All-In Summit: Bill Gurley & Brad Gerstner on markets, downturns & investment cycles
Full transcript · Read the full conversation in order, with its original context.
§01Segment 1
bg Squared.
This is our BG Squared panel. Everybody knows friends of the pod, Brad Gershner, and Bill Gurley give it up for our
--
BG's guest. Rainman David Sachs.
And I said We open source it to
the fans and make discoveries.
Love you. Bill, you predicted 5 of the last three recessions.
A broken clock is still right twice a day.
I mean, here we are again. You you sound to the alarm bell, and, of course, you're right. and you've seen this movie before for all of us younger capital allocators who are experiencing it for the second or third time, but you've experienced it a couple more times.
How how
I mean, it's pretty old. How does it how does this one measure up to great recession, .com bust, you know, 87 and the and the many ones we've seen in between?
You know, one thing that I think is super important to put this into context. Now I'll try and tell this quick. I had a meeting once with Howard Marks who I'd wanted to meet for a long period of time. He's a famous bond investor that does a lot of writing. And for 15 minutes, he asked me questions about the vent venture industry.
A lot of structural questions, and I told him my answer as best I could. and he said, man, that's a really shitty industry. And I said, well, why do you say that? What do you mean? He says he says, you know, cyclical collapse is built into the structure.
And so we have funds that, you know, are taken, you know, committed to that have 10 to 15 year life. So you have low barriers to entry, but you have very high barriers to exit. And so he he felt that it was just systematically set up to to rise and crash rise and crash. And one thing that that I realized coming out of that is that it it doesn't happen like a sign curve, which is what we all imagine when we think of a cyclical business. It's more like a sawtooth It risk risk on is a very slow process, and it and it's it's reflective, so it grows and grows and grows and grows.
and then risk off tends to be very abrupt. And we've seen that here. Right? This this cycle risk on was from
09
That's well said.
Twos 5 months ago. That's really well said. And risk off is 5 months. And and the thing that that that's really tough about that is it it requires a minimal adjustment very
quickly, like, because it it
didn't gradually change it abruptly change. And so, you know, cap charts might have, you know, systematic issues that are stuck because too much lick prep relative to the new reality. Valuations have shifted. The cost of capital is radically different. You may have, you know, on the way up as risk got people took more risk.
You've tried crazier things. You you you're willing to to take take make investments in businesses you might not if they cost capital a lot.
You name a stadium for 5 years as a crypto company.
You might do that. And then but then all of a sudden, it's it's gone.
And now the commitment to naming the stadium is greater
than the
than the market down.
Yeah. Well, I I assume you're referring
to so far. -- true for FTX, but
Well, who I mean, just as an example, it might be a disproportionate value of your yeah. Yeah.
So, anyway, it it's tough, and and in this particular case because that's what you asked. So it it turns out 09 wasn't that bad. If we if we have an 09, that'll be pretty good. Things got turned around pretty quickly. 1 was very abrupt, and we didn't, you know, really start to see liquidity again until with a few exceptions, Elon mentioned PayPal, but like 0 50 6.
You know?
It was a long walk in the desert. I mean, a lot of great companies were started, but a lot of founders gave up at that time. Right?
Yeah. And and and look. I mean, I think to the if you're an early stage investor or if you're an early stage founder that's just getting going or even an early stage company because If you haven't scaled out yet, this probably hasn't affected you. It could be it could be wonderful. Like, your access to talent's gonna be a lot easier.
People are gonna be more prag and rational, but it's a it's usually a long window on the other side. The other the other challenge you have here is in 20. You may be basically had a mini pull back in March of 2020, but then the Fed hit so hard that things just blasted off again. And now and now you guys have talked about this with that tools not in the toolbox anymore.
Brad,
So one of the things I I was talking to somebody last night and this audience is amazing. I was talking to somebody last night and they said, you know, so how does it work? You just get together and talk and I said, You know, what I'm what I love about this group is there are hundreds of hours of like data and research that we're constantly challenged with. We all know where we are We know what just happened. And I think grounding ourselves in just a few facts to try to figure out what the next 6 months are going to be because we have founders here around around their businesses?
Can I raise capital? Are we bouncing straight back from where we were? So very quickly, this chart just tells us You know, the iron law of investing is interest rates. A 1% change in rates leads to a 15 or 20% change in a multiple. And so the reason multiples have collapsed here for all these businesses is because expectations as to inflation and rates has changed dramatically.
I hear a lot of talk about
1999, 2000.
So if it's all about rates, let's just look at those 2 things. We plotted them here together. This is 19 to 22 on the bottom shows what rates did. We took them to to 0. The fed is now saying our neutral rate is 2 to 3%, and people are hyperventilating.
look at where we were in 2000. Look at what the cost of capital was in 2000. Crazy. Right? Right?
And so this this idea and by the way, the delta there.
Yeah.
Right? We went from just above 5 up to 6 a half. Right? So we're talking about going from two and a half back to two and a half or three. But the big question is, are we going back to two and a half or three, or are they behind the curve lost in the weeds and we're gonna have to go to 4 to 5 to kill inflation?
Well, Everybody was saying, inflation, you know, inflation is here to stay forever. Remember, when when we report on core CPI It's what happened last month. It is not a forward looking indicator. So we peaked in core CPI.
Consumer price index. Explain what it
consumer price. There's the basket of goods and services that we all go out and spend money on. So the Fed is focused on the demand side of the equation. They know they hopped us up on a want a red bull and cocaine to survive the pandemic. And now -- I know
you're talking about last night for facts, but keep going.
You still haven't said a word all day. Look at it.
You're okay, Bo. You're gonna
get through it, Saks. You're gonna get through it together. Okay? You are so erect.
So so this chart this chart, we deconstructed 20 bank models to say, what are the components of CPI? How do they differ? The red lines where Goldman thinks we're going. The green line is UBS. I just told you the Fed thinks we'll exit the year at 4.
We just decelerated significantly And when they look at 8 or when they look at May in June, it's gonna be down yet further. And here's why it's going to be down. when the Fed stimulated the economy, all the prices we pay for everything went haywire. Okay. The price for a used car was 20,000 bucks for 10 years.
And then just coincidentally, they give us a bunch of red bull and the price goes to $29,000. For 2 months in a row, we've had sequential declines. You tell me, is the price of the used car this time next year higher than 29 or lower than 29. It's going to be lower because we're destroying demand by raising interest rates. Same for home prices.
So what's plotted here is the home affordability index. Somebody who can afford to pay $1200 a month, In December, could afford a
$350,000
home. Today can afford a $240,000 home. You tell me are the number of new home searches on Zillow going up or down? Go run your Google Trends. They're going down because people's ability to buy homes is going down.
And then finally, airline tickets. Same deal. Right? And so when you put that all together, you say, okay. Sequentially, month over month forward looking, this stuff starting to tip over.
If you look at what consumer confidence is, it's the lowest in 10 years. Right? Consumer confidence is a leading indicator of slowing down. So again, everybody on television is telling us about what just happened It's like the nightly news, big red arrows, inflation going up. This is what's going to happen, and what we all care about is what's going to happen.
We destroyed 15,000,000,000,000. You said this on Pod 80. We destroyed 15,000,000,000,000 of household net worth in the last 5 months. So the expected path of household net worth would have taken us from a 110,000,000,000,000 to a
125,000,000,000,000
over the course of last 2 years. that was the trend we were on. Instead, we got all hopped up and went from
110
to 142 But now we're all the way back to 127. That's what I call on path, on trend. So the Fed has done exactly what it wanted to do It ruined all the specs. It ruined every It took all the sorry. Sorry.
§02Segment 2
Alright. I did one too. Okay. So it took the juice out of the system. Jot and consumer confidence tells me forward looking inflation is rolling.
Finally, Bernanke says this morning or over the weekend, he said, ignore what you everybody else is saying, follow the tips.
No. We've been saying this since May of last year.
So this is the breakeven. This is the bond market when that goes positive That means the bond market is saying that inflation is rolling over because this is the 10 year less inflation. And so now we have anecdotal information about cars, about houses, about airline, we have our common sense We know that those prices are not sustainable, and we have the bond market telling us the same thing. That's why I don't think you should believe the hyperinflation narrative.
Got it. Any thoughts on NFTs? I mean, here's the thing. What about
my board name? What will happen to that?
I know and
when you're going through this and you start to understand the logic of you realize what a mirage we were in that certain assets that had no underlying value, you know, they weren't cars the airline tickets or homes, were also being exacerbated during all of this. And and I think that was probably
one of
the things that made this less fun in this cycle. Bill, you're a fundamental investor. You really think about consumers. You think about the total addressable market. You you give a lot of thoughts to that.
What was the last couple of years like when because you were saying
3
or 4 years ago, hey. This is kinda disconnecting from reality.
You know, back when back when I had that conversation with Howard, I I started doing some more research. I went back and I talked to some of our fund of funds that have data over a very long period of time. And, I mean, it sounds ridiculous, but what what I realized was that the the IRR numbers and the ROI numbers on the Venture capital category were heavily dependent on performance in the in the hottest part of the cycle. And so in the tip of that sawtooth. And that's when we came up with this phrase that the best way to protect yourself against the downside is to enjoy every last bit of the upside.
got it. So while you get anxious about the rollover, you actually can't afford as a venture capital firm and maybe this contributes to the to the collapse as fast as it does, you can't afford not to play the game because it's too hard to predict when it's gonna change.
So there's $250,000,000,000 of committed capital unallocated into companies. What happens in the cycle over the next 5 years if there is this expectation that we're not gonna be in
the good part of the
the risk on part of the curve, that capital needs to be deployed at this point in the cycle. And do we end up having these, like, crazy bifurcations in the market where high quality companies get 10 x evaluation of the mean, and all the money plows into a new companies that
that are kind of outperforming or or what what's
the dynamic?
And I know Brad has some too because we were talking about this this morning. First of all, I I've never ever felt as a as a venture investor that I have to invest money. Like -- Right.
--
and like and if you remember, most of it's committed but not drawn down. Right. and so you you're gonna have to go ask for it. If you're if you're if you, you know, deployed 2 thirds of your fund, into crypto assets with no board seat in the past 12 months. Are you gonna call Harvard and Pennant say, hey.
I need some more right now. I don't think you're gonna make that call.
And -- I wouldn't know.
You're saying they let the capital sit there and never call
Well, here well, you guys were talking about this on one of the recent pods, you know, in in o one, a lot of people actually return the commitment and it was actually an act of greed, not not an act. It it came across like they were being nice, but they were getting out I I call it the Burn Waffle theory. They were killing the fun and getting out of the overhang and starting fresh just like, I guess, it was Melvin that attempted to do. It was a version
of that.
--
recap. in a way.
Yeah. Well, they just wanna get started without the overhang of of the look back.
They deployed 200 300,000,000. I I think one thing, you know, Bill, not to interrupt. you know, the the the the assumption of the question was, will they be forced to deploy capital into a really bad vintage? Right? I actually think the upcoming vintage is gonna start getting real.
It's gonna be a good vintage. I think that what that that was Bill's point. I think we both feel that way. I think the vintage of the last 18 months will be lousy. So the capital deployed over the last 18 months won't have a lot of return.
All of our LPs know it. Right? I was just sitting with an LP, you know, one of my investors at lunch today. Right? Imagine this.
They have 50 investments like benchmark and Altimeter. Right? All of them are going down And now you're gonna call them up and say, I want all this money right now to go invest in a bunch of stuff that still may not yet have corrected enough. These are partnerships. Partnership means a partnership with me and my partners, all of the people who gave me the money.
we're not gonna put our partners in a headlock and drag their money into the market and put into things that we don't think accurately reflect the new world order. if you go back to that first chart, you can underwrite to the 5 year average, the 10 year average where we've been. I think we're going back to trend. but you cannot underwrite to where we were last year. Disabuse yourself.
1 of the bill tweeted this last week. It's spot on. The biggest mistake we will all make is to anchor ourselves to prices that we saw in the world over the last 18 months. pretend you never saw them. Yeah.
Not in venture, not in the stock market because that is a delusional place to think we're getting back there. We're not unless we have another pandemic or a nuclear war and rates go to 0, and then we have bigger problems. So reunderwrite and underwrite to the 5 year average de novo for all your businesses. That's how you survive through this and ultimately come out winning shit.
And the and the other the other point I would make, David, is that the the the new reality is apparent to all of us because of public comps. so, like, you just have a new world order. And so it's very hard. I don't think I mean, there might be someone so sloppy that they just keep investing headstrong, but I think most of them look at where things are in the type of business that you're investing in and and then they feel like they wanna make a turn?
I think I think you're using the right word. It is borderline it's well, it's definitely unprofessional, and it's borderline idiotic. for anybody with organized capital right now to be ripping money in because you don't know what the terminal valuation of a business is. Like at the end of the day, investing is like a line. It starts here with guys like Jason and it ends here with guys like me and Brad say.
and in the middle are these guys that are helping along the way, and it's all hot potato. But by the time the hot potato gets to us, there is there is a price and that price has alternatives. Meaning, if you come to me and say, this thing is worth $10, and I and I say, actually, no. It's worth 2, because that other thing which is better than you is actually worth 5. And that's what's happened in the spot time you get the potato,
you put it on the scale.
There is there is a terminal endpoint to valuation. Right? At the end of the day, there is a buyer of last resort, and that is the public market investor, and he and Xi has said, No Mas. That's what this chart says. No Mas You don't tell me that your thing is worth 50 times, 80 times, 90 times.
It's worth 5.6 times. I saw something this morning from Morgan Stanley that said, if, however, you're a massive grower, 50% plus grower. There's 30 companies in the SaaS index that grow, but only 30 in the entire world that grow above 50%. You know what that multiple is? Just take a wild guess.
8.5.
I mean, we're not talking fifty times. We're talking 5.6or8.6. So all of a sudden, demand this.
To be clear.
This is so those games, to your point, are over I mean, growing by 50% a year, for those of you guys have built businesses that do it, that is still very hard. You know, that's massive compounding. So the game is over. And the idea that there's a quarter trillion, I think that that's a fallacy.
do you think ultimately gets deployed to the quarter 1,000,000,000,000? Just pick it over.
What do
you think?
Over the next 3 years, Of the quarter 1,000,000,000,000, I think you're probably counting 50% of that is private equity or more. Maybe 70% is traditional private equity. Leverage buyout firms are gonna have a field day.
Field
day. I mean so Thoma Bravo and all these guys, they will spend all of that. So You tell me what percentage of
that -- Okay. So let's --
I'm sorry. -- over 3 year over 3 100,000,000,000 of VC, how much
do you owe them money? 20,000,000,000 goes in the next 3
years. 25 or 30 percent. Depends on price adjustment.
I wish we had I wish we had the numbers from a 1 and because because you had similar things where the race
-- because that's freaking tiny. Right? I mean, if you're saying 25,000,000,000 over 3 years, that's, like, 8,000,000,000 of total VC dollars deployed a year.
which we you know, to your trend line thing.
It's tiny. Wonder if you
went back 6 years where that number was.
Let's be counted. -- in front of us. What number of people at these companies is necessary to run them. We're we're looking at a Twitter with 8000. You're looking at a Google.
And even some of the startups, they got I think think -- And they had huge -- -- salaries and and
--
Well, there's no exception, by
the way.
There like, we just talked we just talked about a whole CapEx cycle and a need for hardware and a need for capital equipment. There's a whole semiconductor space There's biotech. I mean, a huge segment of that venture market, Jason, is not software. It's it's very capital intensive businesses, which, by the way, are really critical in
in the soft space, people have been living high on the hog. Let's be honest.
Yep. No.
§03Segment 3
But, like, I like, for example, like, our investing focus, we've moved in the last 18 months to focus a lot on these things, lithium mines. I mean, the stuff that we're doing seems insane. If you had asked me, would you be sweating a a a mine in India, you know, and sending our CFO and a partner to go and make sure the mine exists. I never would have thought that it's possible But the reason is because of this chart, because those trade offs on dollars make so much more sense. To put money into an over like an over bloated software business, comes with a lot of baggage, valuation baggage, team baggage, technical cruft, and all of these things have to get balanced.
And so if you get a really cheap deal, you do it.
Super interesting. Bill, you I mean, you're you're like the software guru. I mean, like, do you feel the same way? I mean, yeah. We'll call it yeah.
Wait. Actually, I wanna make it quick. comment on especially with this slide on SaaS Multiple. So, obviously, it's a price to revenue multiple slide, and and price to revenue is like this really crude evaluation tool. So I think the prudish you could possibly have.
I published a blog post once where I took all the stocks and laid them beginning to end on the price of revenue multiple, and it was like just a massive diversion. There was no such thing. And so what really values companies, you know, it's typically a discounted cash flows. And so now all of a sudden, the buy side's asking SaaS companies about net dollar retention, about long term operating margin, about whether their free cash flow is greater or less than their that income about SBC as a percentage of free cash flow.
Like -- Stock
stock based comp.
Yeah. And all so all of a sudden, the you know, everyone's brought out the microscope on how they're evaluating these companies and and these crude tools that maybe the only like, they're entrepreneurs who who probably think the only way you measure
Sorry. By the way, you're you're you know, the companies that, you know, in your example were all of a sudden, run away with it and get all the money. Think about the problem they have. Their growth is going to slow -- Yeah.
--
nobody grows at
500%
when you're at a
$1,000,000,000.
Right. You're lucky to grow at 25 percent. Right. Okay? So when your growth is slowing and your valuation is outsized like you were gonna get get to
$5,000,000,000,
How do they attract more capital? Right. This is this is why this whole game is very complicated right now.
There there was also something that that took hold over the course of last 2 years. specifically with respect to software, that this was an easy business. She just send us your data. I pop out a term. She It's formulaic as though all software companies are created equal.
And you guys asked a question last week on the pod, how many software companies are actually over a $1,000,000,000 in revenue. Yeah. How many are over 2,000,000,000? Well, we actually went and counted. Oh, good.
Right? In public software companies, over 2,000,000,000 in revenue, we got to 21. Okay? There are only 21 that are worth more than $25,000,000,000 in all the public markets of all the millions of software companies that have been started. But what happened last year was you could be making dog walking software.
Okay? And somebody looked at your multiple and slapped a 100 x on it and said you were worth that as though that was the equivalent of building a data base that would disrupt the entire database market.
So the thing that is returning to markets is
something that we all do for a living called dispersion Some shit's gonna be really great, and the rest is going to be below the mean. And if you look at software, the history of software, right, is that there are very, very few companies that ever get to a $1,000,000,000 in revenue. And so if you were slapping a 100 x ARR revenue, or multiple on a company doing 50,000,000 in revenue, it's highly likely that they will never see that price again, whatever you paid for that asset, because the dilution and the deceleration in their growth rate will absolutely eviscerate any return you have as an investor. And so when you're looking at this back to your point, you know, Not only are we looking at revenue multiples, but we're also looking at something like Snowflake and say, now they're doing 15% free cash flow and expanding those moves. All that stuff is critical.
Girlly, do
you think it's weird that VCs
don't try to underwrite lower value Like, the incentive is always to up your valuation. Even if the company is performing plan, you don't generally do these, like, market driven value. It's like, oh, you're worth 500,000,000 last round. We'll give you a $1,000,000,000 this round. And are we gonna see more VCs do down round?
I I just think that well The
companies that they're in?
There's no there's no VC club where they get together and discuss how we're gonna behave. Yeah. But
-- So you're you're looking at it. There's --
The price
fixing it. But
keep in mind, as as that as that risk going goes slowly up and up and up, you know, and and especially in Silicon Valley, we've had a systematic shift of power from the investor to the founder over a very long period of time. People are friendly because they want diesel. So nobody nobody does it. Nobody -- Well,
let's talk about that. So interesting. You've seen deals happen where you know, one term sheet seems great for all shareholders. And then this term sheet includes some secondary for the founders and no governance seems pretty great for the founders. And Somehow this one magically wins.
And and somebody wins the deal by not taking a board seat. You know, in the 3 decades, you've been doing this now. I think it's 3 or
4.
Going into the 4th. We
might be
going into the 4th. Wow.
I mean, well, as in saying, it
has -- -- decade. Yes.
It's in the 4th decade.
You know, when you when you look at governance, What what is the mistake we've made over this last bull run? Well, once again -- What it should it be?
I think well, I think it I mean -- What's
the right partnership?
I think what it should be is that the market gets to decide. So if, you know, if someone wants If someone can raise, you know, a 100,000,000 with no board seat, no rights, and they want that, I think they should be able to do that.
Like -- Right.
But what's in the best interest of our industry, of all shareholders, the employees, the the
the I'm not judging the question. It's just super complicated. We we put money behind Rich Barton So both of us did, and he had super voting. And but he also, I think, is very honorable about his duty to shareholders. And so
There was
a track record there. Yeah. And and it wasn't it never it never wasn't shoot in the entire history of the company. And so you know? But, you know, if there's a first time founder that's doing that, like, you know, it it who knows who knows what the motivation is and but but once again, it's a market.
It's a free market. And I think that there are certain people or founders that decide, hey, you bring something to the table that I want and I understand there's a government requirement to it, and we'll opt into that. And, you know, willing buyer meets willing seller.
Gurley, what are you guys, Brett? What is your attitude when you guys actually have a win? You do the job, company goes public, and you have the chance to distribute to your LPs. There's been a movement in Silicon Valley where some firms have said, you know what, guys? I'm gonna hold this forever.
I'm gonna create permanent capital structures, evergreen funds. You know, if you know, you foundation want a distribution from me. Just tell me and I'll give you money magically somehow, etcetera, etcetera. What do you guys think about that versus just distributing and walking away, booking the win? And if you wanna hold the stock, you just hold it in your own private account.
Well, let let let me just start by saying that investing is really fucking hard. And there's there's a lot of ways you can lose, you know. And when you guys started the podcast, this I was listening to one of the episodes today and it really hit me. in the in the song that you put together, David says, let your renters ride. And -- Like, what?
I remember that. I think we were ready.
I remember that up
So from the the hit brief history of the podcast, you've gone from talking about that as a strategy to this question that you posed to me, which is
on -- Did you have you
On the off city.
My defense.
Oh, hang it up. JCR, big jump.
Oh, he thought she's
appeared. What?
He's awake. Yes.
He's alive. Get him. We we
have we have all these great minds here, so I figured I'd give him a chance
to I like
I like some of the people on the pod who like to hear themselves talk a little bit too much.
He was resting his eyes. He was resting his eyes.
Alright. Now In fairness, when we had that conversation, as I recall, the context was that way back when, like, for example, when I got when I had Facebook and Facebook went public, the urge was just to sell it all. And so I think where we landed on that was don't sell a 100%. Keep
--
Yes.
20%,
keep 50%. But
that was you personally.
Smuck insurance, basically. Yeah.
But that was for you personally as an investment. What about you as a fund manager?
Yeah. I think for me as a fund manager. So I think we I think we did a pretty good job over the last 6 months distributing out a some gains, some realizations. We actually pay back our whole first fund. But in our second fund, we had about a 120,000,000 of a firm stock.
and we were sitting on it because we believe in the company and still do, and we're still sitting on it. And that was that was, like, a $100,000,000 mistake.
So Right?
So I think, you know, what's happening gonna be from now on? Honestly, my ad from now on is probably gonna
be distributed. So my first chance to actually return any real money to our LPs was when Slack did our direct listing. Yeah. And it was like, you know, there are 3 or 4 of us on the board. Me, Andrew Broch had excelled, John O'Farrell from Andreessen, 2 Independence and Stewart.
And they had gone through a couple of direct listings before bring in our bankers, and they go through this whole rigmarole, and I remember being so amped up in the whole thing And I thought, oh, I believe in this company. I believe in all of this blah blah blah long story short, the point is, I held the stock. I didn't distribute it. The pandemic hit I then distributed in sheer panic, and we left a lot of money on the table that I could have just booked the win for the LPs. And then from that point, I said, Never again.
§04Segment 4
I'll hold it for myself, but the minute that I get a distribution, if I'm in the business of managing money for other people, it's out the door when it's liquid, And I'm not gonna take a I'll I'll take I'll be happy to take a point of view from my own shares, but kind of I felt so I felt so stupid. I took a 50% loss trying to be a hero.
Well, I mean and then also, we we have the issue of selling and secondary when those opportunities arise, and we all just watched the we crashed documentary, which one of your partners plays a role in I don't know. Obviously, it's probably 5% reality, but benchmark did make a pretty amazing trade in selling WeWork Shares early in booking an enormous win. Correct, Bill?
Correct.
Okay. So so just an alternative. Wait. Let me
just wait. What's
answer the question
--
So so you do -- -- sweet or not. Yes.
I think he's gonna give you work
and actually answer it. -- secondary option. So
so the to me, the most important thing is tell your partners what you're gonna do
--
Yeah.
--
and then do it. Because you're making a deal upfront. So for us, the deal was If we invest in something in our venture fund and it's real and and it's realized it goes public, if we see venture like returns, which we define and they with them, as 2 to 3 x over a 3 year time horizon, we will hold. If we don't, we distributed. Last year, we distributed over $6,000,000,000, which was more than all the venture we raised in our first five funds.
Why not because I didn't like Unity or I didn't like Snowflake. Everybody knows how we feel about these businesses, but because we realized that according to the deal we had made with our partners, the framework was triggered. And the second thing I would argue is because people are talking about permanent funds now and all this, that I'm not sure that's the deal people made.
Yeah.
For me, if you're an investor or limited partner in our fund and you want to hold on to it, then also invest in my hedge fund. Because there, we haven't sold a share of Snowflake. But that is a different liquidity profile in the But what
I was getting too And
just let's put that work on the
side. Just in general, when the opportunities for firms to do a secondary prices. What's the right
thing to hear? I mean, that that's rare for for I mean, for an angel, I think it's very different, but it's rare for a venture firm to meet a secondary that has the the firepower to absorb the type that was Masa. I mean, that was very
unique situation.
--
situation. We typically distribute over 3 to 6 quarters following the lockup release unless there's some -- Just systematically
--
Yeah. Yeah. Dollar cost averaging. Yeah. There there have been a few exceptions.
We took OpenTable public in 9. at a very low value knowingly at a low valuation, and I held that until we sold it to booking. But because I felt the network effect was there, and it was gonna keep compounding in kind of thing. And look, if you I mean, look, clearly, you know, what Bezos has done or Zuckerberg like if you think you're sitting on one of those and you I mean, you have to ask yourself.
Well, those are
2.
Yeah. Well, I know. I know. But if you think you are -- Yeah.
-- like, you
know, maybe maybe the Carlson Brothers or another one. It it if it's gonna play out the way those did, you're gonna wanna hold it. Google it. But they're very rare.
Have you and your partners watched both we crashed and the dropout.
I can't speak for all
of them.
I've watched both of them.
You watched both of them.
What about what's more accurate?
I think that well, I don't know about accurate because I I only I don't know the the we super pumped was not accurate just because they made up a lot scenes. Like Drummond wasn't very active at all, but he's in a lot of the scenes. So a lot of them were made up. I think Lito did a better job of showing you who Adam Newman is and really got into the character.
He was incredible as Adam.
So good. That's an actor.
Yeah. An accurate.
--
Yeah. -- to your mean having met.
Yeah. And and equally on the other side, I think that Travis and you know him well is is way more nuanced He's he's one of the greatest, hardest working investors. I mean, founders I've ever worked with. He's super intelligent. He can be really charming
Yeah.
And those dimensions weren't explored in the characters.
Right.
Which I think is unfortunate.
I remember you telling me this is I don't know. In the height of we work, You said, Jamath, this is the single greatest salesman I've ever met in my area.
You told me you said you told me also About Adam Newman,
you said
You said the first time Adam Newman came in, you and your partner left the room and you guys look to each other, and you guys are like, we just have to invest in this guy because he can just --
I said, we should come we should never invest in real estate when we have to do this deal.
Yeah. What what what what
--
Let's let's ask Brad a question.
Oh, wow. Wow.
I watched the Jane and I were watching when we crashed.
I watched
the first two episodes, and the only thing I could think of, Bill, was what's Adam Newman's next company and where do I send the check? because
--
I think he already well, I don't know. I don't know.
He's got something brewing. I have a I have
a question for Brad. So so let's I wanted to go back. You know, I've been up here for, like, 8 hours today, Jake. I don't know how much more you want me to do. I'm exhausted after an hour of these things.
Honestly, don't know how you do it.
You have a round book.
He's been interviewing people for, like, 10 hours. I'm, like, done after an hour a half. Anyway, Brad, so let's go back to the hundred times ARR. Multiple -- Yeah.
--
the people are paying less. year. Because these investors, you know, with the benefit of 2020 hindsight, they may look kinda sheepish, but we know these investors and the PACE car setting the valuations for the whole industry, you know, as these big giant hedge funds, we all know who I'm talking about. They're super sophisticated people. I mean, you know, they're been very successful investors for a long period of time.
You know, what's the ex the word used when we talked about it privately was was gaslight gaslighted that, you know, the market was sort of gaslighting all of us into thinking that their public comps for these companies was were much higher than they were. Is that why is that behind the psychology of why these very sophisticated investors made these big mistakes, or how do you explain that?
Yeah. I I I think there's a massive amount of research that's been done that Buffett and Marx and many others have quoted that your ability to couch calculate risk goes down when you see a bunch of other people doing that thing. Right. Right? Because your body, your mind's telling you, well, I won't die because just doing what those other hundred people are.
That's why there's herd mentality. That's why the Lending effect Confirmation bias. Confirmation bias. And so It's not that I mean, you know, you didn't name him, but Tiger. Right?
We know him. They're great investors, etcetera. But you had to understand they were playing a different game. Right? And so when people who were building portfolios of 20 names We're trying to play the same game as a firm building a portfolio of 400 names.
Right? It was like trying to follow you know, SoftBank in 2017. So I'm not I mean, listen, we all thought Masa SoftBank was gonna be a wipeout in vision 1. It wasn't. Right?
Now I know he just had a huge recent mark. We'll see where it ultimately settles out. So I mean, I think from my perspective, You know, like Bill said, you get forced onto the field. There's a certain amount you have to do to stay in the game to have the conversation. But listen, as far back as, you know, last April, we were sitting around the table on Thursday Thursday at your place saying, this can't continue.
Right? And then in the fall, it was Bezos's selling, Musk is selling like all the signals were going off. Right? And so I think you have to know the game that you're playing. If you're a seed investor, an early stage investor, it doesn't matter what everybody else is doing.
you're you have an obligation to play a differentiated game. And what I would say today is if somebody calls me up tomorrow and says, hey, Tiger's doing this deal at 75 times ARR. Do you wanna do it? They would have to pry the dollar out of my fucking hand with a crowbar I'm not risking my money or my partner's money, doing something that we're not underwriting, you know, to no. I'm willing to underwrite David, to that 5 year average.
I think what you have in the market now is a huge opportunity because people are in a fetal position under their desk scared that the world has forever changed because the CEO's of big banks go on CNBC and start hyperventilating about deglobalization and hyper inflation and all this stuff. And not one of them is actually build a model and, you know, deconstructed the components of CPI. I think the much more likely explanation is that the trends that existed for 20 years still exist. They were interrupted temporarily by us saving ourselves from a catastrophe with COVID. The transient thing that everybody has come to make fun of, Right?
Transient can be a year, 2 years, 3 years. We will look back at this graph. And that inflation will roll over, and I suspect that those trends will continue. So I'm willing to underwrite to that. But if you told me you thought inflation was gonna be 5% for the next decade and the tenure was going to 7%, I would say sure every tech company in the every company in the market?
§05Segment 5
No. No. No. Short everything.
Short everything in the market, and don't invest a dollar in venture until you have line of sight and the market is repriced it. That's what the market is wrestling with right now. We have some people who are saying, you know, it's markets abhor uncertainty. and you have peak uncertainty. We have a war.
We have This is the hardest forecasting job in my career. I'll shut up. You have filibustering, but you know, like that is, you know, I think that is that ultimately the question if if you're a founder or you're investor, what are you willing to underwrite to?
Yeah. And, Bill, what what are your thoughts in terms of early stage and and -- Yeah.
That's exactly what I was thinking.
Like -- Me too.
--
he said he said don't take it. Like, if if if we we we love to invest in two people in a PowerPoint. like, if if that investment can happen today and all it doesn't matter. It doesn't matter if the
--
For sure.
--
inflation pops or interest rates go up It won't affect them. It doesn't even matter. It might work. It might help, actually.
Yes. Because you're hiring people at half price.
Right. And and there's less competition. I mean -- Yeah.
--
my biggest problem of the past 6 years was hyper competition. Like
--
Finding a CFO.
No. Just not just talent. I'm talking about, like
--
Oh, that oh, yeah. I remember Uber
And Lyft and, like, a
100
of 1,000,000,000 of dollars of money raised in the private market and shot onto the playing field out of a cannon. That's brutal. And that's that's not happening if inflation's going up.
It doesn't it doesn't allow the market to really sort out the winners and losers properly because the the companies that should contract get propped up for a little bit longer there's some talented people in those companies that don't then end up in the right home. You know, I I said this last week, the most transformational moment in our company's history at Facebook's history was during the GFC because of the fact that there weren't any other alternatives to go work.
By by the way, I found and and I shared this with my partners the other day. I've bound through my career, which wasn't 4 decades, but okay. Over
3.
Did the window after the correction is the calmest? where there's least anxiety for me at least. Like, everything slows down. People talk rationally. People aren't doing silly thing.
-- like a walk on the beach.
There's a lot more there's a lot more communication that seems rational and pragmatic.
Well and you can also maybe get to know a founder understand the business over 3, 4, 5 weeks and make a decision as opposed to 3, 4, 5 hours, and they tell you, hey, term sheets.
Well, and people think more unit like, think about unit Economics in a more reasonable way and you're not. You know?
This is this is why I mean, the
2
of you invested an Uber. I know because we've had this conversation built
Well, he mentions it for you.
You're too you're too humble to take credit. I did get
25,000,000.
But, you know, Bill's talked about, you know, benchmark's legendary for investing in eBay. And it was winner take all. Oh. Winter take all.
Yeah.
And I suspect that when you invested in Uber, you saw similar network effects you said, oh my god, an even bigger market.
You're a macro drawing.
This is gonna this is gonna be winner take all. Unfortunately, what you didn't plan on was Masa, raiding Saudi Arabia, getting a $100,000,000,000 of free money, and then blowing it out of a cannon into the market, so lift in everybody else could do diseconomic things. And literally for I did
not foresee that.
For 7 years
A confetti
So the entire profit margin of Uber was competed away by stupidity And you tweeted last week, and I noticed it because Jason and I may have a little something on the line here, you know, with respect to Uber, for the first time you tweeted after their quarterly earnings, maybe we're starting to see network effects show up at Uber, Because if you listen to the Lyft call, it was a train wreck.
For a decade, what what that money did was it made those businesses what we call the consumer surplus business. Yes. Meaning, what is a consumer surplus business? It's when all you win. Nobody else wins.
The employees don't win. The shareholders don't win. The investors don't win. Consumers win. You're getting subsidized rides.
You're getting subsidized food delivery. You're getting some subsidized form of content, and there are these consumer surplus businesses that abound right now that still exist, which are propped up by dollars that aren't being that they're not being allocated because they're competitive. That's just because they had
to Negative negative unit unit economic. to drive parole.
I mean, they've said on their call that they were going to continue subsidizing. In fact, they're gonna increase -- Increase.
--
their coupons
I have
a -- It looks like -- I
have a question for you guys.
Yeah. -- all out to hit the mountain. Yeah.
Alright, Bill. I just wanna ask you, the negative unit economics to drive growth trend was a big one. for the last 8 years, and it certainly seemed to have played out at Uber, but a lot of other delivery companies. Do you think that as a strategy assuming capital availability negative unit economics to drive growth. And then once you have the network and once you grab the market, you make money is a reasonable strategy.
It all depends on whether you can rain it back in or not. And, you know, I think DoorDash did an incredible job. I think Jeff Bezos did an incredible job back in
01.
I think if if if 50 entrepreneurs try that trick, 49 are gonna augrain.
By the
way, but can I order?
If you want that by the
way, that's the that's I think that's such a key takeaway.
Well, there's a there's another there's another part about it. You can only pull it off as well as if in that moment you have an effective monopoly, which Bezos effectively did and Tony did in those markets where he was operating. Nobody else was competing in Palo Alto, California and, you know
Well, they weren't competing the way he was. They weren't Yeah. For sure.
I have a I have a question for the 2 of you guys. What do you guys think about something like Instacart in a moment like this? So forty odd $1,000,000,000 valuation maybe gets reset to 24. Who knows file to go public? They file to go public confidentially.
Are
you guys investors?
Oh, I'm not.
I'm not. No. So candidly, what are you
what what's going on here?
I mean, I think it's a I think it's a provocative question because you have you have a business that's raised a ton of capital that was born of the era that we're talking about that probably did things that were unnatural. It were if they weren't negative unit economics, they were close. And they talked about it because they would say -- Yeah.
--
publicly we're gonna roll in advertising and then that's gonna bring us
I got I got in trouble once. I was this is on Bloomberg, so I think you can find this clip. But I was I was talking to Emily Chang, and she said, something to the effect of what did did you just see this latest Sequoia around? And I said and I made this joke. It was a complete joke.
It's not true. I was like, yeah. I went to Instacart. I bought 1 mango, had it delivered for free. Then I bought a second mango.
I sent an email to Doug Leoni. Thanks for the second mango. What a douche. I bought 4 grapes, and I said
--
I I would -- Consumer surplus. I would say -- You
get 4 grapes whenever you want.
It's hard to it's hard to judge your company from the outside because you can't look at the financials. But from our the product experience has evolved over a very long period of time. It's actually pretty good, and
and I
I suspect there's an asset value there and whether that can match up with what someone can afford to pay it.
Alright. We got it.
But but I think we got we got a round. Okay.
Bill, just a final question here. Wait. Wait. Hold on. Why do you think that's fine?
Well, we wanna know where the market is going. -- sincere.
Like, this is the goal
where the markets are. Alright. Brad, Where's the market gonna be at this time next year? And with that question.
We will be higher for growth stocks this time next year, but we may very well get there by way of lower and potentially meaningfully lower because the counter factual to the hyperinflation argument is not you can't deliver the counterfactual for at least 4 to 5 months. The facts don't exist until we actually see the facts play out. But my suspicion is we return to trend things become more predictable and investable again, and we bounce back up to the 5 year average.
Alright. Back now for you, Bill. Final question.
It is.
I don't get that one.
No. Too easy. You can answer it if you like, but I got a more important
one. 6.385% higher.
Okay. I know you're not gonna answer it, so I got a better one for you. You you're not in the next benchmark fund. Essentially, that means retirement of the spurs Now the market's down. You seem like you're a little bit bored.
Are you gonna get back into early stage investing? Yes or no? And are you missing it?
I think I don't know what that was. I I think I could I I might get intrigued with doing angel stuff the way Bezos did. I don't think I wanna practice the art taking board seats. I'm still on 10 that that I'm serving dutifully. and and I've played that game.
You know? Maybe similar to what David said about operating a business.
You mean a great founder? They got a good idea. You vibe. You put in a 500 k chat.
Yeah. I'd be open to that. Do you
wanna do you wanna tell her?
I'm very excited about public stocks here, actually.
Really? Yeah. Continue. It's not even that what?
Public stock. Yeah. Like, the valuations are creating super interesting. Such crazy.
You wanna do your Bill Gurley invitation for you?
I just gotta hear that.
I said,
okay. at the poker table.
Jake Cowell.
It's a great question.
Do I have to stay out
here for this?
Yes. I've been
I've been investing for the better part of 3 or 4 decades.
§06Segment 6
grew to
the floor, and ten boards I doodle served on. Every time I showed it all in with kings, Jamat sucks out on me with a 9, 10 suited, and that's just my luck right now. So maybe I'll just look the public market. I'll just have be a liquid. I'll be a liquid.
Ladies and gentlemen, BG Squared. BG Squared Babies.
we'll let your winners ride.
Rainman, David Saffens.
And it said -- We open store sit to
the fans, and they've just gone crazy with it.
like, white hair winter's right.
Besties are gone. That
is why a dog driveway.
We should all just get a room and have one big huge order because they're all just useless.
It's like it's like sexual tension, but they just need
to release them out.
What? You're the bee bee. What? You're every
be your feet.
Sweat. Sweat. Where did
you get Merkeys are back?