Late-stage VC markdowns and mistakes, market strategy, Ukraine/Russia update with Brad Gerstner

The episode opens with the usual round of mock introductions. The regular science-focused host is said to be taking the week off after a viral turn on social media discussing a possible famine tied to the Ukraine war, and a guest fills his seat. The guest is introduced with a string of jokes before being welcomed back as Brad Gerstner, and the other hosts get their own teasing nicknames.

One host sets the frame for the show: it is not a political program, but the war in Ukraine has become too acute to ignore, and the plan is to start with markets. The group turns to Brad Gerstner to walk through the SaaS market and the broader index, since listeners are asking what the war, interest-rate hikes, and the repricing of stocks mean for the months just past.

Gerstner calls the move a repricing, but says he thinks of it more as a normalization. His argument: in a post-COVID world, rates were always going to return to roughly where they sat in January 2020, around 2%, and the historic growth multiples of 2020-2021 had to come off. By his account, multiples had run 30% to 50% above the five-year pre-COVID average depending on the index, so that correction simply needed to happen.

He adds that the correction was always going to be painful once the artificial support of near-zero rates and large congressional and Fed injections went away. What he says he and most others did not anticipate was that, on top of returning to normal rates, markets would face fears of higher inflation and a devastating war in Ukraine. Those two shocks, in his telling, pushed up risk premiums and expectations for future rates. He stresses why this matters: investors had grown comfortable using a predictable rate, with the ten-year around 2.5%, to estimate value in their discounted-cash-flow models, and that anchor was suddenly thrown into doubt.

The discussion breaks for a light moment when a young child appears on screen. The hosts coo over the baby, trade the old line about never competing with babies or animals, and one notes that the child, Talita, is one of several. The exchange is pure banter and carries no analysis.

Asked what he expects for 2022 and into 2023, Gerstner says multiples are now below the five-year average for internet names and roughly at the average for software. He argues the rate path became much more certain after a Fed statement he thinks was under-reported: by his reading, the Fed expects inflation exiting the year around 4.3% and the ten-year near 2.3%, implying about 2% negative real rates. He explains that under the Fed's prior protocol a 4% inflation rate would have pushed rates to around 4.5%, which would require growth multiples roughly 30% below the five-year average. These are his figures and interpretation of the Fed's guidance.

His broader point is that investors across mid-stage venture, late-stage venture, and the public markets all need a view of exit multiples. If inflation and rates settle durably around 3% to 4%, he says, you simply have to adjust what you will pay for growth assets. He does not claim certainty, framing it instead as a distribution of probabilities, and cites bank forecasts raised that morning for the ten-year, to 2.7% for 2022 and as high as 3.5% for 2023. The attributed numbers are his and the banks', not independently verified here.

Over a five- to ten-year horizon, Gerstner says he does not believe in global stagflation or a lasting hyperinflation regime, but expects the next 6 to 18 months to be filled with volatility and uncertainty, during which capital allocators will put less into risk assets and pay less for them.

Chamath says he has no firm prediction for the year. He expects markets to drift upward in the short term before volatility returns, and describes his own approach as finding good long-term businesses, closing his eyes, and managing his own psychology rather than watching prices daily. He suggests that is what most people should be doing.

The part of Gerstner's argument he finds most striking is the implication for late-stage venture, which he says is badly mispriced and may need to be marked down by 50% to 60%. He points to the Instacart markdown reported the day before, which he describes as moving from a roughly $40 billion valuation to about $24 billion. These figures are as the hosts state them.

Chamath benchmarks the move against last February's highs, which he calls the peak for everyone. By his account, the comparable companies to Instacart are down somewhere between 50% and 70%: a food-delivery name off about 70%, Uber down roughly 60%, and DoorDash down about 55%. Against that backdrop, he argues, Instacart had to reset. Its particular problem, he says, is that it is a late entrant trying to go public in a crowded space where earlier players consumed large amounts of capital while rates were low.

He draws a lesson for founders: you want to raise when money is cheap, but you cannot control that timing. If you cannot control your own operating margins and profitability, you end up paying an enormous price for someone else's capital. He expects that dynamic to play out across several markets.

Turning to enterprise SaaS, Chamath says the sector has always claimed long-term profitability, but that only a few names have built enormous moats, citing ServiceNow and Salesforce at the high end and a next tier led by Palo Alto Networks. For most of the rest, he argues, people should question where durable profitability will come from. If that skepticism holds, he says, late-stage private SaaS companies are in trouble, and the same pattern appears in delivery, where public comps such as Uber and DoorDash have seasoned over years.

He frames the core risk again around late entrants: if you are the seventh, eighth, or tenth business trying to go public, and the earlier ones were, in his phrase, cash-burning machines, you will pay a heavy price to list. That, he says, is the reckoning now starting to show. He adds that the roughly $24 billion Instacart figure could prove cheap or could still be $10 billion too high, depending on how the market judges the last buyer of resort.

Asked whether Instacart missed its window to go public and what that implies for the backlog of hundreds of unicorns the venture community has been funding, Sacks says some of them will likely IPO at down rounds. Asked to define the term for newcomers, he explains that it means going public at a valuation below the last private round.

The consequence, Sacks says, is that late-stage private investors who assumed that backing a company in its final private round before an IPO was an almost automatic gain, a kind of arbitrage, will be disappointed, because it is not. He adds that Gerstner had been sharing the relevant charts with him since around December.

Sacks describes the charts: public SaaS valuations plotted as a multiple of ARR, and a companion chart for non-SaaS internet companies as a multiple of revenue. Once he saw them, he says, it became obvious that valuations were reverting to their historical mean. During the two COVID years, the multiples had risen to what he calls insane levels because of the liquidity pumped into the system, so the direction of travel back toward historical averages was clear.

One host offers a simplified version of Gerstner's framework. When rates are at zero, buyers will typically pay about 8 times revenue for a reasonably high-margin, high-growth software company, so a business with $100 million of top-line revenue might be worth about $800 million in the public markets. For every 100-basis-point rise in rates, he says, the valuation falls by roughly 15% to 20%. With rates near 2.75%, that implies a price somewhere between 30% and 40% below the zero-rate level.

The practical takeaway, he continues, is to revisit the headline valuations from the zero-rate era and haircut them by 30% to 40% in a steady state where the company keeps executing. Any slip in performance, or a further rise in rates, widens that discount. Gerstner agrees the relationship holds, clarifying that his 40% figure was offered as a numerical rule of thumb rather than a precise claim, and the hosts note there is little daylight between the two views.

Closing the segment, Gerstner returns to what investors are actually paid to do: find good companies and avoid bad ones, a task he says they are decent at. He notes that most fundamental investors disclaim being macro experts, saying they do not know where inflation or rates are headed and just try to find good companies. The excerpt breaks off here as he makes that point.

Gerstner argues that for a decade it was easy to ignore price because inflation sat near 2% and the ten-year near 2.5%. With that stability gone, he says, no investor can credibly claim price does not matter, because the exit multiple is central to the game. He notes that many who invested from 2013 to 2015, when entry costs were low, exited when entry costs were high, and that multiple expansion hides many sins.