Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more
Full transcript · Read the full conversation in order, with its original context.
§01Segment 1
When are you coming to Miami?
Are you
there already?
I'm here. Yeah. I just got here.
Oh, cool.
Come tomorrow. Have a good weekend.
I mean, you get right on someone else's plane. Mine's been repossessed.
Wow.
You can give me a ride.
I'll have mine for at least another couple of weeks.
I love I love my commercial. You know what I love my commercial? every fan of all in the Michigan store stops me and takes a selfie. I cannot tell you the love in Miami. I sat down to have a meal outside.
Where you by yourself or you're a -- By myself. It's
11:30. I it's like, hey. Everything's closed. There was this one little place that's open. I kid you not.
I sit down. 2 guys come over. We love the pod. And I'm I'm trying to eat my meal, and they're asking me questions. And they wanna 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 who have seen this video. and now it's youth too. So the seven people that they were so over the moon.
We should never have cut that.
Well, we could play it now.
It was good.
Thank you.
It was incredible. I say we We we just throw to it right now. Is that a good plan, maybe?
And here we go.
And 3, 2, 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 entrance?
my god. You're on, like, NerdWallet. That's, like, nerd Adderall.
Take it easy, dungeon master. I just guy hasn't been so
happy since he rolled a
30 on the 30 sided die. Jesus. Oh my god. I've got a plus step in
broad support.
--
from? What is oh, from Dungeons. I've never played. Oh, really? You were playing League of Legends?
Okay.
Oh, great. I'm gonna just apologize and advance the audience.
Okay. Here we go. No interruptions, please. Thank you. In the voice of J Cal.
Hold on.
Is there a frog in your throat? What's going on there? Oh god.
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. We'll always come to your rescue when you're in a bind.
He calls himself Mister 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 mob. Hey pal. It's the 17th most important guy from PayPal.
He's back with the same political speaking tracks, the one and only Mister David Sachs. David, welcome to the show. Thank you.
Thank you. I think we need to work at some of your rhymes. But
-- Yeah. We might need to tighten that up a workshop. But yeah. Yeah. Keep going.
Maybe it gets better.
He contradicts himself twice a week, but we're still enraptured because his mixed 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 as a bit below his line. He Silicon Valley's most renowned dictator, our friend, the verbal master Bader, Jamal Polly Hot Potato. Chamath, welcome to the show.
Great to have you here.
Wow. That was brutal.
God. Oh, I'm not done. We're an increasingly notorious whack pack litigated by David Sachs, m c'd Biden investor hack, and soon to be canceled because of the performance of Timoth'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.
New MC. Thank you, everyone. I'm gonna have to man, I don't wanna read the YouTube comments on this one. Alright. We'll scrap it.
No. No. No. No. No.
No. No. You can't spike this. Sex, commentary?
Well, I mean, it it felt a little bit squirt short to me.
Yeah.
I thought mine was fine, but I think these other guys are a little bit shell shocked right now.
I went a little hard. 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 wanna do something funnier for my birthday.
I'll be back next week with some actually funny intro material. to the audience.
The let your winner slide. Brainman
David Sanders.
We open source it to the fans and make discoveries.
Alright. Alright. Listen. Stocks and crypto have plummeted Tiger Coinbase Shopify, employee RSUs, Mem Stocks. It's all gone everybody.
The world's over. So where do we start? You guys wanna start with crypto? stocks, where do we even begin?
Should we talk about what happened when rates went to 0, and how financial assets inflated. And I think we talked about this during the pandemic right when the pandemic was starting. Timat, 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 ride at, like, Magic Mounder 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 there were it would 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 specs and transactions. It was an incredible rush of capital. And so when, you know, the central bank made interest rates 0 and then banks could lend out money at close to 0 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 gonna make money. And, you know, suddenly, the frigging vacuum came out, which was like, let's take all that money back. And so when interest rates got hiked, it was like all that money's coming back out of the system, and it was like this whooshing sound.
Like, the airlock got opened, and all the cash came back out. And as a result, the bubble is just all deflated, and it happened so quickly that it's what 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 still happened. People are still trying to unwind the things where they're, you know, in huge positions.
But You know, it 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 the 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 q4oflastyear, 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 it, 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 q 4 of last year, there was a
0.92
correlation between that and the S and P 500 going up. What does that mean? So if you look at a negative 1 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 0 correlation, that means it's just random. Whether whether one thing goes up and down has no influence on the other.
But a point 92 percent 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
$1,000,000,000,000.
We have destroyed collectively as a society.
35 $1,000,000,000,000
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 5 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, heavy 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, Friedberg, it's literally everything that's getting smoked. There is not a place that you can effectively hide that has been safe. Crypto smoked.
The credit markets totally frozen. The equity markets, Nasdaq is in a bear market. The S and 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 cost.
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 gonna 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, $40,000,000,000 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 mark in 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 gonna 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. Saks, what's your take on the list?
Yeah. I mean, look. We're in a stock market crash that, I think, over the last week, sort of became 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 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 crashed, they got no cash stuff 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 hodel or buy the dip or -- Mhmm.
--
you know, they had the laser eyes going, I don't see any of that right now. Like, you know -- Pure capitulation. Fear. Exact yeah. Exactly.
So this is just a a route across the board. I agree. It's every asset class. I think home prices that's coming, Jason, because like you said, mortgages are going up.
Inventory is going up. So that's a leading indicator.
Yeah. People can't afford the same mortgage they did before because rates are going up very fast. So, you know, home sellers are gonna have to drop prices. And until they're willing to do that, The inventories go up.
That's a little dance that happens in real estate is the sellers don't want to accept reality, and they don't have to sell because they're living in -- Right. -- as opposed to their crypto holdings, which they're not living in and they're not getting value from.
§02Segment 2
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 the sort of the the air has come out of the balloon, but consumer has generally been holding up pretty well. Obviously, we had unemployment, you know, 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 that are gonna 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 returning 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.
So in other words -- Because
of inflation when you
said -- -- 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 2.
Well, no. You're giving them a 6% raise.
Oh, I'm sorry.
Yeah. Yeah. Or or like like a 5.6% raise or something like that against 8% inflation. And net net, they're down 0.6%. Got it.
They're down to. Not up. Yeah.
In purchasing power. Exactly. In spending power. Sachs's point is, like, I mean, the number was 60,000,000,000 of new consumer credit last month, which is, like, something we haven't seen in a very long time as consumer 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.
Right. This is this is the question as what are the next shoes to drop? So so you think about, like, what's happened in the market so so far. It's mainly been multiple multiple compression. Like, earning season was pretty good.
I mean, it was hit
on this. -- for some folks. Yeah.
For some folks. So the the socks that got hammered were generally the COVID stock. It was the Pelotonics, the Netflix -- Peloton.
--
Zoom. You know, you could like Coinbase and Robinhood with the day traders because that was people are laying off that stuff. So but to basically, the COVID stocks have been hammered, but the b to b stocks actually had really good results. And yet, you know, the SaaS index is down like, 80%. You know, the average SaaS multiple, it was over 15 times.
You know, last year, in the on the public comps, and now it's down to 5.6. So the SaaS companies have been hammered despite having great earnings. So When we don't know how they're b to b, they don't they they're a little bit insulated from the consumer, but what we don't know is what happens over the next 6 months? If we go into a deeper session, then do even the b to b companies start being impacted?
That would look like sex, 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 or 25% of their employees which are starting to see that contagion, they might also pull out their SaaS bill and say, here's 12 SaaS products we're playing for. Let's consolidate down to 8.
Right. I've got a SAS startup that sells, you know, 6 and 7 figure deals into enterprises. And they closed their deal with Uber the day before Dara's memo came out saying we gotta be really focused on cost cutting. What Wall Street wants now is free cash flow. Yep.
We gotta really sharpen our pencils. they were like, shoot. Good thing we got this across the finish line. Yeah. If it had been, like, 2 days later, it just would have been a much tougher process.
So first, you're right that companies that get impacted are the ones with exposure consumer, but then those companies start sharpening their pencils at buying less. So the question is how much are earnings now gonna be impacted in the b to b space and what sort of recession do we have. I think, like, recession now is inevitable. You to Tamast's point, you can't have 14% of global wealth wiped out practically overnight and not have that translate into a big recession.
Monotary of a is gonna slow dramatically. The money circulating around is you can feel the brakes happening. You can feel the the the tightening testing. -- way poorer
than they were 6 months ago.
Yeah. 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 $90,000,000,000 a month But to run off all the money that they printed will still take 3 years. Right? So we have to take about $3,000,000,000,000 of excess capital.
out of the economy. And so if you add that 3,000,000,000,000 as well, that's just going to disappear. To the 14,000,000,000,000,000, we've already, you know, or the 14% the 35,000,000,000,000. Sorry. You know, you're you're starting to touch numbers that are, you know, as bad as the GFC in terms of global wealth construction.
And,
again -- You're referring to the great financial crisis when you say GFC. 2008 --
Unlike the GFC, this Walt 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 Friedberg.
Yeah. I just wanna 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 0 and flooded the market with money. So everyone kinda gets the money, and then they're like, hey. I'm worth a lot more.
And then all of a sudden, the free money's taken back, and you're like, oh my gosh. I'm worthless. I've been destroyed. It's, you know, it's 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 wanna 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 wanna finish this one because I think it's really important. And at the end of the day, If that capital didn't really go into 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 gonna 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 second quarter. We're in a recession.
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 2 years. And people took that money and they went and bought new cars or they bought a crypto or they bought
one thing
or another NFT 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 wanna keep living this lifestyle. I wanna keep spending this money. I wanna I I had all this stuff taken away from me.
shoot. What am I gonna do? And then they take on credit. And the credit markets haven't tightened enough yet on the consumer side that we may find our 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 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 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 Okay? So for example, you were not allowed, for example, to have a qualifying mortgage be over a
$1,000,000.
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 depth per 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 works, but, like, all
I'm saying is the market allows you to to be that levered without actually getting foreclosed on or, you know, you're allowed to get the bar weights 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 that gets people down.
And real estate is a very unique category because you have iBuyers 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
Too much.
I don't think we have, like, a a a a an issue in real estate, to be completely honest with you. I 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 Saks 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 gonna start to see or 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 Airbnb's, 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's that 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, of one big escape velocity moment for me in my career in 2016. So I believe in these products, I believe that they were. But the reason I'm bringing this up is that the what it said is I'll just read this to you. The preferred equity 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. We wrote to your point that's pretty mispriced.
I I think one of the thing we're that's a silver lining here is we did build up 11,000,000 job openings. Labor participation is really low right now even post pandemic. people if you ask this question, I think, Shamalff, if, like, how are people gonna get out of to Friedberg point, the lifestyle issue? Like, they wanna lose sight. It's a pretty easy solution.
Go back to work. Get a second job. Start working again. We we peaked, you know, in the nineties 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
§03Segment 3
is -- -- precisely is that it's bottom. Meaning, like, if you look now the last 3 or 4 -- 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.
with 3% unemployment, we're kind of on a floor. You can't possibly have less unemployment.
Unemployment's going up. I think unemployment has peaked unemployment's going up, and that's exactly what Jamal said. Look. All of us in our board meetings last several months released since the beginning of the year have been warning founders that the environment is changing don't assume that we're always gonna have a boom and the Calacanis always gonna be there.
However Nobody's taking the advice.
No. Well, because there's been resistance because people don't wanna believe it. And addition, it's always like, well, how do you know it's not gonna bounce back? Right? And now I think after what's happened really since April and really in the last week or
2.
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 gonna be or they don't, but everyone understands things have changed. So every company that's that's acting sensibly is freezing their hiring, putting a break on the growth, you know, slowing down their plans, and that will absolutely translate into, you know, 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. Right? 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've stopped all of that. You know, these last 5 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?
What's nominal? Yeah.
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 5 or 6 months, and the and the burn hasn't dramatically changed, I think that they are they did been a little derelict in their duty. It's a it's a 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 Saks said, you have to do it as a director. If you're worth the salt at all, you have to do it. Right.
And it's been quite the opposite. We saw with fast.com co was the opposite. Right? People were just not even considering it.
As your survival risk is on the table, you really have to act differently. It's kinda like the difference between
a
a poker tournament and a cash game.
Mhmm. You
know, like, players behave very differently in a poke a poker tournament, the players are much more conservative. Why? 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 base basically being in a cash game where people can just rebuy. Maybe they won't you know, 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 just 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 just be more conservative. You can't let yourself bust out of the tournament.
By the way, I'll say 2 things on that. 1, what you're describing is exactly the condition that is now led to the fact that roughly 1 third of public biotech stocks are trading below cash. So they're they're entity yeah. So they're entity value. The biotech industry as a whole, Syn Bio in particular, but, really, biotech About a a third of companies now trade below their cash balance.
I'll send you guys some some likes 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 and D cycle to prove that they're 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 gonna be any capital left, they're still burning whatever it is.
20, 30, 40, 80,
a $100,000,000 a quarter. They've only got a few $100,000,000 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 the clinical trials is much lower.
Therefore, the 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 a investment bank doing Tech M and A. and that was right after the dotcom implosion.
Most of what I worked on was public companies that were selling for less than cash. Today, we, you know, we don't talk about that over the last 20 years because it just never seems 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 and that is what happened in the com. Yes.
We sold we sold a bunch of companies. I was on the the banking side, representing the sellers, the the private the public companies because There 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 gotta get
--
Shut it down.
--
take 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 a 100,000,000 of cash. They sold it for 60,000,000.
Private equity firm comes in, and they're like, boom boom boom. Everyone's fired, the sink shut down, and they liquidated it. And they took you know, made made a $20,000,000 spread on that thing. I will say on the on the flip side 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 a more venture money raised than in any time in history, 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
$230,000,000,000
capital dry powder hangover. So there's a quarter there's a quarter $1,000,000,000,000 of cash sitting in venture coffers that they can call and write and check 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 gonna happen in private markets because you're gonna have the haves and the have nots. The haves are gonna have a lot of fricking 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 have are gonna have a lot of capital available to them
-- With one caveat. With one caveat. -- caveat -- Which is -- -- evaluation.
So what do you guys think will happen? Right? There's 2 caveats. 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 gonna need to be discipline, and they're gonna you're right. The the that money will go to the winners. Other thing to remember is during the great financial crisis, for about a year, maybe even 2, many venture firms did not want to call capital from LPs whose portfolios were crushed. NLP 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 wanna clear our already you know, demolished portfolios to then fund your venture fund. So those are commitments. It's not cash in the bank. And those commitments only come from Harvard Yale, Calipers, Ford Foundation, whoever, more or less on Credit Kettering. If The GPs hit 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 it to trim up. 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 in canceled and tore up the LPA.
Mhmm.
Now why would they do that? Why would you tear up commitments for a quarter $1,000,000,000,000? 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 and the i and all of a sudden say, you know what?
I'm gonna 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 entrants 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 they have the psychological baggage of a horrible portfolio or horrible marks. So, for example, there was a tweet, and I'll 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 $1,000,000,000 value valuation,
$1,000,000,000
valuation. A Cloud unicorn today would need to plan on doing
178,000,000
dollars in revenue. In the next 12 months, if you apply the current median cloud software multiple 5.6 times forward revenue. Now let's put it in a different way. If you're a company that's worth
10,000,000,000,
That means that you have to come up with
$1,780,000,000
of annual recurring revenue for the market to give you a median multiple. How many SaaS companies in SaaS would SaaS you'll know this? How many SaaS companies even get close to 2,000,000,000 of ARR? probably a lot less than the number of SaaS companies that are worth 10,000,000,000 on paper. So, you know, by the way, we should also about who is the bank 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 in Freebrook, 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 investor today who've deployed way too quickly. And if they wanna have any reputation over the next 10 years, we'll have to rehabilitate their portfolio.
and try to return money.
Let me just say one thing. I saw an analysis from one of the biggest venture firms in the valley over a 14 fund cycles. So they 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 a declining business. And in that support, they lost half their money.
The other 60%, they make, like, 3 x. Right? So it kind of averages out that they make kind of, whatever it is, 2, 2a 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 support of capital. And I know it can get there, but that belief ultimately costs the LPs and costs the fun more, and it's why we saw such negative return cycles happen after the dot 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 $1,000,000,000. So this is over, you know, 30 years to say. What
do you mean?
How many how many funds do you think even existed over a
$1,000,000,000
since 1994? to today? How many funds?
Like, how many funds have been raised that are over
-- Individual funds are the brand names?
Yeah. Since 1994, how many do you think there are?
§04Segment 4
40. 1276.
Oh, you're including private equity and stuff. Oh, I
was yeah. That was Venture. Yeah. Yeah. Okay.
Sorry.
Okay. So now of those
1276,
Private Equity Funds, or growth funds, or crossover funds, or audit 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. It's not hard. 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 $1,000,000,000, Very few people know what they're doing. Very few. It's hard. It's hard.
The -- Yeah.
So -- -- the
multiples compress as you get to bigger deals, And and you can't say just where the value is. --
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 $450,000,000? Why would they only raise
$500,000,000?
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, incremental clarity, and for making our LPs happy. Every variable was optimized at around 550. Okay. And then you see 5,000,000,000 dollars, 6,000,000,000, $10,000,000,000 funds.
funding -- Makes sense.
-- 5,000,000,000, 6,000,000,000, 10,000,000,000
dollars, $20,000,000,000, $20,000,000,000, $20,000,000,000 private companies. And I think what we have to do is put 22 together and realize that it's gonna be 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 gonna be able to provide fundamentally sound advice to the CEO. They're going to optimize for making that portfolio, turn to getting 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 reflected in that sense. And so, you know, gonna go through a few years of sorting the chaos,
down rounds, liquidation preferences nonsense. Saks will be.
Yeah. So so look. I 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 $500,000,000 to $600,000,000 range where you really only need 1 winner per fund to basically return the fund. But let me let me go back to this point about
Can you explain the math the math of that. You typically own 15, 20 percent of a winner. So just -- Yeah. I mean, it
might even last by the time best to reach this Brexit. Yep. Right. Exactly. So, you know, if you own 10 percent of 1 Decacorn, that's a $1,000,000,000.
And if it's a $500,000,000 fund, you've doubled your fund. But if it's a $1,000,000,000 or
$2,000,000,000
fund, you haven't even paid back the fund yet. So that's I mean, this is
How hard is it to hit a decacorn?
Hard. It's hard. Hard. It's hard. It really hard.
Real hard. I hit
2. I hit 2.
Yeah. I've had 2 in a decade. Yeah.
I've had to do an exact same time period tomorrow.
Yeah. to this point about dry powder, so I think it's actually important. So this would be a little bit more of a of a bright spot. So in a weird way. So there's a, I think, stunning article in TechCrunch just 2 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 1st weeks of May have been even worse. So who knows what they're at now? But they had a separate venture vehicle. And their their history of their venture vehicles is that they raised
3.75
for a fund in 2020, then
6.65000000000
in 2021 And then just this year, they closed a $12,700,000,000 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 $12,700,000,000 fund that they just raised is already nearly depleted. It's something like 2 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, d 1, c 2, they are completely risk off. I don't think they were ever as aggressive as Tigers, 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 drawn up.
-- so fast, Max. 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 your sweet spot, I typically do see it into series a. You do a and to b.
They were coming in and marking up our and 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.
Mhmm.
The only problem was and by the way, they did a if you could I think they did a good job sort of prioritizing that solution. I mean, if you send them mirrored numbers in a certain format and do a meeting, they were like a term sheet generator. I mean, they the odd term sheet.
What's that your original idea, Shamont? You had saw you had funding as a service at one point?
I did this thing called Capital as a service where you would send us you would send us But you would send us your data, or we would plug in to whatever you use, say, with 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, 250 k checks. It was called capital as a service. It's still a phenomenally good idea, but you would wanna cure that business for probably 10 years, I would wanted to do that on
10
years on my own money. You know,
10, 15, 20, 30, 50,000,000
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.
To ask the question, sort of, what what was wrong with it, I think that the 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
hedge fund guys. Right? 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 arb 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 a great approach for founders who want late stage capital. If the valuations have been correct, I think it would've worked.
So -- 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 we did that last private round, you're underwater big time in those names where I I don't know if -- Right.
They were 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 economies. And then people start making investment decisions that don't work. And then you have this massive
How long have we been doing this, Chamath? How long have we been overfeeding the market? It it obviously happened under Biden and Trump. Did it go back to Obama or no?
Yeah. It started in 2000 and
8, 9, with almost of the fallout. Yeah.
Trouble Passet 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 markets everybody behaves, like, there's a downside price at which the Fed is guaranteed to act, and that rule 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, 2000 tens, 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 have this, again, very reflective loop where you know, anointed experts, you know you know, did talk pieces and thought pieces and books, and then pseudo intellectuals would pair at 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 you're trying to take the oxy away, and that's a and people are gonna go through
--
With trauma. -- really, really, really bad withdrawal. Yeah.
If you have a quarter $1,000,000,000,000 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 allocate it 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 rise of the unicorn, which is what we saw over the past, call it, you know, 8 7, 8 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 it does not happen in this moment.
Well, I so look. If we look ahead 2 or 3 year I
had a -- Alright. Can I just tell you why? Let's take let's take the perfect company, which is Stripe. Okay. So now
$50,000,000,000
of payroll.
--
to a mega cap. Right? I mean
-- $50,000,000,000
of horrible VCs who have made horrible decisions heretofore Knocking on the Colos' door saying, can you please take my $50,000,000,000 because I'm trying to be money good. Why do the Colosons wanna take on this headache? Why do they wanna 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 varied to of 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 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 that this is the moment where a really horrible VC who's had a terrible track record who've just blunder through $5,000,000,000 is going to be able to put in a
$1,000,000,000
to strike.
What do you think, Saks?
When you speak to kind of the environment that that I think is gonna happen over the next few years and than what founders will succeed. I think you're right, Friedberg, that the VCs are gonna become much more discriminating. And there's gonna 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. Strong with high growth and moderate burn will get funded through this downturn, starts with moderate growth and high burn will not get funded.
So what's gonna happen is that the sort of mediocre ones are gonna we're gonna get to a very polarized outcome very quickly where you know, 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 kinda 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.
§05Segment 5
1 is, obviously, if they're just not growing, they're not gonna be able to to raise. And good growth really starts in the early stages in terms of doubling year over year. 2nd, 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%.
And third, CAC payback. People wanna know that you can pay back your customer acquisition costs in a year or less. And then like I mentioned, the burn, you know, a burn multiple of One is really ideal where you're burning not more than your your net new ARR, but certainly not more than
2.
I think burn multiples over 2 where you're spending you're burning $2 to add $1 of growth, that's where I think, you know, companies start becoming unfundable. So I think founders are gonna just have to pay a lot more attention to these disqualifiers. Yep. 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 gonna happen.
The crossover investors are washed out the system. They're gone. I mean, Tiger's already deployed all this capital. I don't know when they're gonna be back. So the so called tourist money, the the basically, the big investors who weren't in the system a few years ago, They're basically gonna leave the system.
However, there will be the big traditional venture funds will have large funds, but they're gonna deploy them much more slowly. These 1 year pace of deployments they're gonna stop. Back to
3.
They'll be back to 3. Exactly. So just think about that. Even if you had the same amount of money being raised and deployed, but it was happening over 3 years instead of
1,
that would be a 2 thirds reduction in the availability of capital in the system.
So which was that gonna go to? You you're not putting that -- -- to
the best companies that I'm talking about.
You're not gonna go to somebody who's gonna blow through it in 9 months who's playing every hand. Like, you cannot play that way anymore.
Exactly. So what we're telling our our our founders is number 1, you gotta lengthen your runway. Like, the days of raising a new round every 12 months are over, you gotta plan on not raising for 2 to 3 years if you can help it. And then you really have to sharpen your pencil and work on these business fundamentals. And you know, 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. And that fixing a business normally takes 2 to 3 years. So, you know, if you got less than 2 years or even two and a half years of burn and you have one of those disqualifiers I talked about, you better, like, cut your burn quickly 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 I I 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 Gully is called 5 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 girly, well, I guess, who's gonna have the last laugh? I think
-- Precisely, I I texted girly last night.
He's had the last laugh at
30. I literally dm'd him last night. I listened. The water great right now. I am doing deals back at 6 to $12,000,000 in the seed space with, you know, 200 k in revenue and real founders and discipline.
Start investing again. It's great now because the deals are now taking I I don't know if you're experiencing some of the stocks, but the deals went from taking 2, 3 days Now they're back up to 4 to 6 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 were getting to talk to 3 or 4 customers.
I had Friedberg who said you can't be in this deal if you wanna talk to my customers. And that wasn't one founder. multiple founders said, if you wanna talk to our customers, then you don't get an allocation. And I I said, okay.
The thing to keep in mind I went to the deal,
but that was how functional this West 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 70%
on valuation. 30 90%. do you solve it?
I have
a point of view on that actually because so so look. I he he there's a major difference, I think, between evaluation multiple collapse in the public markets versus the private market. It's gone down. Look, the SaaS valuation multiples have gone down 70, 80%. There's no disputing that.
If I write down Look, it used to be the the public markets were trading at 15 times ARR for the median SaaS company announced 5.6. So, yeah, we're talking about 2 thirds,
70, 80%
reductions. If it happened in the public stocks, it deserves to happen in the private stocks too. absolutely right about that and a lot of people aren't recognizing that fact. However, here's the difference. The median SaaS company is growing maybe 15 to 20%.
When you've lost 80 percent of your value and you're only growing 15 to 20%, it's gonna take you a decade to grow back into your old valuation. However, pry good private companies, not all of them, but the great ones. They're still growing three x year over year. So if you're able to grow three x year over year and you do it 2 years in a row, You're 9 x where you were even if the a r r multiple claps 80%, you can still get an up round. It's not gonna be the a 9 x up round.
It might be a a 2 x up round.
I know how that's mathematically true, but listen. If you're a
$100,000,000
ARR business, Let's just say you were able to raise at 10 or
11,000,000,000.
Yes. You're mathematically bright that you know, a 100,000,000 times 9 is 900,000,000. But I think it's important to first say how many app software companies are there that generate a $1,000,000,000 of ARR. Do you remember when Salesforce first passed a $1,000,000,000 of ARR? We thought, my gosh.
And then they said, we're gonna get you mentally. So the this is exceptionally rare air, 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 no. I'm not saying that to HUSAC. 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 $1,000,000,000 of ARR? especially in a moment where people are cutting back on spend. How does that happen? So
Yeah. Look. I agree getting from a
100
to a 1,000,000,000 is really hard.
You know, -- $10,000,000,000 company supposed to do because in this map, they have to get to $2,000,000,000 of ARR to be worth
10,000,000,000.
I do think lot
of -- How do they do that?
How does the random SaaS company that you and I have never heard of? How do they generate 2,000,000,000 of ARR? I can tell you the handful of companies that generate 2,000,000,000 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 know, the move to 3 d. This year, if they crush, they'll do
1,300,000,000. Incredible business. It's an Yeah.
It just it just went down 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, Opendoor has $2,300,000,000 in cash and a $3,700,000,000 market cap. Enter value 1.4. And they I think they also have a couple of 1,000,000,000 in real estate.
Coinbase 6,000,000,000 cash, $12,000,000,000 market cap. So I 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 -- Yes.
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 0.
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 b election, which is effectively you buying the stock, starting the clock on long term capital gains, etcetera, etcetera. Then you have stock that you give to employees. They're 1 of 2 kinds. Nonqualified 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, your 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 -- You know, there is no cost basis. Your your the price of your stock is effectively
0. You know, like, a penny for it or something.
Yeah. Like like, the 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. Yep.
Yep. And and and shift it to long term capital gains. Okay. So now Saks 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 the 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 with you, I don't know why it started, but it's a historical artifact of you know, the 19 sixties seventies. I think
I I think I know why it started.
Go ahead.
Okay. So the the the this got lawyered because let let's say you start a company And just to use some round numbers, a, investor wants to give you $10,000,000 to start the company and for 10% of the company, a $100,000,000 valuation. If you didn't have preferred shares, then the founders could basically on the the day after the money comes, they could say, we wanna liquidate the company. We decided we don't wanna do this anymore. And they own 90% of the company, and they could basically then distribute out the 10,000,000 to all the shareholders, and they would keep 9.
and 1,000,000 would go back to the investor. Correct. So that's why lawyers came 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 in the money. That was the idea.
And when and the second piece was if the company gets sold for less than the cash put into least the people with the cash can get their money out first.
Right.
So if it sells for 10,000,000, you get your 10,000,000 back. Or if 11, you get 1,000,000 after that. Yeah.
So let's just say asen does the first 1,000,000, so there now there's a 1,000,000 of preferred. Then Saks does the series a and he puts in 10. Now there's 11,000,000 of preferred even if it's at a much higher valuation. And then I come in and I give a 100 at an even higher valuation. So now there's a $111,000,000 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
$200,000,000.
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 3 Brooks companies worth at least a
$111,000,000,
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 stat that exists? And do you believe that the company is gonna be worth much more than that because that's the only way that you're gonna actually participate in the equity.
§06Segment 6
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 $11,000,000,000 company, Okay. Well, you need to generate $2,000,000,000 of revenue. And if you're at a
100,000,000,
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 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 stat? Yes. You know, how much is a total prep stock? 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 gonna be very important for you. 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 word 0. 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's 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 wanna 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 gonna be very problematic for employee retention. You're good.
So -- You
know, in those con x. Look. There's a couple things that I always support. You know, if if you need to reprice the options, you know, you can reprice the and give employees the benefit of a new 409 A. So the company doesn't set the option price.
That's set by an external 409 A audit. But If that 409a 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
-- Explain what a 4098 is. Just broad strokes.
It's it basically, with 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 set don't determine their own fair market price. they go out and they you get some external auditor to do a 4 9 a audit and then the
4
and a, 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 5th, a 10th, something in that range is typically. So if the is worth a dollar of preferred. The fair market value of the common could be 5¢, 10¢, 15¢. Depends on if the company's gonna run out of money. how many months of runway they have?
Are they profitable? And so it is a fair thing to do. And 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 if the SaaS 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. I mean, so so so the way it works is that when a company IPOs, you get rid of all the different classes of stock. You know, the everything basically, the preferred convert to common in an IPO.
One class of shares.
Yep. 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 prefer to the same.
And so economically, they're converging to 1 to 1 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 prefs stack matters, the more overhang that creates. But the benefit to employees is it creates a larger discount on their strike price on the 409 a. So that is the offsetting benefit. If the 409 a goes down because the markets change, then the board can vote to apply a new 409 h to the employees.
That's a beneficial thing to do for everybody. So that that's something, you know, 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 then the company may be worth it exit. Then what you need to do because then then there's nothing for the employees.
There's no incentive anymore. What you need to do is create a basically, an employee participation, you create a corridor where you say, okay. 30% of any acquisition price for this company is gonna go to the employees. You created 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.
And 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 sort of over capitalized company across the finish line. And, you know, it can be pretty frustrating to see when that when that happens.
It's a good time for employees to understand this. This is a 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 gonna go back to work because they need to, and that'll be good for monetary City, fill these jobs, 11,000,000 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 opening some low unemployment. We've never had a recession like this. So that that's the fascinating of itself.
But for employees, And for companies, the new discipline might be there's not gonna be 4 or 5 offers for every tech employee. If people are gonna cut 10 to 25%, This is the contagion moment. And 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 b c companies all do 10 to 25% layoffs. Uber Dara said we're gonna look at hiring as a luxury.
It's probably not gonna happen. The only person who said they were gonna hire into this was Google. Sundar today said maybe as many as twelve thousand people over the next couple of 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, 2 days a week 2 weeks.
And then by theendofthismonth, May, there'll be 3 days a week in the office mandatory. The head of machine learning said, hey. That doesn't work for my team, and they said, okay. And they said, okay. We don't have to do it.
And they said, no. Okay. We accept your resignation. So I think even the Mighty with unlimited cash reserves is saying, you know what? we have to shed some people who don't wanna 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 layoff people, You're gonna look pretty weird in this market to your investors and they're gonna be wondering why aren't you laying people off go ahead, Freeburn.
I feel like an old guy now has been working in Silicon Valley for 20 years, 20 21 years. And I remember, like, in o 1, 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, when 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 start up was the cool thing, and There are a lot of people that moved from New York in the last couple of years to SF leading up to the most recent crash after the pandemic. And so, you know, look, there there is an ebb and a flow in and out of this industry. I do think that this capital overhang, however, this quarter $1,000,000,000,000 of dry powder that's sitting in VC coffers is gonna be significantly stimulatory in a very good way. I think it will create real jobs and and 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 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 start ups.
Oh, I'm more excited than I've been in years. This is my time.
This is what I love.
It's it's time to go. And so I talked earlier about how the 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 finds 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 freaking wasted. on speculative nonsense over the past few years. And I think the fact that we've got a quarter $1,000,000,000,000 sitting in VC coffers more than we've ever had, That's a quarter $1,000,000,000,000 ready to fund the next generation of technology businesses that can build new jobs and create new areas of the economy your 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 3 buy ins. How does that person make the good next decision.
Now -- I will
I will tell you three stories from my last week because my last week has been filled with these experiences apart. Sorry. Go ahead.
So let me let me let me just talk about the the the business of investing and the psychology of investing. So look at probably who has been The most incredible performer this year is Ken Griffin in Citadel. And right underneath him is this guy, is the englander at at who runs a place called Millennium, and then, you know, a close third would probably be stevie Cohen at SAC. Now how do these guys run their business? they have 100100 of teams investing in all kinds of different things.
And what they've 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 life cycle. 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.
He's operating effectively between 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 the reaction I'm seeing in the market
One last thing to add to your thing. And on top of that, there are only
7
or 8 people who've actually made money in this entire market.
Yeah. Who the hell breaks?
Early stage investors have done well. Early stage investors have done
seed investors.
--
our first fund. That was nice.
Yeah. I I'm in the black stocks.
you -- Yeah. -- girly. I mean, what about all the other thousands of people that raise
This is distributed. 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
§07Segment 7
about -- -- some companies. Yeah. You know, I think I have a Bloomberg at my desk. And one thing that I look at every now and then is the ownership table
--
Mhmm. -- 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 1,000,000,000 of dollars now paper losses that they have to go back to their LPs and say
-- Yeah. Heart conversation. --
Missus Foundation, I know that you wanted to fund cancer research. you know, I had $9,000,000,000 of gains, and now
it's 2. 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 2 weeks, I have 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 kinda 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 there
were -- -- worried about careers now. So, no, I mean, I I had I had a crossover investor tell me tell me that look, I think that things are oversold right now. This is an attractive time
to buy.
But they won't
take an
act. But they won't.
Because because look. If I'm right, that's 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.
and arrest.
I'm risking I'm risking my career.
I'm kinda just calling nice.
Yeah. So why would I do that? I'm just gonna sit and watch.
I'm the opposite right now.
Yeah. Guys, the same is true in VC. So I had several VCs this week. who kinda shared the same point of view, which is at our partnership meetings, I don't know what you guys are doing, Saks, 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 wanna be the guy in the VC context catching knives. But, look, that's a near term psychological phenomenon. I think the reaction, Shamoff, is everyone 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 $1,000,000,000. It's not near term.
That's not the point I was I was trying to make earlier, which was there's a quarter $1,000,000,000,000. It's a macro point. about the fact that there is gonna be funding available. I it doesn't matter if these guys are gonna make money or not, or they're gonna make shitty investments or not. there is gonna be a stimulatory fact all you need is 1 of the next $1,000,000,000,000 mega caps to emerge from the a quarter trillion that's sitting.
And there
will be -- For
the entire industry, it looks fantastic. And for that business to transform the landscape of some part of
the VC is not gonna lie. --
jobs to be creative.
I I think it's pretty sucks.
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 from 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 gonna 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 that have happened.
Amazing. Shamal, I wanted to answer your question. He said, what do you do if you get punched in the face seven times? You you you're running bad in a poker game. And, you know, if you look at Phil Hal Luther or other people who, you know, go through that variance, I think -- Take a break.
Well, you take a break. Go for a walk around the pool. --
and you dip take a different smaller space.
One thing I like to think about is hey. I'm gonna play a better play better cards to start your hand and maybe play in position. And in in in the analogy here, playing better cards, you know, backing better founders and better products and then playing a position, knowing where in the life cycle of a company value is created, and 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, Saks, or maybe 2 weeks ago, 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 $30,000,000 valuation last year and topping off 3,000,000 with the people who couldn't get in and you told them, you know, I'll come back to you when it's 90,000,000. go see if they still wanna put that bet in. And then for the VCs who are out there in the early stage, you know, making bets on sub $15,000,000 $12,000,000 companies in the seed round. If if they're focused on customers and product, even they got a couple of 100 k in revenue, it's I think it's a good bet.
And and I'm I'm going to increase our investing in those type of companies. Under 20,000,000, under 15,000,000 focus teams, who understand that the climate has changed. If you are not --
Yeah.
-- taking the medicine, you have to Saxon's excellent tweet storm, You're dequeued from funding. I think it's very important that people understand what sex ed. If you do not accept the reality, a VC who has lived through 1 2 or 3 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.
know, let's keep in touch. Let me know how it could be helpful. The other thing is that
an entire generation of investors had been coddling entrepreneurs And in moments like this, sometimes you need to actually have hard conversations. And if that train I don't know how you tell that entrepreneur, listen. You need to be actually 5 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 in 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 point, the idea that you 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 0. There should be no intellectual standstill whatsoever in a moment like this. Right. You know?
Yeah. Okay.
We're we're still investing.
--
what the prices are.
Yeah. We're still investing. It's just that lower valuations.
There should be no sand still. Exactly.
This is the time to invest sex. Right? I mean --
Yeah. I wanna say something sort of positive. because a lot of founders watched the show. It's like, look. What what Jason said, if you you need to accept reality and if you don't, you're gonna have a bucket of you know, very cold water dumped on your head when you got in fundraising, realize that you're not gonna be able to make it.
And then, you know, all of a sudden, you're gonna be packing up shop very quickly. So you gotta get You gotta get a reality check and understand. But look, great companies are built during downturns. You know, PayPal was built during the dot com crash. My company Yamro was built during the greater session.
Google, Uber.
Totally. I mean, the list goes on and on. So downturns are a great time to 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 you focus on business fundamentals. You don't de queue yourself.
David.
And if you do that, you'll be fine.
You just brought up something incredible. I remember we raised money from Microsoft at a $15,300,000,000 valuation. The great financial crisis took hold and marked 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 the $1,000,000,000 at, like, a $9,000,000,000 valuation. So we took a you know, 33, 40 percent haircut.
A down round. Facebook had a down round.
We patterned our balance sheet, and we said we are now gonna 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 if if this is what people like Zuck are willing to do, you have to really hold people's feet to the fire for founders who are not him.
What is the fast dot cofounder willing to do? You know? Like, you shut it down. Like like, literally, there's some founders I 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. then hit the brakes.
Like, hit the fucking brakes, save your company, live to fight another day. If you have 6 months of runway, get to 12 and then try to live to fight another and 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.
Sleep at the -- They were literally texting and driving. They were texting and driving.
We we yeah. Where 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 assumed 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 5 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 gonna 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 SaaS 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 1,000,000 in revenue. 2,000,000 10% off 2,000,000, you've got 1.8. Would you rather make 800,000 more and be breakeven right now? And there are, sometimes, founders just have this amazing moment where, 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, the reality is if if if Michael Morris were to tell you that, you do it. You'd be hard pressed to not to not say yes.
Of course. He 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 $1,000,000,000,000 of funds that are probably stranded in the hands of really inexperienced allocators. who are gonna light it on fire for the most part, and they're not gonna have the courage to sort of lead these
--
See what happens. All you need is all you need is
1. Everybody should think about what I don't know where how you phrase it to founders, Saks. But I say to them, when I invest in their companies, listen, when when everything's get really and you have a conversation that is the hardest conversation that's making you 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, I'm not speaking to an attorney, but, you know, Travis called me once or twice on a Saturday and said, hey.
We're struggling with x. What what do you think? And Travis knows how to run a business a thousand times better than me. But being a sounding board and giving your founder's permission to come to you when things are fucked up is critically important as an investor and being able to have it intellectually honest to your point, Shamont, discussion about the hardest issues is really what the job is in my mind. What is gonna 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 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 you're scared. You know, it's gotta be an investor in your group who will have a candid discussion.
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 cofounder or with 1 or 2 of your trusted board members and really say what is the real valuation of this business today and what could it sleepy. 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 burn so that you extend your runway. I think if you could do those 3 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 real crucible moment to use a Sequoia phrase.
§08Segment 8
How do you guys think the market gonna settle out. Do you have any predictions on the bottom? I will tell you a statistic. I think Michael Murray put this out yesterday. He did not He he deletes his tweets every day.
Very interesting character, by the way. But he he pointed out how from top to bottom during the kind of 2 era, 01, 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, JPMorgan, I forgot which others, but highlighted that, you know, on average, it took 6 times their total shares outstanding. for them to go from top to bottom, meaning that the shares ultimately turned over 6x 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 peak.
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 gonna be tanking for quite a while. And these days that are, like, big updates, everyone trying to call the bottom, he's like, no. This is the dead cat bounce moment. 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 risk the volume that needs to trade before you find what the true market bottom is.
So, you know, it was a really interesting kind of site, this kind of statistical insight that he pulled together and 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 know, these conversations around where's the bottom gonna be.
Can I
just pull up this one chart so it kinda 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 2 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's 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 gonna go higher. The 10 year table's 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 gonna be very tough about our current situation is if we go into recession over the next 6 months, what does the Fed do about that? I mean, they don't really have much dry powder here. In previous recessions like the GSC in o
8,
I mean, the interest rates were around 5%. So when they saw some to
0,
they had some serious you know, that was some serious relief. Here you're at
1%,
what do you do? You drop that to 0. And then, meanwhile, inflation's 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 a blog post called the most reckless fed ever.
So in this most reckless fed ever, they basically just just took the fed funds rate and subtracted inflation to get the real fed funds rate. So the fed funds rate, debt of inflation. And what you could see here is that starting around
2000 18, 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 2 ago? He said he doesn't see a risk or a session on the horizon. It's like, what are you smoking? I mean, This is just like his inflation is transferring comment a year ago. You're wondering, like, do we have better data than the than the Fed chair does?
Because we're 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 a crash, but, you know, some people might just say that investors are violently reacting. to the the shifting tides on capital availability. But I will tell you I'll 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 we're gonna run into a consumer credit bubble here.
I do not think that consumers are gonna 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 share 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 gonna face a credit crisis in, call it, 9 to, you know, 9 months to to a year we're all gonna wake up and be like, wait a second. How are consumers gonna be able to afford all this credit? Very simple. And I don't know how you bridge that hole.
End of the great resignation, that whole concept of, like, funemployed, and I'm gonna flip NFTs that I'm not gonna go to work, I that's out the window. So -- But I I -- -- been enjoying -- Yeah. people are gonna enjoy
that there are there are more shoes to drop here, and I think consumer is one of them. And maybe there's systemic risk 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. So he's more focused
--
Oh, here we go. -- in Ukraine. Here we go.
--
in the United States. We are let we have tweetle d and tweetle dumb on this case. Biden and Powell are gonna go down as the worst president etcetera all times. No. It is it is like the anti Reagan Volcker combination.
I mean, they've caused this problem.
Well, first of all, this is a long I I don't know if I agree. It's a longer conversation. I gotta run.
But -- Yeah.
Like, you know what? I think we all -- Trump Trump spent a little bit of money too. We all wanna blame someone the reality is there was a massive leveraging that happened going into 2008. And
we gotta work it out.
We thought we were delevering, and I don't think we've been delevering since 2008. and all of a sudden, the chicken's coming home to roost or whatever the term is, and we're all sort of waking up to the fact that wait a second -- They
flooded the system with 10,000,000,000,000. We got a money. It got us 2 years. That's that cause. It's not
--
And more recently, consumers at all of us have not -- -- 14 years ago.
It's not from 14 years ago.
It's from last year to
a year.
-- austerity measures are the long
side cool here, but -- Yeah. Go.
If you look back through time, roughly, if you look at, like, the average mean PE for the S and 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 be back to where we were before. So You know, I actually think we're probably close to a near bottom ish here, 38100 ish in the S and 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 game stop game stop like Rally's, 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
-- Well, block -- -- percent. Square. 5 6%. Armada is up in 25%. And Even Lyft went up 5%.
So I I this is the There there was definitely some panic selling yesterday. -- the bottom. Yeah.
Yeah. There was so much panic selling yesterday that the market's bouncing up from that. Look. The 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
$2,000,000,000,000
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 wanna say it. It's it's it's correct. But Larry Summers was correct.
The administration did not listen to him.
Larry, who I know very well, and Agwaiith, who who I love, is like girly as well. His 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, stops spending, some austerity measures. Like, we could only work our way out of this. And I think what we're gonna 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 gonna make the economy that Americans want to live in. I know this sounds fucking crazy, but if you want to spend money and you wanna enjoy life, you gotta work. You can't we can't have this kind of labor participation, and we can't have people flipping NFTs
for a living. That's not work. Yeah. 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 search
by -- It's by vibe. It's by search. And and -- Search biocide.
It's 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 and a week there. Well, I
mean, we we all wanna talk about UBI. I think it's a very virtuous 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 to flip their NFTs, and your board 8's gonna become worth a $1,000,000. Your Bitcoin's gonna be a $1,000,000 each.
This is not reality, folks. Value is created when you make stuff in the world. When you code, when you build companies, when you go to work,
it may happen, but it's gonna take a long time.
I mean, at some point, maybe we'll have some energy source and and, you know, robot building everything for us. But we got a wrap here. We'll see everybody at the All In Summit. There'll be a a bunch of stuff dropping. Do just a couple of programming notes.
Please, please, please. There are no more tickets. I do not try and crash the party. There's gonna be security there. Everybody with a badge, we're gonna be checking the badges to them off.
Everybody's got a photo on their badge. Please don't bring a plus 1. And please, please, please, please do not try to crash.
Thank you. Love you.
Love you. Talk to you soon. Everybody will see you time on the all in podcast. Bye bye.
The Ledger winner's ride.
Rainman, David Sachs.
We open sources to the fans and they've just gone crazy with it. besties are gone. That is why they are dog taking it. I was
driveway tax.
Oh, man. I have a casual meaty necklace. We should all just get a room and have one big you, George, because they're all just useless. It's like this, like, sexual tension, but we just need to release them out.
What? You're the bee What? You're
a thief. What?
Where did you get Murkeys are back?