has to capitulate again and start another hiking cycle. So I think it’s a

complicated moment. I think all of the smart money in Wall Street that I talked to up until this

point, they forecasted like this period would be choppy. And the second half of the year would be

really robust and like you needed to be super long and things were going to be incredible.

And when I talked to them this week, they’re like, Oh, God, we weren’t positioned for this,

we had no risk going into this, we’re going to be forced buyers. There’s a bunch of companies

that are whispering that they want to go public now. Oh, really? The big banks have been calling

around trying to book build quietly for some IPOs. And so if they try to kind of crack this

capital markets open, I think there’s again, the marginal risk will be that we do whipsaw

sex when you say book build, you mean trying to see if you’ll get some early takers to buy equity

in an IPO, perhaps even in a company like stripe that’s been sitting on the sideline.

So not stripe, they’re in a complicated moment. But when they call to book build,

they basically say, Hey, listen, XYZ company, quiet filed, look at the s one, what do you think,

where’s the price, blah, blah, blah. And they’re trying to get an indication of whether you’d want

to be in the IPO book. So I think that there’s a lot of those testing the waters that are now

starting again, would there be an appetite in your mind for an IPO in the second quarter of

like a stripe type company, but you know, I don’t know what the other candidates are the lead

candidates, but tribe is one people talk about most, the thing that we have to think about is

like, most of the market are not people, right? Most of the market are computers and algorithms

and ETFs. It’s an extremely formulaic buying model. Do you have components of an index,

those represent certain percentages, you have to own those percentages to be relevant as that index.

And so it’s this reinforced buying loop, as well as a reinforced selling loop, right?

So when things start moving, those folks have to just systematically move money in

all the humans know that. So the humans tend to front run all the computers,

and they basically are the ones that sell into these guys. And then that’s what inflates these

prices. Similarly, on the way down humans try to front run it by being short into that stuff.

So we could see the capital markets open, even if we don’t, it’s actually the worst scenario,

because now you have all this money going into a fewer number of names.

That sort of explains Facebook has doubled in in 3060 days. Yeah, it was about Tesla,

Tesla has doubled in 30, you know, 3060 days, a lot of the tech stocks, like high beta stocks

that we are all, you know, helping to build, those companies have just absolutely ripped 60 to 100%.

These are not healthy and normal moves. And so the question is what happens if

inflation somehow, all of a sudden pokes itself back up right now, it doesn’t look like it is.

And Powell was clear. And it’s true. We’re in a deflation. He said deflation 11 times during his

he’s very clear about his use of language.

Yeah, that’s why the market rips. I mean, basically, that was all part of a narrative

where inflation is on its way out, we’ve licked that problem. And that’s what the market was

pricing in. And I think now the question is, in light of today’s jobs report, is that actually

true or not? And I’m sorry, disinflation, not deflation, disinflation. Yeah. So I think,

you know, one way to one way to look at this is, Jake, how you showed the chart of the Fed

funds rate. Another chart is the yield curve. We just pull up the yield curve for a second.

This is the yield on US Treasuries on you know, our T bills. And one way to look at this is as

a prediction market of where the market thinks interest rates are going, because the Fed sets

the rate for the Fed funds rate, which is the overnight rate of lending to banks, but they do

not set the rate of, you know, three months, six months, bonds, 10 year bonds, and so on.

The market does because the market trades those bonds, and it imputes a yield that the market

requires to want to hold those bonds. So what’s interesting is that if you view the yield curve

as a, again, as a prediction market, it tells you at any given time, what the collective wisdom is

of the market. Now, this thing is fluctuating, moving all the time. So that collective wisdom

is changing. But where things are today, it’s pretty interesting. It looks like what the market

is saying is that within the next six months, the rate peaks at 4.75%. So Nick, if you just want to

hold the mouse on the six month dot, you’ll see it’s 4.76%. So basically, the market is predicting

we get maybe one more quarter point, roughly, not much. And then if you go to the two-year,

it’s at 4.09%, so a little over 4%. So what the market is actually predicting is that over the

next two years, we’re actually going to get a 50 basis point decrease from the Fed. And then if you

go to, say, the five-year or the 10-year, we’re at 3.5%. So the market is basically saying that

long-term rates are going to stabilize at 3.5%. We’re not going back to the abnormal

zero interest rate policy or ZERP that they had for 10 years. 3.5% will be the long-term stable

cost of money. But you can see that the market, the prediction market, thinks that the Fed has

done enough to combat inflation because the Fed funds rate now basically is where the bond market

thinks it should be. And in fact, the bond market thinks it’s coming down over the next two years.

But coming down to what would be 3.5%, in a world that we’ve lived in for largely over the 14 years

of this bull run, the majority of that was at close to zero or zero.

Right. And that’s why we’re never going back to the bubble of 2021, where SaaS companies

were trading at 100 times ARR. We’re going to go back to an environment like a more normal one,

where valuations are more like the 2017 valuation, something like that. By the way,

it’s 3.5% is not a bad… It’s still a great deal. Still a great deal if you got your mortgage at

that. If you listen to Buffett, Buffett’s teacher, this guy, Ben Graham, in Ben Graham’s book, the

way that he would look at a stock, and obviously, look, things have changed, but the way that he

would look at a stock is he would look at that risk-free rate, he would double it. And then

the inverse of that is the maximum price to earnings ratio that he would pay for a stock,

right? That’s the trade off is if you can get more than two times the risk-free rate,

then it’s worth owning a company. What that means is that if you take 3.5% as a terminal rate,

the right PE is around 14 for the S&P 500. Right now, the S&P 500 trades at 22 times PE,

which would mean that we are 50% overvalued. Now that again, that’s a Benjamin Graham model. And I

think the world has pretty cleanly moved away from it. But there’s probably some rooting in

that intellectual framework that’s still valuable. And to your point, David, it just

reinforces that man, we need to start to learn a new regime here. Because when rates are not zero,

there’s just a lot of excess that you can’t support. Because the alternative trade offs

for investors are plentiful, you know, and plowing money into a money losing startup becomes less

attractive. And to just give people some background, that’s the intelligent investor was

that book, I believe, and he was talking about value investing, which is, hey, what’s the earning

per share? What’s the ratio? What’s the PE? And that’s something that growth and momentum

investing has been the opposite of and this is a could be, I think you wrote a blog post about this

Chamath, sort of the regime change. If you look at the Googles, the Facebooks, the apples,

Amazons is a little bit of an exception here, those companies printed money, they had profits,

they built up large cash reserves. We look at the next cohort of companies, Airbnbs, Coinbases,

Ubers, etc. They focus on the top line growth, much like the Amazon, which was a very obscure

approach. Correct? Chamath in the history of this,

Nick, do you want to just throw up this chart, we did a little analysis over here. And it was just

basically looking back 60 years of company formation, we looked at all of the 100 most

valuable public company startups, and we index that to the 10 year interest rate.

So what are we looking at here, Chamath with this chart?

So basically, we went back from 1960 onwards. So basically, you know, 63 years. And what this

shows you is the 100 most valuable public technology companies, then the size of the

circle here is their market cap. And then it’s overlaid on top of the 10 year interest rate,

as well as gray bars for recessions. So what is this graphic meant to illustrate? Well,

it just was for us to study, is there a correlation between the value of companies?

And what the interest rates were what the economy was doing at the time. And to your point, Jason,

the trend is pretty starkly made on this chart, which is that if you are a company that was

founded in a period of austerity, you had the ability in general to build a much larger company

than that, which was founded in a period of wealth and excess. Right? So when you look at

when rates were sort of approaching zero or were zero, there was a lot of really successful

companies, they’re listed here in the in the light gray on the right. But none of those things

really represent the success that these other companies had. That’s the first interesting

takeaway. The second interesting takeaway, though, from this has nothing to do with rates per se.

But it is that when rates intersect with the emergence of huge technology trends.

So in the case of the 1970s, it was the PC revolution. In the case of the late 1990s,

it was the internet revolution, those two things, which required enormous

progress in both physical infrastructures, so atoms, as well as software infrastructure bits,

when you put those two things together, those also created big companies. And so,

if you add that all up, the point is that whenever you see huge tectonic shifts in technology,

combined with periods of austerity, that’s when the gargantuan dollars are made.

So in the 1970s, companies like Microsoft and Apple from the get go had to be profitable.

Right. And in the absence of one very important round of financing that Amazon was able to close.

The next big wad of companies were founded again in rising rates where they just had to get

profitable or find a way to be positive free cash flow, or have positive working capital

faster than anybody else. So these are like really interesting trends that I think just

say that as rates creep back up. And if we can intersect that with some improvements in technology

over the next five to 10 years that we’ve all talked about, it could be a real boon for startups

and startup investing. It would mean people are a little more resilient, a little more hardcore to

use a term free bird. What are your thoughts on this analysis by social capital? It’s interesting.

I mean, I think there’s probably two ways you could interpret this one is in an era of excess

capital, all the capital gets competed away. And so you pay more salaries, you have, it’s harder to

get high quality talent, you make a lower margin, etc, etc. It’s much more kind of competitive on

the ground. And then another one is just obviously kind of like evolutionary fitness. When there’s

less capital investors are more selective. I think what might make this era a little bit different

than the past is just the amount of terms dry powder sitting on the sidelines right now. So the

total VC capital raised last year, I think was a record high. That means there’s a lot more cash

that needs to kind of be deployed in the next 12 to 36 months than has ever been deployed in the

history of venture. If that holds true. So that may be kind of a counterbalancing effect here

where it may take three years before that effect plays out, where there’s more of a dearth of

capital. It’s certainly the case that institutional investors, endowments, pension funds, traditional

family office LPs and venture funds are making far fewer commitments this year to new funds,

as I think we all know, and that tightening will play out in the venture funds that will get raised

for this vintage, the next vintage and so on. And so maybe that that kind of evolutionary

fitness concept starts to play out later. And sizing and sizing and sizing. I think there’s

also this like, you know, we talked about this on our text screen, but the venture business of the

last 15 years. Everyone since 2008, everyone’s been trained. And all the younger people that

have come up and are now partners and running the firms on an environment of momentum investing,

rather than fundamental investing. And so there is also a question of how fit the investors are

for a market space, where valuations are flat, or descending, or the decision whether or not

to invest is no longer driven by who else is investing and how much is the company growing

and how much is their valuation going up. But it’s much more about kind of the fundamental performance

of the business. Does this match what you’re seeing on the ground sacks?

Are people being more dogmatic, pragmatic? Are the capital allocators really

sharpening the knives and looking at these businesses a different way?

Is it actually hit the streets?

Yes, there’s a record amount of money venture capital has raised over the last,

you know, couple of years, but it’s going to be deployed much more slowly and carefully

over the next, say, three or four years than it was over the previous few years. So divide

that amount of money by three or four, because the pace of deployment is going to go way down.

And so, yeah, I think people are going to be more careful. They’re going to take longer to make

decisions. I think it’s going to be much, much harder for new funds to get started. All of the,

you know, hype around, you know, solo capitalists and, you know, all these, you know, seed funds and

micro VCs and all this kind of stuff. I think a lot of that’s going to get washed away. I think

in hindsight, a lot of that was a product of the bubble. And yeah, I think you’re going to be in

for a period of some retrenchment in VC. And I think that’s good. I mean, I think to the point

of Chamath’s study that, you know, that the counterintuitive finding in his study was that

great companies are created during times when we’re not in a bubble and capital is sloshing

around everywhere, but when you’re in a environment of moderate capital availability.

And I think the point is that we all have to be under some stress, right? That’s what evolution

requires is, you know, if an ecosystem or an organism is not under stress, they have no

pressure to evolve and become fitter and compete. And I think that’s what makes our industry and

our ecosystem very adaptive over time is that it’s constantly, you know, it does face survival

pressures, but over the last several years, all the survival pressures were taken away because

anybody could raise money. And there was always another bridge available. There was always some

extension and there was no some convertible to be done. There was no reckoning. You know,

a lot of these companies just seem to, you know, get another 12 months of runway and other founders

learn so many bad habits during that period of time and so much entitlement and excess built up

in the system during that time. And I think now we’re, we’re seeing that a lot of that is working

its way out. I mean, just look at the Facebook results the other day. Let’s talk about Facebook

as an example, because here you have a company where the stock over the past year had been

pounded. It was like down over 50% and the market did not like its

answers around the capital investments it was making. And then Brad Gerson, our friend

wrote that letter encouraging them to get much more efficient. And then they did that

and they basically started doing some riffs and basically just getting much more efficient

and what they’re doing and specifically taking out layers and layers of middle management.

I mean, that was really the big thing. So they kind of took a page out of Elon’s book

in terms of what Elon had done at Twitter. I mean, not nearly to that extent,

because I don’t think they needed to, but they targeted this idea of we have too many layers

in the company, too many mid level managers, and the stock ripped just was it like up 2025%.

Yeah. And they’re up to, I actually bought it based the day they had the layoffs,

I put in a buy order, and it was closed at $94. And now it’s at 193.

And FedEx, of all places, is laying off 10% of its offers, officers and directors. So the idea

now is, hey, in the senior ranks, what is the inefficiency there? How do we get more doers,

more people who actually are building or operating the companies to take the reins and get rid of

this, as you’re saying, middle management, this waste that companies have.

Let me tell you specifically the problem that builds up in these companies

is that everybody wants to be a manager. And so you can’t just come at this problem by saying,

we’re going to increase the number of reports that each manager has from five to 10. That doesn’t

work. Because let me tell you what happens is that every individual contributor who’s a star

thinks that their career advancement requires them to manage a team. So what happens is you

take that star I see, and then you create a team around them. So that person then hires

five people to manage. And those five people are not a star. Yeah, they stop working, they just

start managing. Well, maybe you get like 20% more production out of that six person unit than you

would have just out of the star, but you’re spending five times more money. So it makes

no sense. And the problem is it cascades. So that I see becomes a manager, they hire five people,

then those five people, one of them’s a star and says, well, I want to be a manager.

And all the organizational pressure is to keep building more and more teams, and more and more

layers. Here’s the quote from Mark Zuckerberg to illustrate your point from a recent all hands

meeting. I don’t think you want a management structure that’s just managers managing managers,

managing managers, managing managers, managing the people who are doing the work. Yes, it’s

the problem of infinite delegation. Every like star builds a team around them to delegate the

work, but then they hire a team to delegate the work to and pretty soon the most junior

interns in the company are doing all the work and all the best people are just managing. So

it’s actually a huge problem. And I think that I’d say that a lot of CEOs don’t quite understand

the problem because they think that all they have to do is increase the number of reports

that managers have. It’s not, you also have to reduce the number of layers in the company.

And just the ultimate example of this, just to put a point on it was at Twitter, what we saw

is that when Elon went in to basically do a riff at Twitter, the first question he asked

in the engineering department is who’s checked in code. And they looked at the code repository

and over 50% of the engineering department had not checked in code in months. And you want to

know the reason for that is because the engineers were told that if you want to be a manager in this

company, you don’t code, managers don’t code, only ICs code. And no one wants to be an IC,

no one ambitious wants to be an IC, they all want to get promoted. So it all gets

Explained what an IC is?

Just individual contributor.


So the whole thing turned upside down because of this idea that again,

ambitious people want to be managers and managers don’t do the real work.

Yeah. It’s like cowboys who don’t know how to ride horses. It’s like,

it’s a dangerous precedent to set. What are your takeaways Chamath from what happened at Facebook

when you look at it and the pressure that was put on the ripping of the stock, even though they’re

down 2% year over year in terms of advertising revenue.

There’s a guy on my team sent me this chart. He did a pretty detailed

technical analysis of Facebook. Nick, can you please put that image up there. So basically,

this shows

This is really technical.

This is the first time Facebook mentioned the word metaverse in q2 of 21. On the earnings call,

they mentioned it 20 times. And the gray line here is a stock price. So as they kept mentioning

it, the stock price just, you know, react. But q q4 of 22 was the first time that the word

efficiency exceeded the word metaverse. And you saw and you saw the stock price rip up. So what’s

happened at Facebook is really interesting, because I think it transitioned to what’s generally called

an X growth company, which means that people are now looking at a business that has essentially

gotten to its peak size. And now what they’re looking at is its ability to generate cash flow,

the cash flow generation or cash flow yield of the business was like three and a half percent.

But they’re making enormous cuts, both in capex as well as headcount over time, they’re getting

their expenses under control. And all of that should drive up their cash free cash flow yield.

And so I think why people got very excited is there are very few x growth stocks that you can

own, that can just compound and crunch ginormous amounts of money. And these guys are in an

incredible position to do it, you know, more than 100 plus billion dollars of revenue. And if you

get these costs under control and get efficient, get the employee base down to 30 or 40,000 over

time, this is a thing that just spits out just ginormous amounts of cash. And so

so it’s value investing and Warren Buffett, that means the earnings per share go way up.

Yeah, you know, like, like, the Facebook PE is quite modest, actually. Now, I actually

put back in stock based comp, and its PE is about 11. So still reasonable. If you go back to the to

the Ben Graham analysis, this is a company that perfectly meets that criteria of like,

you can buy it at a PE, that’s basically two times the risk free rate. And so I think it’s

an incredible stock now that you can own. Because if they keep grinding out all of these kind of

free cash flow gains, man, they’ll just they’ll just have enormous amounts of money, they already

announced a $40 billion buyback. You know, the thing to keep in mind is Apple had a moment like

this. And when Apple went x growth, they did the brilliant thing, which is they said, we’re going

to borrow heavily. And we’re going to return cash. I may have posted this in the group chat to you

guys. By 2025, Apple will have exceeded $1 trillion of cash distributions. I mean, that is just nuts.

Is that include buybacks in cash distributions,

buybacks and dividends. And so Facebook now you can credibly see a path where Facebook could

chunk out hundreds of billions of dollars of, of total shareholder value returned over the

next four or five years. And so, you know, for value investors, it’s somewhat of a kind of a

no brainer. I mean, nothing’s a no brainer, but yeah, really, really attractive value fundamentals

right now. I mean, you did see Warren Buffett buying Apple, I think it’s his largest position,

you’re gonna see him probably do the same with Facebook. There was an interesting mass extinction

event tweet that went on that’s related to all of this Tom Loverio, a GP general partner at IVP,

which is a venture firm tweeted the following thread, there is a mass extinction event coming

for early and mid stage companies late 23 and 24. But make the 2008 financial crisis look quaint

for startups below I explain when, how and why. And we’ll start to offer some detailed advice,

basically four and five, four in five early stage startups, he claims have less than 12 months of

runway, according to a Q4 survey of 450 founders by January ventures. He sees late 2324 when this

will all come home to roost Mark Suster from upfront ventures, friend of the pod reply with

the following precisely our internal analysis 5000 seed 2.5 million raised or above a and b

companies with three different categories funded in the last four years, we estimate 50% will go

out of business. loss ratios in the last seven years have been artificially low due to excess

capital as we just discussed previously with the never ending bridge.

We’ve talked about this before, if you look back over 40 years of venture capital,

the average top core top fund distributes 1.6 or 1.7 x the capital they raise.

Even though now we’ve gone through a period where people have shown these

unbelievable markups, right tbp is the total value of paid in capital.

distributions have not really budged that much distributions are still modest, they’re below 2x.

And so we have to go through what’s called mean reversion, right, we have to go back to the

historic statistical average, which means that a 50 to 60% mortality rate seems pretty reasonable.

By the way, in bubble, that’s what we went through, you know, in 2001 to 2005,

we had a 50% mortality rate at the seed stage. I mean, you kind of expect 70% to go out series a

maybe a little bit less free, but what are you seeing on the streets? You’re investing in

startups? Yeah, look, I think that there’s is there an opportunity, by the way, also in here?

So what are you seeing? But is there an opportunity in this group of this cohort of companies, which

seem to be upside down and or in a tsunami right now, this cohort of companies, I think,

generally, is overburdened with feature orientation and short term ism more than you would see in an

era of reduced capital rather than excess capital. And what I mean by that is a lot of companies

built a business or built a product that allowed them to show traction in the market faster.

And typically, those products that are easier kind of paths to market end up being features,

they don’t end up being platforms. So it’s very hard to become a big business or to become a

scaling business, or to differentiate in a competitive market. That’s a generalized,

that’s a very general statement. But I think, you know, when you miss out on the platform play,

you start betting as an investor on a lot of the derivative plays that look like the real big

company look like the platform. I mean, think about how many companies try to look like some

iteration of Stripe, or tried to look like some iteration of Uber, or tried to look like some

iteration of, you know, name your big kind of behemoth. And as a result, you get all these

sort of feature ish platform plays that have maybe a niche, or some kind of, you know, narrow kind of

market opportunity, they got funded, those those businesses obviously aren’t going to have the same

valuation multiples of the winners in the market. And now, and they burnt a lot of money to

demonstrate growth, because so much of investing over the last 15 years has been momentum investing.

And so they try to grow, then they try to get a higher valuation, investors plan more money in.

Now, the problem is that so many of these series BCD and E companies have a true market value.

They’re not a valueless company. But the true market value of them is probably less than the

total preference stack of the capital that’s gone in. So there’s a way let me Yeah, let me

just make sure people understand. I’ll just describe it. Yeah. So when investors invest,

they have preferred stock, so they have a right to get their money back. So they let’s say a 1x

liquidation preference, they invest $100 million. The company is worth 300. So they own 25% of the

company after they invest, but they have a right to that $100 million. First, before common

shareholders get paid. The problem now is that a lot of those companies may be worth less than 100.

They’re not worth 400 anymore, they’re worth 100. And you can see this play out in the public

markets with that that data set I shared with you guys a few weeks ago, over two thirds of

companies now that have gone public since 2020 are worth less than the capital that they have

raised as in the venture market. So if they were still private, they would be worth less than their

preference stack. And that’s where these companies start to unravel. Because now the investors have

to totally recap the company, the founders don’t want to have all of their common wiped out now

they own nothing. And there ends up being a very ugly scenario that happens with the board at that

point on how do we wind this thing down? How do we recap it? What’s going to happen? And that’s

usually where everyone starts to run for the hills, the founders one or more of the founders

leave and so on. I have a question for you. So you mentioned this earlier, which I think was a

really important point, but we didn’t really touch it. Do you think there’s going to be

a reckoning inside of venture firms about recalibrating general partners?

100% I mean, look, and why sorry, just explain why. Yeah. So I think what’s happened is over

the last 15 years to become a successful venture investor, you’ve gotten into the hot deals,

the deals were and hot deals, the valuations are typically climbing up. And, you know, when the

valuations climb up, that’s an indicator that the company is doing well, and you should invest.

That’s been the model for operating in the last 15 years. But the truth is that maybe just because

the valuations have gone up, and more money has gone in doesn’t necessarily mean that that’s a

great business, or as Jamal points out, that you ultimately get a positive net return on that

investment down the road, and that windows now closed. So the the investors that have been

trained jet, this is such a generalization. And I hate saying it because we have so many

good smart friends that work in venture. But generally speaking, there are a lot of folks

who have come up who have been trained on this momentum investing model. And it’s like it’s like

day trading, the stocks are going up, let’s all put money into the stock going up. Instead of

having a more fundamental approach to is there real cash generation potential and scalability

and platform ability of this company. And as a result, you’re going to have to see I think the

junior partners that have come up and done well in this market.

Can I build on your point?

Well, they’re, they’ve, they’ve done well on paper, but they haven’t done well on distribution. So

maybe that Chamath becomes the well, so you decide who’s a good venture capitalist, which of these

companies actually returned capital at a peak market?

Well, I think Freeberg is really onto something. And he mentioned this before. So I got curious

about this. And I went into pitch book. And my team and I looked at all of the people,

the humans in our business, that have generated more than a billion dollars in distributions on

a given deal. And there’s 20 that have done that in our industry. Like, there’s people that have

made hundreds of millions of dollars once or twice, but there’s 20 people that have made more than a

billion dollars more than once, okay. And if you look at a single one came up through the ranks as

a pure engineer or product manager, right, everybody to a one is extremely commercial in

their background and their operating experience. Very few percentages of them were actually

founders, a huge percentage of them were trained in banks and other places. So non traditional,

quote, unquote roles for what this current crop of GPS look like, because we went through a phase

where if you were a VP of product, or a VP of design, or a VP of engineering at a well known

startup, that was the most obvious onboarding into a venture firm. But if you just look back at the

data, that cohort of people has actually never made money, again, according to pitch book.

That’s fascinating.

And that’s a really fascinating counterintuitive takeaway, which is that, and by the way, what’s

so interesting about that is Pat Grady, I think had a tweet, and it just sums it up so cleanly,

because he just hired somebody from CO2. And the tweet was something to the effect of this guy

is the most commercial guy we’ve ever seen something like that. And I thought that was

so interesting, because that is exactly what our heuristical analysis of this data was as well.

Commercial people in venture are the ones that make the money.

So you look at a Fred Wilson, Michael Moritz, Danny,

Bill Gurley, they were investment analysts, I can share your list markets before they

became venture investors, or Mike Moritz, who was a who was a journalist,

which is a journalist is just an analyst. It’s another if you’re a good journalist,

it’s another word for analyst. Yeah,

it was really, really interesting looking at that list. So like, you know, there are people in

there like Jim Getz, Alfred Lynn, Danny Reimer, Jan hammer, Fenton. So if you look at all of

these folks that are just tier one people, and we know all of them, the one common thread amongst

all those folks is that unbelievably commercial and so Jason in a in a moment like this, where

you have to really hold the entrepreneurs feet to the fire or be their partner to make extremely

hard decisions, you have to have the ability to be respected by them in those moments where you can

force a very difficult decision. And then separately, if you have to basically force

liquidity so that you prioritize your limited partners, how do you do that while still managing

the relationship with the entrepreneur? How do you know that you just need to cut your losses

and get out? These are very difficult trade offs that I think folks haven’t been trained in doing

to David’s point. So it’ll be really interesting few years to see how these organizations

I think this goes, this goes to sax’s point about, hey, the ecosystem, if it’s hard,

if it’s cantankerous, if there’s sand in the oyster, it could make the pearl.

If you have a, you know, a congenial relationship with, you know, your product manager, VC and

everybody’s champagne and caviar and and high fiving, maybe that’s not as good as having a

Bill Gurley, a Michael Moritz and having a foil maybe who is putting pressure on the management

team, hey, we need to hit these numbers, freeberg and then sex.

Yeah, look, I think one one counter argument here may be that there is this friggin title wave

of AI companies. And there is this incredible amount of lubricant in the dry powder that’s

sitting on the side of the, of the market right now that all these venture funds raised in the

last two years, that is going to lubricate all these AI companies into every vertical in every

market. So every company is wrapped up in an AI cloak, like a magic invisibility cloak, every

AI company has got an AI hat and a badge and a tattoo now or every company is being rewritten

as an AI company. And the money wants to find its way into AI and it wants to rewrite industry with

every industry with AI. So I think similar to what we saw with mobile, and the social web,

you know, going back 10 or 15 years, we’re seeing kind of this AI wrapper and this AI technology

enabler, rewrite the possibility of every vertical, and the VCs have capital more capital

than they had 15 years ago, or 10 years ago, or even seven years ago. So there is this counter

narrative, which may be that the game, the game goes on, the band continues to march on the current

crop dies out. But there’s immediately a new crop waiting right behind it. Or what happens is the

herd dies, and everyone runs to the back of the right and gets recapitalized. Because I can tell

you every startup I know that’s not going well, everyone’s talking about leaving to go do an AI

company. And I think they’re ready to write money. I think you’re I think you’re right about

that. I think the question is, the actual person making the check, will they be more or less likely

and at least what history would tell you is that we’ve hired an entire generation of people

that and this is clear do not map to the people in our industry that have actually generated

returns. So you’re right, they may take this money and misallocated into these companies

that are just, you know, rebranding themselves. But that just goes and further proves that there

is a type of person that hasn’t been recruited into these venture firms yet. That was the first

generation that made all the money. I think it’s always been the case that there is some difference

between the background of the VCs and the backgrounds of founders. I mean, you guys

mentioned Gurley and Moritz, like we said, Moritz was a journalist who had written a book about

Apple. He wasn’t technical per se. And Gurley was a investment analyst on Wall Street before

he then made the transition into VC. And as we both know, they’re like legendary VCs.

You know, I think the what you want to see in a VC, I think the background matters a little bit

less than, you know, like, how curious are they? How good are they about learning a new area? How

good are they at being like a heat seeking missile? I mean, basically, just like zeroing in on,

like, what is the hot space? And specifically, what is the best company within that space,

and somehow figuring that out, being able to assess a founder, you know, that’s like a very

subjective thing. So I think there’s lots of qualifications that you want to see in a VC.

Now, at the same time, I do think that if AI is the next wave, and the next sort of platform

opportunity, as we all think it is, I do think that places more of an emphasis on technical

skills. And I was, I was literally just having this conversation at craft that, gee, maybe the

next hire, we should make a craft should be someone who’s really deep technically. So they

can, you know, help go deeper on technical due diligence of AI companies, they’ve never made

money. What’s that? They’ve never made money in the history of our business, who those people,

that archetype of hire has never done that on behalf of well, he’s in biotech and life sciences,

they have the best investors usually saying he’s saying a technical hire who worked in the trenches

at a company is not as fit. No, has not in the past has not in the past gotten DPI. Whereas

somebody who is more commercial to analyze a business, the ideal person is going to be able

to get returns. Right, right. So look, I think, you know, the ideal person would be someone who’s

formerly a great investor, but also has some technical background and some technical chops.

We also have a team approach at craft. So if you have someone who’s very technical, they can just

diligence the technical aspects of the deal. Somebody else can be responsible for, you know,

making an assessment of the founders, how we’ve solved this is we have a group of third party

individuals that we work with, that we keep on retainer that we compensate. And whenever we need

to do deep technical diligence, we partner with them to do that work with us. And what it allows

us to do is get the best of their technical thinking, without also putting them in a

position of trying to adjudicate whether this company is good or not. What I’m trying to

understand is, what is this technical edge? And can I understand the boundaries of that,

but I still keep the investment decision to myself and my partners, because otherwise,

the difficulty is, in my experience, deeply, deeply technical people are extremely good at

diligence, but generally are poor at making investment decisions, because there’s a part

of their brain that flips on, which is like, I could do it better, or I could do it this way,

or I could do it that way. And I think like that anchoring bias can be very dangerous. And you

almost want to be a little dumbed down from that depth of knowledge, because you either find

everything that is like not worth doing, and then you can miss a market. Or you miss the thing that

is good enough, because you’re like, Oh, well, I would have done x, y, and z in a different way.

So we kind of like use them, but we keep them at arm’s length so that they never feel the pressure

of having to actually decide on our behalf, how the money should be spent. Yeah, that’s interesting.

Yeah, the number one thing we’re doing at this early stage is training our founders,

I know this sounds crazy, on accounting best practices, and pricing best practices. And

we literally have founders who have never made a plan I’m talking about at the seed stage,

who don’t know accounting. And so we are running for seed stage startups, and I’m kicking myself

that we didn’t do it two years ago or three years ago, but better late than never, on how to just

maintain their books and understand operations and the the operational lack of discipline in

the market. I’m seeing series A and series B companies that literally don’t understand their

own accounting. And so when we start talking to their accountants, there is a huge gap between

what the accountants think of this business and what the founders think of these businesses.

And founders think they have more revenue than they have or less revenue. They’re really don’t

even know how to calculate their runway in an honest way. And so there is back to your point,

Chamath about on the on the venture side of the business, a lot of product focus,

a lot of operational focus, there’s not enough focus on just the bottom line.

The reason that happened is what Friedberg said before, which is like somebody would build

something, there was a little bit of momentum. And you’d have to go and present these bona fides

to these entrepreneurs to get into the deal. And so vent what venture firms thought was the right

bona fide to present as oh, I built XYZ product at this other company, right? And they thought

that that edge could get you into a deal, maybe, but it could turn out that that was the wrong

company to be in in the first place. And so you just missed an entire generation of value creation

because it happened sort of off piste off the trail. Like, yeah, you really do need to understand

fundamentally, because we’re talking about public markets here, the Facebook analogy,

what is the ultimate earnings? What is the ultimate cash that is going to get thrown off

this business? And that’s what the whole industry needs to, I think, pivot to and just that needs to

be the operating principle. You guys know how much money Facebook, Amazon, Google and Microsoft

raised combined total before they went public. That’s very small. I mean, Google is minuscule,

less than a quarter billion dollars. Unbelievable. Yeah. All the inefficiency is extraordinary. And

then on top of this inefficiency, I don’t know if you’re seeing this, they were all profitable

when they went public. On top of all this inefficiency is a dependence on venture debt.

I don’t know if you’re seeing this sacks, but the amount of focus on adding debt to

unprofitable companies over the last five years has been just extraordinary. I don’t understand

I’ve never understood the venture debt model or really how it works. I feel like it’s a category

that doesn’t make any sense. Say more. I mean, well, I mean, explain it to people what’s happening.

I don’t really understand how it makes sense for lenders or for founders. To be honest,

I think the whole industry doesn’t make any sense. For founders, I don’t like it because

the money has to be paid back, right? It’s debt. So founders take in this venture debt,

thinking like it’s an equity round, but without dilution with some warrants. And they don’t

realize, well, wait a second, we got to pay this back in a year or a year and a half out of the

next round they do. But that creates an overhang on the next round because the new VCs coming in,

they want their money to go into the company, not paying off a bank. So it actually makes the next

round less attractive. The other thing about it is that the lender is not getting an equity reward,

so they don’t want to take equity risk. They may be getting a nice

coupon. They might be getting 9% or something like that, which sounds high for debt, but they’re not

taking true equity risk in the company. So the last thing they want to do is be your last six

months of runway, right? They want to be your first six months of runway and then get paid off

on the back end. And I think a lot of founders think, oh, well, I’ll take this money and it’ll

extend my runway from 18 months to two years. But what will happen in that last six months is all

of a sudden the bank will come to you and say, no, no, no, no. You have this or that material

adverse condition. It’s called a Mac out. And there’s all these terms that founders don’t

understand because it’s highly legalistic. Covenants, yeah.

Covenants. And so all of a sudden, the founders find themselves with a lot less flexibility

in that last six months to a year. Either a covenant gets triggered that makes them pay

back the money immediately, or their business flexibility goes way down because they’re

consulting with their bank about everything. All of this is coming home to roost right now.

I think it’s a terrible deal for founders. And I think that even for the lenders, I mean,

I guess I assume that these banks know their business better than I do, but

I think that the reason I don’t trust it as a category from a lender point of view or from

an investor point of view is that all the data about defaults over the last five to 10 years

happened in this free-flowing zero interest rate environment. And so the startup mortality rates

were artificially low because it was so easy to raise. So yeah, venture debt makes sense in an

environment in which founders are generally able to raise the next round and then pay back the

venture debt. But let’s say that that tweet storm you mentioned, Jason, can you bring that back on

the screen? I actually think this tweet storm is basically correct. I’ve referred to on this show

before that I think one of the things that built up during this bubble is latent startup mortality.

So many startups that should have died from not being able to raise next round

live because they’re able to raise money. And what this tweet storm is predicting is that

the second half of 2023 and then 24, you’re going to have a huge crunch where all these companies

have to go out and raise, they’ve been waiting. So they’re all going to get to the point where

their cash is so low, they have to go out and raise. And now all of a sudden, they’re going

to be confronted with the new market conditions. I wonder how many of them have venture debt as an

overhang. And those ones, yeah. And they’re going to find they have less runway than they thought,

because again, those banks, they are going to try and collect the debt before the startup

runs out of money, not when it runs out of money. Catch two falling knives, basically.

Exactly. So, look, I just wonder, what I don’t trust is whether the return models on venture

debt that were created over the last five to 10 years will be a good predictor of what the returns

will be in the next five, 10 years, when a lot of the mortality that should have happened in the

past now happens in the future. I mean, then, and Sachs, correct me if I’m wrong here, but

I’m also starting to see really gnarly term sheets, people foreclosing on businesses,

people offering, like literally had a term sheet come in, like, we’re going to forgive the last

note and take this business over for $1. And everybody gets wiped out. The amount of bad

feelings that you have to go through, even if there is a core business to freebirds point

earlier, hey, they raised 100 million, but there’s a $50 million business in here that people would

love to invest in, who wants to go through the hand wringing the negotiation, the toxicity

of a recap. It’s an extremely hard process to go through. Are you going through any recaps right

now, Sachs? And what is the, what is the approach of the firm in terms of dealing with these kinds

of situations? Do you even want to start that discussion up? Or is it too painful?


I don’t think for most of our companies, we’re at the recap or restructuring stage. I mean,

I’m talking about the ones that aren’t going well, people still have a fair amount of cash

in the bank. And we’ve been beating the drums for literally a year.

What about new opportunities and new opportunity comes to you, it’s one of these overhang companies

that wants to restructure, would you even engage that? Or is it just too hard?

I looked at seven at the end of last year, and I tried to reprice three of them.

And every single one was able to get a convert done away from us.

Yeah, so I mean, yeah,

we tried to find a market clearing price for this equity, but nobody wants it to David’s point,

because there’s too much money on the sideline. And people are willing to give them a lifeline

that doesn’t force them to come to hard terms with what the reality of the moment is.

Yeah, I agree with that. We’re not quite there yet. And I think the reason why that that tweet

you posted, got some traction is it’s saying, listen, the crunch is going to happen second

half of 2023 and 2024. That’s where you’re going to see the down rounds. That’s where you’re going

to see the restructuring, the recaps, and all the rest of it. And look, I’m sure like every VC firm

is going to be a player in that. But yeah, it’s going to be a lot of miserable work.

This is when you’re going to see people’s true colors when when when you have to recap a company.

And yeah, that’s when you can really start to see how crappy it was in 2003 to be here.

Remember 2003?


Oh my god.

Yeah, there was lucky to raise 500k on a $3 million.

Oh my god, like 2004. Like what a brutal year.

Yeah, there’s gonna be a lot of that. I think the next 18 months,

or let’s say the next two years, there’s gonna be pretty rough for a lot of companies.

And it’s just that they didn’t cut enough. I mean, we’ve been beating on the drums for a year

for companies to length of their runway. And some did to some extent, but many didn’t do enough,

and they’re going to get caught in this crunch. Can we just go to that chart that Brad put out?

I think that what a lot of founders don’t quite understand still, is that things are just never

going back to 2021. I think a lot of founders listening to the top of the show, where we’re

talking about inflation is under control, they see the market rally, Facebook’s up 25%, they may be

thinking, okay, we just have to weather the storm for six months or a year, and then everything’s

back to normal. And I think what’s important to understand is that the market did bottom out about

a month ago, and is up pretty nicely. If you see here, this is the SAS index, it’s the median

enterprise value divided by next 12 months revenue. And it was really beaten down about

at the end of the year, at the end of last year, coming into this year. Yeah, it was like,

it was like four to five X multiples of next 12 months revenue for SAS companies.

That’s all the way up to 6.1 now. So, you’re talking about 20% to 50% rally for a lot of

companies, which is huge. We’re still below the long-term median, which is just under eight.

Okay. But what people need to understand is that even if we revert all the way to the mean

of eight, which I think at some point we will, that’s still well below the bubble of 21,

where they got to 16. So, even if things continue to inflate, valuations will still

never quite be where they were in 2021. And if you think it’s getting back to 12,

or 16, it’s not happening. For high growth companies, for high growth companies,

in 2021, you were in the public markets, you were seeing multiples of 30 to 35 times.

Now those companies are maybe at eight to 10, or 12.

I think the reliable way that we can look at this for the future is that we’re never going to see

these kinds of multiples again, unless rates are zero, and all kinds of tourist capital

need to find a home to escape 0% returns in every other asset class. But if even the

safest asset class now will give you three and a half, 4%, this is probably the new normal for

quite a long time. And we’re going to be back in that early 2000s kind of mindset, which takes

a lot of hard work to build value around.

We talked about the sort of whipsaw economy. And there’s a lot of mixed inflation data.

I think founders need to understand that there’s a bifurcation, what’s happening

in the tech ecosystem is not necessarily what’s happening in the overall economy.

The tech ecosystem is clearly going through a reset and a recession. Job cuts are now the rule,

valuations are much lower. Whereas in the overall economy, we saw a job support

today of over 500,000 new jobs. So the fact of the matter is that even if the overall economy

avoids a recession, that doesn’t mean that things are just going to bounce back.

Tech is a depression slash recession. Best case is recession.

Tech is a boom bust cycle. And we had a phenomenal 10 years of boom. Now we’re in a bust.

And so I would just like tell founders, you know, look, it’s good if we have a soft landing

in the economy, I wouldn’t assume that that’s going to happen. I still think there’s a really

good chance of recession later this year. But it almost doesn’t matter for you. What matters

is your business and the capital availability for startups, which is fundamentally different

and will remain different than it was in 2021. Freiburg, you were talking in the chat about

Donnie enterprises and Hindenburg doing the short research and publishing it.

Stock has just absolutely gotten clobbered. They were trading at gosh, 4100 was the

52 week high, and this thing has just cratered in the last five days.

I mean, I think explain what’s going on here.

Well, I mean, the story that the conversation I thought it would be interesting for us to have

is the role that these short seller research analysts play in driving efficient markets by

identifying perhaps things that the market broadly is missing. Particularly, given that a few weeks

ago, we were all kind of talking about the FTX debacle, and how no one was doing their diligence

and no one was digging in and no one was kind of revealing publicly what was going on inside of

that business that ultimately caused significant losses. You know, the claims made by Hindenburg

is that this company Adani, which is founded and run by a guy named Gautam Adani. He started the

company like I think 3035 years ago, and he’s built this thing into this, you know, the sprawling

empire, as people would say, where he’s owns ports, he owns mining companies, he owns energy

transmission businesses, he’s got a whole green energy business. And he’s taken a bunch of these

companies, and he’s floated them publicly. So they’re all kind of publicly traded. There’s some

degree of interrelatedness between all these businesses. It reminds me a lot of I don’t know,

if any of you guys remember, I keep a Tista out of Brazil. You guys remember this guy, where, you

know, he kind of built the sprawling empire, very kind of broadly diversified industrial conglomerate

with, you know, lots of different kind of segments and used a lot of leverage, a lot of debt to grow

the business, and a lot of interrelated inter party transactions. And ultimately, the whole

thing kind of came crashing down. And that this Adani business, it’s super technical and super

complicated, all the kind of accounting shenanigans that Hindenburg is claiming has been going on,

and capital markets shenanigans that they’re claiming have been going on with this business,

but their kind of report, which I think is like 400 pages long, has caused the responses for pages,

their responses long to get the markets shrugged off the response that he put out, didn’t really

care. And they kept kept selling the stocks off. So it’s like seven or eight publicly traded

companies, all of which are just getting decimated. Look, I don’t have any strong opinion on this

business. I you know, I kind of skimmed through the thing. But you know, it really made me question

like how such a big call it accounting or capital markets fraud if it really is that can go on,

and how much of a role these sorts of players play in the market, whether you guys think that

this is a good thing in the market to have these short seller reporters out there, you know, doing

this analysis publishing it, Jason, by the way, you called out Nick Nicola, Nicola, the electric

car company, as you know, Hindenburg put out that Nicola report, not tanked, right, they claimed it

was all fraud, etc. And then the thing got destroyed was Trevor Milton got convicted.

Right. And so I mean, I guess, do you guys think that these guys have a have a positive role net

net in the market, in kind of identifying and calling out this stuff, because we all have

friends that are on the wrong side of short sellers, and they complain about it. And it can

be really difficult to grow and build a business when people Ilan had these guys literally claiming

he was running a fraud for years and years. And it was an intense amount of scrutiny. Because when

the trap when the stock was less trafficked in when we were in it in 2015, and 16 and 17. That

was the constant reframe and Ilan was constantly batting back folks like this, who would make

claims. And the way that these guys are allowed to operate is because they use the First Amendment

and say we have the right to say this stuff. I think that shorting falls into two buckets. One

is you use it as a hedging instrument. So when we talk about spread trades, like long Google,

short Facebook, or long Facebook, short Google, you should be allowed to short I think that that’s

a very reasonable thing to do. I think the the question is, if you were on the inside of a

company and you say XYZ is happening, for example, Trevor Milton, and it causes the stock to go up,

and it turns out to be fraudulent, he’s held accountable. The question is, should there be

the same responsibility for people on the outside, who if they have enough distribution, can say the

exact opposite of XYZ is happening. In this case, XYZ is not happening, which then causes the stock

to go down. Because what the business model of these short sellers is, write a document,

it looks very polished and very credible, put on some positions, then put the document out.

If the stock goes down, you close it out. In my opinion, I think that short sellers are really

important part of a well functioning market or the ability to short. But what I would like to do is

take an extra step, which is, you should hold these folks accountable the same way you’d hold

an insider accountable, which is almost to the effect of like, when you put out this screed,

if you make money from it, it should sit in escrow, and the SEC should actually adjudicate

whether it’s true or not. So in the case of Hindenburg and Nikola, they shorted the stock,

they put out a report, it turned out they were right, all that money is completely well earned.

Now, what if this Adani thing turns out to be not true, or true, nobody knows right now, except 50%

of the market cap has already been wiped out. So that’s where things I think are, are in a bit of

a gray area. The last thing I’ll say is that if you look at in the developing world, there’s a

very gray line between some of the leading entrepreneurs in these governments, because

these entrepreneurs are doing the work of some of these governments, whether it’s I keep a Tista

in Brazil in one moment, right around natural resources, or Adani and Ambani in India, or a lot

of the people that have made a lot of money in China, or the people that are making money and

in developing markets, Turkey, Russia, etc. The government uses very talented entrepreneurs to go

and concentrate capital to develop infrastructure progress. We did that in America in the 1800s as

well. So that’s where I think, you know, you have to also balance it because his response was

basically like this is an attack on India. And in a way, you can see where he’s coming from,

right? Because he’s building ports and roads and bridges. And he’s like, without this stuff,

how is India supposed to even exist in the 21st century? That’s a reasonable claim. So I agree

with you, Friedberg. I don’t know whether the report is right or not. But this extra step of

actually having the SEC actually tell us what the answer is, I think would be a very important

improvement to how this kind of stuff works. The other improvement that the SEC has been

proposing in rule 13 F dash two, is that people would need to disclose their short positions,

this proposed rule would require institutional investment managers, I’m reading from the SEC

website managers exercising investment discretion over short positions, meaning specific,

specified thresholds to report on the proposed form SHO information related to end of month

short positions and certain data. That is a no brainer, that should absolutely pass.

aggregate the resulting data by security, thereby maintaining thereby maintaining

confidentially of the reporting managers. Yeah. And publicly disseminating the data

to all investors, this new data would supplement the short sell data.

I think this relates to overlanding of stock, right? I mean, this is less about like, who’s

doing what, and it’s much more about, are we kind of creating critical fail points in the system

by seeing over leverage and over lending in certain

well, there should also be some rules about the spreading of fear, uncertainty and doubt that

that happened with Tesla q, I mean, paradoxically, you know, thousands of

know, but people that but that’s an anonymous accounts, you know, that’s an example of people

essentially lying in public, yes, try to get the stock to move. And Tesla’s not a fraud. That’s a

real company. I mean, there was a car of the year while this was going on. But there was a real

delivery to that company, right to employees that got spooked to partners that may have gotten

the pressure, you know, we saw this the pressure on Elon in those periods of time. And he was,

he was like on the knife’s edge, where there was the potential where the company may not have been

able to finance its cash flow needs because of those Tesla q guys. And so it’s not to say that

the Tesla q guys can’t say it. But they should be forced at some level to prove it. If you can

create crazy stuff. I posted a link by the way, for anybody that’s interested in reading this.

There’s a person called Carson block who’s being investigated. Yes, because he may have pushed the

boundaries of how short sellers do this. It’s a really fascinating read in the Atlantic for

anybody who wants to read it. But this is sort of where the short selling thing can a little bit go

awry. And it’s the title of this is the man who moves markets. And it’s it’s quite a quite a

really interesting read if you’re interested in in how all of this stuff works. All right,

everybody, that’s the all in podcast for February, third and fourth for Saks, Friedberg and Chamath.

I’m Jake out of the world’s greatest moderator. We’ll see you next week.

Oh man, we should all just get a room and just have one big huge orgy because they’re

all just useless. It’s like this like sexual tension that they just need to release somehow.

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