E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

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00:00:00 Speaker 1 

Good evening. 

00:00:02 Speaker 2 

I’m here. 

00:00:06 Speaker 5 

I mean General Office, plane lands repossessed, second. 

00:00:13 Speaker 4 

I had mine for at least another couple years. 

00:00:16 Speaker 4 

I love my commercial commercial. 

00:00:19 Speaker 4 

Every span of all in the Secret Service stops me and takes the selfie. 

00:00:23 Speaker 4 

I cannot tell you the love in Miami. 

00:00:26 Speaker 4 

I sat down to have a meal outside. 

00:00:27 Speaker 4 

Were you by yourself, or is? 

00:00:29 Speaker 4 

By myself, it’s 11:30. I was like, hey. 

00:00:31 Speaker 4 

Everything is closed or there’s one little place. 

00:00:34 Speaker 4 

I kid you not. 

00:00:35 Speaker 4 

I sit down to guys come over. 

00:00:37 Speaker 4 

We love the pod and I’m. 

00:00:38 Speaker 4 

I’m trying to eat my meal and they’re asking me questions and they want to know where’s Friedberg? 

00:00:44 Speaker 2 

And I’m like. 

00:00:45 Speaker 4 

It’s so bad. 

00:00:46 Speaker 4 

Well, I showed them the video and they were in stitches. 

00:00:51 Speaker 4 

I resized ice. 

00:00:52 Speaker 4 

There’s only like 5 people have seen this video and now it’s used to since 7 people like they were so over. 

00:00:57 Speaker 4 

The moon 3. 

00:00:57 Speaker 5 

Should never Coco. 

00:00:58 Speaker 4 

Well, we could play it now. 

00:00:59 Speaker 4 

It was good. 

00:01:00 Speaker 4 

Thank you. 

00:01:01 Speaker 4 

It was incredible. 

00:01:01 Speaker 4 

I said we we we just wrote to. 

00:01:03 Speaker 4 

It right now is that I. 

00:01:04 Speaker 4 

Got a plan meeting? 

00:01:05 Speaker 4 

And here we go in 3/2. 

00:01:09 Speaker 4 

This is like. 

00:01:10 Speaker 4 

A nerd Olympics for Friedberg. 

00:01:11 Speaker 4 

He’s like nerd stretching. 

00:01:13 Speaker 4 

Having a nerd freak out, right? 

00:01:16 Speaker 4 

Do you know what I’m most excited about that I want us to? 

00:01:18 Speaker 4 

Look into Jason central. 

00:01:19 Speaker 4 

Oh my God, you’re on like nerd for all that’s like nerd Adderall. 

00:01:23 Speaker 4 

Take it easy, guns your master. 

00:01:26 Speaker 2 

I just got hasn’t been so happy. 

00:01:27 Speaker 4 

Since he rolled. 

00:01:28 Speaker 4 

The 30 on the 30 side, he died. 

00:01:32 

Oh my God. 

00:01:32 Speaker 4 

I’ve got a full staff. 

00:01:35 Speaker 2 

Oh, I’ve never played. 

00:01:37 Speaker 4 

Oh, really? 

00:01:38 Speaker 4 

You were playing League of Legends? 

00:01:39 Speaker 4 

OK. 

00:01:41 Speaker 4 

OK, I’m going to just apologize in advance to the audience. 

00:01:44 Speaker 4 

OK, here we go. 

00:01:45 Speaker 4 

Interruptions please. Thank you. 

00:01:46 Speaker 4 

In the voice to Jake. 

00:01:47 Speaker 4 

Now hold on. 

00:01:53 Speaker 5 

They’re hogging there, so what’s going on there? 

00:01:54 Speaker 3 

So guards. 

00:01:57 Speaker 4 

He’s super loud and has nothing to say, but we keep him around to give me as a producer and we don’t have to pay one good investment in his 30 year career. 

00:02:06 Speaker 4 

But he wrote a book about. 

00:02:07 Speaker 1 

It and tells all the VC. 

00:02:08 Speaker 2 

‘s to kiss. 

00:02:09 Speaker 4 

His rear? He’s one-of-a-kind. Will always come to your rescue when you’re in a bind, he calls himself Mr Calacanis. 

00:02:16 Speaker 4 

But we all just call him and **** Jason Calacanis, everyone. 

00:02:19 Speaker 4 

Jason, welcome to the challenge. 

00:02:20 Speaker 4 

Great to be here, actually. 

00:02:22 Speaker 4 

Are kind in touch. 

00:02:24 Speaker 4 

His words are incendiary and divisive, but only if you identify as a gender fluid progressives. 

00:02:30 Speaker 4 

Otherwise, to you, he’s a scholarly God fighting the Great War against the rise of the wolf mob. 

00:02:35 Speaker 4 

PayPal is the seven case most important guys from PayPal. 

00:02:39 Speaker 4 

He’s back with the same political speaking track to one and only. 

00:02:42 Speaker 4 

David Stacks David welcome to. 

00:02:44 Speaker 3 

Thank you. Thank you. 

00:02:44 Speaker 2 

The chef Chu. 

00:02:45 Speaker 5 

I think you need to work. 

00:02:46 Speaker 5 

Out from your rhymes, but. 

00:02:47 Speaker 2 

Yeah, we might need to. 

00:02:48 Speaker 4 

Tighten that up a workshop. 

00:02:49 Speaker 4 

Yeah, yeah, ’cause. 

00:02:51 Speaker 4 

She’s gone. 

00:02:52 Speaker 4 

Maybe gets better, contradict themselves twice a week, but we’re still enraptured because this makes sweaters are so slow. 

00:02:59 Speaker 4 

His monologues last most of the show, but he never talked anymore about IPO 2.0, as he’ll tell you over and over, he drinks the world greatest wine. 

00:03:07 Speaker 4 

But commenting on other topics as Abyss below his line, he’s Silicon Valley’s most renowned dictator. Our friends, the verbal masturbator Tomas Hollyhocks, Icator Dimas, welcome to the show. 

00:03:19 Speaker 2 

Great to have. 

00:03:19 Speaker 5 

You here? 

00:03:20 Speaker 5 

Wow, that was brutal. 

00:03:21 

God, I’m not done. 

00:03:23 Speaker 4 

We’re an increasingly notorious wack pack, litigated by David Sacks, emptied by an investor hat and soon to be cancelled because of the performance of some operators back. 

00:03:32 Speaker 4 

We are the all in pods and you’ll never get this 90 minutes. 

00:03:36 Speaker 2 

I’m the Sultan of Science with an IQ of 103. I’m taking the throne as this podcast UMC. Thank you, everyone. Gonna happen. 

00:03:46 Speaker 1 

And I just want to read the YouTube comments on this. 

00:03:49 Speaker 4 

Crap it. 

00:03:50 Speaker 1 

No, no, no, no. 

00:03:52 

No, no, no. 

00:03:53 Speaker 1 

UPS by commentary. 

00:03:57 Speaker 5 

Well, I mean, it’s a little. 

00:03:59 Speaker 1 

Bit short shorts to me, yeah? 

00:04:01 Speaker 5 

I I thought mine was fine, but I. 

00:04:04 Speaker 5 

I knew these other guys a little bit shell. 

00:04:05 Speaker 5 

Shocked right? 

00:04:06 Speaker 5 

Now I went a little hard. 

00:04:08 Speaker 1 

I actually wrote this for your for your birthday. 

00:04:11 Speaker 2 

And then I decided. 

00:04:12 Speaker 5 

To throw this OK, well. 

00:04:14 Speaker 1 

I guess maybe we save it for your. 

00:04:15 Speaker 4 

Birthday yeah, you may want to do something. 

00:04:17 Speaker 5 

Fun here for my birthday. 

00:04:19 Speaker 4 

I’ll be back next week with some actually fun intro material. 

00:04:23 Speaker 4 

To the audience. 

00:04:33 Speaker 1 

We open source. 

00:04:40 Speaker 4 

All right, all. 

00:04:41 Speaker 4 

Right, listen, stocks and crypto have plummeted. 

00:04:42 Speaker 4 

Tiger Coinbase, Shopify, employer refuse, mean stocks. 

00:04:46 Speaker 4 

It’s all gone, everybody. 

00:04:47 Speaker 4 

The world over. 

00:04:50 Speaker 4 

So where do we start? 

00:04:50 Speaker 3 

Right. 

00:04:53 Speaker 4 

You guys want to start with crypto? 

00:04:58 Speaker 4 

Where do we? 

00:04:59 Speaker 4 

Even begin should we talk about what happened when race went to zero and how financial assets inflated? 

00:05:06 Speaker 4 

And I think we talked about this during the pandemic, right when the pandemic was starting tomorrow, I remember. 

00:05:11 Speaker 1 

An early show we. 

00:05:12 Speaker 4 

Did where you and I talked about how it felt like we were going into like the Roaring Rapids? 

00:05:18 Speaker 4 

Riot is like magic down or Disneyland. 

00:05:20 Speaker 4 

I kind of described it like that, like it feels like you’re going through a rushing river. 

00:05:23 Speaker 2 

And there was just. 

00:05:24 Speaker 4 

All this capital flowing so fast, like overnight. 

00:05:28 Speaker 2 

There were it. 

00:05:28 Speaker 4 

Was like all of a sudden we went from this, like, COVID standstill to, Oh my God, this rush of capital. 

00:05:35 Speaker 4 

And you could feel it, right? 

00:05:36 Speaker 4 

All the businesses were all involved in and started getting term sheets and doing deals and there were stacks and transactions. 

00:05:42 Speaker 4 

It was an incredible. 

00:05:44 Speaker 4 

Rush of capital. 

00:05:45 Speaker 4 

And so when you know the central banks made interest rates zero and then banks could lend out money at close to zero and still make money. 

00:05:53 Speaker 4 

And then people could lever up assets and then those asset values inflated and they could borrow. 

00:05:58 Speaker 4 

More and keep. 

00:05:59 Speaker 4 

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. 

00:06:15 Speaker 4 

But really, it was just about, hey, if I invest X dollars and someone else is willing to. 

00:06:18 Speaker 1 

Pay Y dollars. 

00:06:20 Speaker 4 

For this asset, tomorrow I’m going to make money and you know, suddenly. 

00:06:24 Speaker 4 

The fridge and vacuum came out, which was like, let’s take all that money back as well. 

00:06:28 Speaker 4 

When interest rates got hiked, it was like all that money coming back out of the system and was like this whooshing sound like the airlock got opened and all the cash came back out and as a result, the bubbles just all deflated. 

00:06:39 Speaker 4 

And it happened so quickly. 

00:06:41 Speaker 4 

That’s what was crazy to me. 

00:06:43 Speaker 4 

Was that for so long? 

00:06:45 Speaker 4 

Everyone has 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 happens so fast and it’s still happening. 

00:06:57 Speaker 4 

People are still trying to unwind the things where they’re, you know, in seats, divisions, but you know it. 

00:07:02 Speaker 4 

I think it really is just. 

00:07:04 Speaker 2 

But it really is this. 

00:07:06 Speaker 2 

This kind of incredible. 

00:07:07 Speaker 4 

Moment where you see all the money gets pumped in, it all gets rushed out. 

00:07:11 Speaker 4 

As fast and I think we’re all kind of like, you know, in awe at how quickly the the response has been. 

00:07:17 Speaker 4 

Maybe some context is helpful. 

00:07:20 Speaker 4 

From 2019 up until the beginning for not really the beginning of this year, but probably Q4 of last year. 

00:07:30 Speaker 4 

You could have. 

00:07:32 Speaker 4 

Calculated an incredibly tight correlation between the stock market and the Fed money printer. 

00:07:41 Speaker 4 

So the Fed is in control of how they can introduce dollars into the economy. 

00:07:45 Speaker 4 

How do they do that? 

00:07:47 Speaker 4 

They literally manifest money. 

00:07:49 Speaker 4 

They don’t actually technically print this stuff. 

00:07:51 Speaker 4 

Let’s just assume. 

00:07:52 Speaker 4 

For these purposes that they actually do print it. 

00:07:55 Speaker 4 

And they literally take that money and they enter the market and they buy things with it under giving you this newly created money that they just created out of thin air. 

00:08:03 Speaker 4 

From 19, so from 2018 up until about 2 four last year, there was a .92 correlation between math from the S&P 500 going up. What does that mean? So? 

00:08:16 Speaker 4 

If you look at a -, 1 correlation, that means that if. 

00:08:21 Speaker 4 

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 .90% correlation effectively means that for every dollar that that created. 

00:08:40 Speaker 4 

The stock market is going up by that change dollar and that is definitely what we. 

00:08:44 Speaker 4 

Have up until November of 2021. 

00:08:48 Speaker 4 

Since the beginning of this year till about yesterday, so I think the number is still going up, probably by at least $5 trillion. We have fixed troise collectively as a society. 

00:09:00 Speaker 4 

$35 trillion in global market value. 

00:09:04 Speaker 4 

Now to give you a sense of that, that’s 14% of all global wealth that has been destroyed in basically five months. And for reference in 2008 when we went through, you know, a cataclysmic shock to the system that’s present the banking infrastructure of America. 

00:09:24 Speaker 4 

And put a potential contagion to the world that destroyed 19% of the world’s global wealth at that point. 

00:09:30 Speaker 4 

So you know we’re approaching some really crazy heading moments in time where in terms of the market correction in the value just. 

00:09:41 Speaker 4 

The difference here is that the last time around it was really about a handful of financial institutions and some very specific assets, right? 

00:09:51 Speaker 4 

Mortgage-backed securities, you know, some parts of the of the credit markets and then a bunch of financial stocks some others. 

00:09:59 Speaker 4 

Largely it this. 

00:10:01 Speaker 4 

Time around, as you just said, people keep literally. 

00:10:04 Speaker 4 

Everything that’s getting. 

00:10:05 Speaker 4 

Smoked there is not a place that you can effectively hide. 

00:10:08 Speaker 4 

That has been safe. Crypto smoked, the credit markets totally frozen, the equity markets now factored in the fair market. The S&P is basically flirting with a bear market now and I don’t really see any end insight meanwhile. 

00:10:24 Speaker 4 

We’re waiting for CPI to downtick. 

00:10:26 Speaker 4 

Inflation hasn’t really done that. 

00:10:28 Speaker 4 

It looks like consumer price index. 

00:10:31 Speaker 4 

How much that cost? 

00:10:32 Speaker 4 

So that’s taking a lot longer than we thought to sort of roll over separately. 

00:10:36 Speaker 4 

Jobless claims are now starting to tick up, which means that companies are beginning to affect the layoffs because they feel this pressure. 

00:10:43 Speaker 4 

So now you’re going to see an unemployment rate that starts. 

00:10:45 Speaker 4 

To go up. 

00:10:46 Speaker 4 

And then meanwhile, we’re fighting a proxy war in the Ukraine against Russia to the tune of about, you know, $40 billion every sort of month or so when we open the paper and decide to read about it. 

00:10:58 Speaker 4 

So you put all these things together, it’s not clear that there is the momentum to create a market bottom real estate finance if you. 

00:11:04 Speaker 1 

Look at it was a major. 

00:11:06 Speaker 4 

For compression in 2008, real estate held up. This holding up seems to be holding a little bit. 

00:11:11 Speaker 4 

I don’t know how about wrong. 

00:11:12 Speaker 4 

Nothing left with mortgages going up. 

00:11:13 Speaker 4 

So when you were talking about all the different categories are successful one cat. 

00:11:16 Speaker 4 

Sorry, that I guess hasn’t fallen yet. 

00:11:19 Speaker 4 

Sack with certain things. 

00:11:20 Speaker 5 

Yeah, I mean, look, we’re in a stock market crash that I think over the last week sort of became panic. 

00:11:25 Speaker 5 

I mean I think now there’s panic selling going on. 

00:11:27 Speaker 5 

That’s not to say that it’s all oversold, but certainly there are names now that are starting to come screaming buys, but nobody has a capital to to buy, I mean. 

00:11:36 Speaker 5 

It’s easy to say. 

00:11:38 Speaker 5 

You know in theory that you should be greedy when others are fearful and fearful when others are greedy. 

00:11:42 Speaker 5 

The problem is that everyone already fully deployed and then when the soccer crash, they got no cash to buy up new names. 

00:11:48 Speaker 5 

And, you know, that’s one of the things that. 

00:11:50 Speaker 5 

You’ve noticed in this downturn. 

00:11:52 Speaker 5 

And I’d say especially with crypto this with all the other crypto downturns there. 

00:11:56 Speaker 5 

Were always, you know, the crypto accounts. 

00:11:58 Speaker 5 

Saying hodl, or buy the dip, or if you had to legalize going. 

00:12:03 Speaker 5 

I don’t see any of that right now. 

00:12:04 Speaker 4 

No sure capitulation. 

00:12:04 Speaker 5 

Like, you know? 

00:12:06 Speaker 5 

Fear exactly, yeah, exactly. 

00:12:08 Speaker 5 

So this is just a route across the board. 

00:12:11 Speaker 5 

I agree with every asset class. 

00:12:12 Speaker 5 

I think home prices that’s coming, Jason, because like you said, mortgages are going. 

00:12:17 Speaker 4 

Up inventory is going up. 

00:12:20 Speaker 4 

So that’s a leading indicator. 

00:12:22 Speaker 5 

People can’t afford to pay mortgage they did before because rates are going up very fast. 

00:12:28 Speaker 5 

So you know sellers against top prices and until they’re willing to do that Crematory. 

00:12:34 Speaker 5 

Sure. So that’s coming. 

00:12:35 Speaker 4 

That’s a little dance that happens in real estate and the sellers don’t want to accept reality, and they don’t. 

00:12:39 Speaker 4 

Have to throw. 

00:12:39 Speaker 4 

’cause they’re living in as opposed to their. 

00:12:41 Speaker 4 

Crypto Holdings which they’re not living. 

00:12:43 Speaker 4 

In and they’re not getting values from. 

00:12:45 Speaker 5 

And frankly, I think the consumer in general, that’s the next shoe to drop here. 

00:12:49 Speaker 5 

Because right now. 

00:12:51 Speaker 5 

It’s been you had this sort of financial correction, you had this massive asset inflation. 

00:12:56 Speaker 5 

And now that that’s sort of the. 

00:12:59 Speaker 5 

The air come out of the balloon, but the consumer has generally been holding up pretty well. Obviously we had unemployment you know near 3%, very low, although those which is special wasn’t great, but the consumer was doing fine. 

00:13:10 Speaker 5 

It was sort of holding up the economy. 

00:13:12 Speaker 5 

Now I think you’ve got a bunch of different factors are going to really hurt the consumer over the next several months like you. 

00:13:17 Speaker 5 

Said is your face. 

00:13:18 Speaker 5 

Showing off means that home loans which are more expensive car loans any other? 

00:13:23 Speaker 5 

You know, personal consumption loans show US credit card debt now has all of a sudden skyrocketed. 

00:13:30 Speaker 5 

So there’s an article in Axios on this that the amount of consumer debt is surging and to this highest level of increase in. 

00:13:40 Speaker 5 

Over a decade. 

00:13:41 Speaker 5 

So consumers are turning to plastic to cover this. 

00:13:44 Speaker 5 

Lower costs. 

00:13:45 Speaker 5 

And then, because of inflation, that wages in real terms fell 2.6% over the past year. 

00:13:53 Speaker 1 

So in other words, this. 

00:13:53 Speaker 4 

Requested installation when you say match, yeah. 

00:13:54 Speaker 5 

Is inflation says here to look at wages in real terms, people are actually making less money. 

00:14:00 Speaker 4 

You give somebody a 10% raise, 8% inflation it. 

00:14:03 Speaker 4 

Mess after two. 

00:14:04 Speaker 5 

So now you’re giving them a 6%. 

00:14:06 Speaker 5 

Raise. Oh, I’m saying, yeah. Or or like like a 5.6% raise or something like that. I think there’s 8% inflation and net Nets are down 2.6%. 

00:14:15 Speaker 4 

But it’s not obvious. 

00:14:17 Speaker 4 

In purchasing power. 

00:14:19 Speaker 4 

In spending power. 

00:14:21 Speaker 4 

‘s at this point is. 

00:14:21 Speaker 4 

Like, I mean the number was 60 billions of new consumer credit last month, which is like something we haven’t. 

00:14:26 Speaker 4 

Seen in a very long time as consumers trying. 

00:14:29 Speaker 4 

Crazy this gap to afford the things that they’ve got. 

00:14:31 Speaker 4 

Used to spending money. 

00:14:32 Speaker 4 

On to jump up like that. 

00:14:34 Speaker 4 

Just indicates that we may be in the. 

00:14:35 Speaker 4 

Beginning of the consumer credit bubble now. 

00:14:37 Speaker 5 

Which is scary, right? 

00:14:39 Speaker 5 

This is, this is the question is what are the next shoes to drop? 

00:14:41 Speaker 5 

So, so you think about like what’s happening in the market? 

00:14:44 Speaker 5 

So, so far it’s mainly been multiple compression like earnings season was pretty good. 

00:14:50 Speaker 5 

I mean I never measure. 

00:14:50 Speaker 4 

In the evening for Samsung Champ. 

00:14:52 Speaker 5 

For some, so, so as the socks that got hammered with, generally the COVID socks. 

00:14:55 Speaker 5 

It was the telethons then Netflix zoom hearing shirt like Coinbase and Robin Hood with the day traders ’cause that was rolling off that stuff. 

00:14:56 Speaker 4 

June Palatine. 

00:15:04 Speaker 5 

So but so basically the COVID stocks. 

00:15:06 Speaker 5 

Have been hammered. 

00:15:07 Speaker 5 

But the B to B stocks. 

00:15:09 Speaker 5 

Actually had really good results. 

00:15:11 Speaker 5 

And yet you know the fast index is down like 80%, you know the average soft multiple, it was almost 15 times you know last year in the on the public comps and now it’s down to 5.6. 

00:15:25 Speaker 5 

So the task companies have been hammered despite having great earnings. 

00:15:28 Speaker 5 

So when we don’t get out there be to be there. 

00:15:31 Speaker 5 

They’re a little bit insulated. 

00:15:32 Speaker 5 

From the consumer, but what we? 

00:15:33 Speaker 5 

Don’t know is what happens over the next six months. 

00:15:36 Speaker 5 

If we go into a deep recession, then do even the B2B companies start? 

00:15:40 Speaker 5 

Being impacted. 

00:15:41 Speaker 5 

That would look like sacks. 

00:15:42 Speaker 4 

Just to be clear, you know, people maybe start canceling their Netflix or they don’t take that vacation. That’s the consumer getting his first a business that’s laying off 10 or 25% of their employees, which refers to see that contagion. They might also pull out their tax bill and say. 

00:15:57 Speaker 4 

Here’s to our fast products applying for. 

00:15:59 Speaker 4 

Let’s consolidate down to 8, right? 

00:16:01 Speaker 5 

I’ve got a fast startup that sells, you know, six and seven figure deals into enterprises. 

00:16:06 Speaker 5 

And they close their deal with Uber the day before Doris memo came out saying that we really focused on cost cutting. 

00:16:12 Speaker 5 

What Wall Street wants now is free cash flow. 

00:16:14 Speaker 5 

Yeah, we got to really sharpen our pencils. 

00:16:16 Speaker 5 

They were like shooting, got this across the finish line. 

00:16:18 Speaker 5 

If it had been like two days later, it just would’ve been a much tougher process. 

00:16:22 Speaker 5 

So first you’re right that companies that could impact with the ones of exposure to the consumer, but then those. 

00:16:26 Speaker 5 

Company, search, shopping. 

00:16:28 Speaker 5 

The pencils are buying less. 

00:16:29 Speaker 5 

So the question is how much our earnings now can be. 

00:16:32 Speaker 5 

Practice in the B2B space and what sort of recession do we have? I didn’t like where special analysis inevitable you to smoke point. 

00:16:41 Speaker 3 

You can’t have. 

00:16:42 Speaker 5 

14% of global wealth, white job practically overnight and not have that translated into a big. 

00:16:47 Speaker 4 

Recession monetary velocity is going to slow dramatically the money circulating around. 

00:16:51 Speaker 3 

Right. 

00:16:53 Speaker 4 

Is you can feel the break shopping ensure that the tightening insurgents. 

00:16:56 Speaker 5 

People really are just way. 

00:16:57 Speaker 5 

Taller than they were six months ago now. 

00:16:58 Speaker 4 

Yeah, guys, just to be clear, we actually haven’t started to remove the money in the system. 

00:17:03 Speaker 4 

So the process of quantitative tightening, which is the feds mechanism of removing liquidity. 

00:17:10 Speaker 4 

He’s going to start now to the tune of about $90 billion a month. But to run off all the money that they printed will still take three years, right? So we have to take about $3 trillion of excess capital. How is the economy? 

00:17:24 Speaker 4 

And so if you add that 3 trillion as well, that’s just going to disappear to the 14 trillion we’ve already seen over the 14% to 35 trillion tsar. 

00:17:34 Speaker 4 

You know you’re starting to touch numbers that are, you know, as bad as the GC in terms of global wealth destruction. 

00:17:39 Speaker 4 

And again Monday after the great financial crisis from suggestion. 

00:17:43 Speaker 4 

2001. 

00:17:44 Speaker 4 

Like the GOP, this wealth destruction is touching a lot of normal, everyday folks in very broad based ways. 

00:17:52 Speaker 4 

And that wasn’t necessarily the case. 

00:17:54 Speaker 4 

There were a lot of people that unfortunately lost their homes, but even that was still relatively continuous to the hundreds of thousands. 

00:18:00 Speaker 4 

Here we’re talking about 10s of millions of people owning every kind of imaginable asset class who’s seen wealth destruction, you know, somewhere between 25 to 90%. 

00:18:13 Speaker 4 

And that’s also free bird. 

00:18:14 Speaker 4 

Yeah, but I just want to make the case that people keep using this term, wealth destruction. 

00:18:18 Speaker 4 

And it was only wealth that was accumulated in the last few quarters since we had COVID and we released all this capital and made interest rates zero and flooded the market with money. 

00:18:29 Speaker 4 

So everyone kind of gets the money and then they’re like, hey, I’m worth a lot more. 

00:18:33 Speaker 4 

And then all of a sudden the free money taken back and you’re like, Oh my gosh, I’m worth less. 

00:18:37 Speaker 4 

I’ve been destroyed. 

00:18:38 Speaker 4 

It’s, you know, it’s it’s crazy. 

00:18:40 Speaker 4 

The reality is. 

00:18:41 Speaker 4 

This was meant to stimulate the economy. 

00:18:43 Speaker 4 

Money was released, and the idea when you released capital from a central bank is that that capital flows its way into productive assets, meaning businesses that can employ people, that can create products that people want to consider. 

00:18:56 Speaker 4 

And ultimately, it’s very hard to manage that when your only mechanism is to raise or lower interest rates and make capital available. 

00:19:03 Speaker 4 

Or bye bye. 

00:19:04 Speaker 4 

At the end of the day, a lot of that capital flowed into financial assets and inflated. 

00:19:10 Speaker 4 

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 learn, and all of those assets, the value of the stock went up, but the capital didn’t necessarily flow into creating new jobs. 

00:19:24 Speaker 4 

Creating new businesses and creating new products. 

00:19:26 Speaker 4 

I want to finish this one because I think. 

00:19:27 Speaker 4 

It’s really important and. 

00:19:29 Speaker 4 

At the end of the day. 

00:19:30 Speaker 4 

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 stimulates a real productive economy. 

00:19:44 Speaker 4 

That’s where we have a problem with stagflation and where we are inevitably going to run into a recession, and I think the biggest concern I have. 

00:19:51 Speaker 4 

Yeah, and if we’re in a recession right now? 

00:19:52 Speaker 4 

Yeah, we are. 

00:19:54 Speaker 4 

We’re biggest concerns. 

00:19:55 Speaker 4 

The biggest concern I have, as I mentioned earlier, is this consumer credit problem. 

00:19:59 Speaker 4 

A lot of consumers got used to the free money over the past two years and people took that money and they went and bought these cards. 

00:20:05 Speaker 4 

Or they. 

00:20:06 Speaker 4 

Chris so or they bought one thing or another NFT and a lot of people got used to living a lifestyle that allowed them to stand in a way that they otherwise would not have been able to spare. 

00:20:15 Speaker 4 

And then all of a sudden the rug got pulled out and now everyone like, well, I want to keep living this lifestyle. 

00:20:21 Speaker 4 

I want to keep sending this money. 

00:20:23 Speaker 4 

I want to. 

00:20:23 Speaker 4 

I I had all this stuff taken away from me. 

00:20:25 Speaker 4 

Shoot, what am I going to do and? 

00:20:27 Speaker 1 

Then they take our credit. 

00:20:29 Speaker 4 

And the credit markets have been tightened enough yet on the consumer side that we may find ourselves in a really ugly consumer credit bubble. 

00:20:35 Speaker 4 

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, 7X. 

00:20:46 Speaker 4 

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 the massive housing bubble. 

00:20:57 Speaker 4 

We’re missing a bunch of important data points. 

00:20:59 Speaker 4 

Here’s the most important thing that happened was we changed the way that we were allowed to capitalize mortgages and the. 

00:21:04 Speaker 4 

All right. So that’s fundamentally is what process, OK. So for example you are not allowed for example to have a qualifying mortgage be over $1,000,000 at the end of last year we. 

00:21:14 Speaker 4 

Change those. 

00:21:15 Speaker 4 

So if you access those effects that allow the FDIC and all these, you know, Fannie Mae and Freddie Mac and all of this financial, gobbledygook, acronym, infrastructure. 

00:21:25 Speaker 4 

That props up the US economy. If you factor in those rules, I don’t think it’s as extreme as you’re describing. 

00:21:31 Speaker 4 

What do you think? Consumers have more deaths per relative to the value of their home, sorry, just relative to their income, than they did during the 2008 financial? 

00:21:38 Speaker 4 

Crisis at the fact. 

00:21:40 Speaker 4 

Had a meeting with the structural way the market works. 

00:21:41 Speaker 3 

I mean. 

00:21:42 Speaker 4 

I think thing is, the market allows you to be that leopard without actually getting foreclosed on or you know, you’re allowed to get them all the ways that allow you to do that. 

00:21:50 Speaker 4 

All I’m saying is it’s not like excess credit is being built up in the system abnormally by consumers. 

00:21:57 Speaker 4 

It’s just that these products again are being structured in a way that that gets. 

00:22:01 Speaker 4 

People down and real estate is a very unique category because you have high buyers taking stuff off the market. 

00:22:06 Speaker 4 

You have regulation not letting people build more, so I would be very reticent to extrapolate what’s happening in real estate. 

00:22:13 Speaker 4 

Yeah, I don’t think we have like a. 

00:22:15 Speaker 4 

Uh, issue rules? 

00:22:17 Speaker 4 

To be completely honest with you, I I think that we may have a looming credit crisis. 

00:22:23 Speaker 4 

But the practical issue today is I think asset wealth destruction in the financial markets, whenever that happens, generally tends to lead to what fax said, which is belt tightening by companies. 

00:22:33 Speaker 4 

Both on maximizing short term free cash flow which unfortunately the way to cut back is by cutting prospects and the way that you cut callbacks faced by unfortunately spending less on goods and services which affects other companies and firing employees. 

00:22:49 Speaker 4 

And I think what you’re going to start to see or a bunch of those things where these companies. 

00:22:54 Speaker 4 

Taking short term optimizations, then how that unfortunately impacts the consumer is what people said, which is that if the consumer was already living, you know, sort of tapped the Knights edge and using a lot of credits to basically allow them to live a lifestyle. 

00:23:11 Speaker 4 

That wasn’t sustainable. 

00:23:13 Speaker 4 

Whether that meant not having a job or whether that meant, you know, vacationing and staying near being bees, all of that will come to an end. 

00:23:20 Speaker 4 

Now you could say what is the Canary in the? 

00:23:22 Speaker 4 

Coal mine and. 

00:23:24 Speaker 4 

Let me just give you one thing that hits the wire this morning. 

00:23:28 Speaker 4 

Which will show you how bad the credit market is. 

00:23:32 Speaker 4 

So there was an article in Bloomberg that came out that said instead of Elon taking enlarging loans to fund their acquisition of Twitter. 

00:23:43 Speaker 4 

There is an idea being floated by Morgan Stanley to use convertible debt. 

00:23:49 Speaker 4 

I love this idea because I think it’s excellent mechanism. 

00:23:52 Speaker 4 

Just to you know when Ellen had convertible debt on Tesla, but. 

00:23:56 Speaker 4 

Was you know. 

00:23:58 Speaker 4 

One big escape velocity moment for me in my career in 2016, so I believe in these. 

00:24:03 Speaker 4 

Products, I believe that they were. 

00:24:06 Speaker 4 

But the reason I’m bringing this up is that the what is said about the frequency, 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. It’s the single greatest investors cost of capital for debt in today’s market is 14%. 

00:24:25 Speaker 4 

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 whispering asset, one by is the greatest science provide generation. 

00:24:35 Speaker 3 

Right. 

00:24:37 Speaker 4 

There’s a bunch of stuff we both share price that’s pretty mispriced. 

00:24:41 Speaker 4 

But I think. 

00:24:41 Speaker 4 

One thing that’s a silver lining here is we did build up 11 million job openings. 

00:24:47 Speaker 4 

Labor participation is really low right now, even post pandemic people. 

00:24:53 Speaker 4 

If you ask this question, I think she must. 

00:24:55 Speaker 4 

Have like how are people going to? 

00:24:57 Speaker 4 

Get out of the free books points a lifestyle issue like they want. 

00:24:59 Speaker 4 

To, uh, so pretty easy. 

00:25:02 Speaker 4 

Go back to work, get a second job, start working again. We we peaked, you know, in the 90s with something around 67% labor force participation and then we’re now, you know, just right around 62. This is a large number of people who could go back to work now. 

00:25:22 Speaker 4 

You mentioned that in flight check up ever so slight in unemployment claims. 

00:25:26 Speaker 4 

We’ll see if that goes up. 

00:25:28 Speaker 4 

But I think the potential way out here, James face is at its pardon, meaning like if you look now the last three. 

00:25:30 Speaker 2 

That’s what I see. 

00:25:34 Speaker 4 

Or Forbes ranked. 

00:25:36 Speaker 4 

Unemployment claims readings in a row have largely showed that it’s floored. 

00:25:40 Speaker 4 

And it looks like in the last couple of readings that it’s starting to pick up well with 3% on the plane. They were kind of on a floor you can’t possibly have less. 

00:25:48 Speaker 4 

That’s fine. 

00:25:49 Speaker 5 

That’s one that’s growing up. 

00:25:50 Speaker 5 

I think employment has peaked, unemployment going up, and it’s exactly what your mom said. 

00:25:55 Speaker 5 

Look, all of us in our board meetings last several months, really since beginning of the year, have been warning founders that the environment is changing. 

00:26:02 Speaker 5 

Don’t assume that we’re always gonna have a boom. 

00:26:04 Speaker 5 

The castle is going to be there, however. 

00:26:05 Speaker 4 

And nobody taking. 

00:26:06 Speaker 5 

Advice, well, because it there’s any resistance because people don’t want to believe it. 

00:26:11 Speaker 5 

And then in addition, it’s always like, well, how do you? 

00:26:13 Speaker 5 

Know it’s not going to bounce back, right? 

00:26:16 Speaker 5 

And now I. 

00:26:17 Speaker 5 

Think after what’s happened really since April and really in the last week or two, I think no one really saying that anymore. 

00:26:24 Speaker 5 

Everyone understands that we’re in a new environment and they just don’t. 

00:26:27 Speaker 5 

They either have experience with how bad it’s going to be or they don’t, but everyone understands. 

00:26:31 Speaker 5 

Things have changed so every every. 

00:26:33 Speaker 5 

Company that’s that’s acting sensibly. 

00:26:36 Speaker 5 

Is freezing their hiring, putting a break on the growth, you know, slowing down their plans and that will actually translate into, you know, less operation? 

00:26:46 Speaker 4 

Yeah, we’ve we’ve really pushed. 

00:26:50 Speaker 4 

That exact plan, I used to sit down with our founders from indeed board meetings. 

00:26:55 Speaker 4 

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? 

00:27:02 Speaker 4 

So 3 flavors of kind of like kind of go to do what you’re doing, actually put a little bit more gas on it and you know, press. 

00:27:10 Speaker 4 

And then really go for it. 

00:27:12 Speaker 4 

I stopped all of that. 

00:27:14 Speaker 4 

You know, these last five months have been me and my founders basically saying, OK, guys, what’s the extreme bear case when the bear case. 

00:27:22 Speaker 4 

And then what’s the base case and 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? 

00:27:24 Speaker 1 

But normal then. 

00:27:35 Speaker 4 

And when that’s not possible, how do we minimize burns where we can extend our runway as long as possible and show technical validations so that we can? 

00:27:43 Speaker 4 

Raise money on reasonable terms, not even great trips. 

00:27:46 Speaker 4 

And if the boards of these private companies haven’t been doing that for the last five or six months and those and the burn hasn’t dramatically changed, I think that they are. 

00:27:55 Speaker 4 

Or they did been a little derelict in their duty. 

00:27:58 Speaker 4 

It’s a it’s a if you’re not doing a very good job as a board member or investor, if you haven’t forced these conversations with you and you didn’t expect that each year to bring this to you in many ways because it’s very hard for them with this, with the focus that they had every day to put this front of mind. 

00:28:13 Speaker 4 

But as I said you. 

00:28:15 Speaker 4 

I have to do it as a director, but your words of faults at all. 

00:28:19 Speaker 2 

You have to do. 

00:28:21 Speaker 4 

But it’s been quite the opposite. 

00:28:22 Speaker 4 

We saw with Fastcam Co was the opposite, right? 

00:28:24 Speaker 4 

People were. 

00:28:25 Speaker 4 

Just not even considering. 

00:28:26 Speaker 5 

It it’s a survival risk is on the table, you really have to act differently. 

00:28:31 Speaker 5 

It’s so like the difference between a poker tournament and a cash. 

00:28:34 Speaker 5 

Game, you know, like players say very differently and it looks like we turn that the players are much more conservative. 

00:28:40 Speaker 5 

Because once you’re out, you’re out. 

00:28:42 Speaker 5 

So if you move along and get busted out of the tournament, whereas in a cash game you can just read by, well, we’ve gone from basically being in a cash game where people can just revive. 

00:28:50 Speaker 5 

Maybe they won’t, even if you go out and raise more money. 

00:28:52 Speaker 5 

Maybe it’s not. 

00:28:52 Speaker 5 

The evaluation they want maybe? 

00:28:53 Speaker 5 

It’s not as much as they want. 

00:28:54 Speaker 5 

But, you know, in that boom. 

00:28:56 Speaker 5 

You can always just go raise more money now if there’s no more money available. 

00:29:00 Speaker 5 

To keep funding your plan if it’s not working, you really have to think about survival and you ***** being more conservative. 

00:29:06 Speaker 5 

You can’t let yourself bust out of the tournament. 

00:29:08 Speaker 4 

By the way, I’ll say two things on that. One, what you’re describing is exactly the condition that is now led to the fact that roughly 1/3 of public biotech stocks are trading below cash. 

00:29:19 Speaker 4 

So they’re, yeah, so their entity value, the biotech industry is a whole thing, buyer in particular, but really. 

00:29:28 Speaker 4 

Biotech about 1/3 of companies now trade below their cash balance. I’ll send you guys some some links on this, nick. I’ll add it to the show notes afterwards. 

00:29:37 Speaker 4 

And the reason is, yeah, 40% of them have less than 1020 months of tasks. 

00:29:45 Speaker 4 

Uhm, 60% of them have less than 2 1/2 years worth of cash. And historically, biotech companies, they kind of run an R&D cycle to prove that their biotech product will. 

00:29:56 Speaker 4 

And they’ll be a pharma company that will swoop in and give them some money to go through the next phase of clinical trials or they’ll do. 

00:30:01 Speaker 4 

A secondary offering and raise more money to get through the next. 

00:30:04 Speaker 4 

But because the capital markets are gone now for them or the assumption? 

00:30:08 Speaker 4 

Is hey, there’s not going to. 

00:30:09 Speaker 4 

Be any capital left. 

00:30:10 Speaker 4 

They’re still burning whatever it is, 20304080, a $100 million a quarter. They’ve only got a few more $1,000,000 in the bank and everyone 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. 

00:30:24 Speaker 4 

Get through the next phase of clinical trials is much lower, therefore the the ascribed. 

00:30:29 Speaker 4 

Value of your. 

00:30:29 Speaker 4 

Business is negative and we’re seeing that across the board. I started working in Silicon Valley in 2001. That’s when. 

00:30:35 Speaker 4 

I graduated. 

00:30:37 Speaker 4 

From Cowen, I worked at an investment bank we check every day, and that was rightafterthe.com implosion. 

00:30:42 Speaker 4 

Most of what I worked on was public companies that were selling for less than. 

00:30:45 Speaker 2 

Cash today we. 

00:30:47 Speaker 4 

You know, we don’t talk about that over the last 20 years, so it just never seems to. 

00:30:50 Speaker 4 

Well, it’s a phenomenal thing to happen, right. 

00:30:52 Speaker 4 

And you could basically what that means is you could shut the company down and make a profit and still own the IP. 

00:30:58 Speaker 4 

So we met with what happened in. 

00:30:59 Speaker 4 

The dock on the left. 

00:31:00 Speaker 1 

We thought we sold. 

00:31:01 Speaker 1 

A bunch of companies I was on. 

00:31:02 Speaker 4 

The banking side of representing the sellers, the President, the public company. 

00:31:06 Speaker 4 

’cause there was no business. 

00:31:07 Speaker 4 

They were just burning money, and there was no line of sight from making money or line of sight to raising money. 

00:31:12 Speaker 1 

So the board said, you know what, we just got additional. 

00:31:14 Speaker 4 

Discussing got shot. 

00:31:16 Speaker 4 

And then, you know, hey, what’s cheaper? 

00:31:18 Speaker 4 

Shutting it down, we’re going to make us more money shutting it down and attributing attacks or letting a private equity firm come in and shut it down for us. 

00:31:23 Speaker 4 

And in a lot of cases, they sold these public companies to private. 

00:31:26 Speaker 4 

Equity firms, let’s say the company got 100 million cash, they sold it for 60 million. Private equity firm comes in and they’re like, boom, boom, boom, everyone fired this thing, shut down and they liquidated it and they took, you know, they made a $20 million spent on that thing. 

00:31:38 Speaker 4 

I will say on the on the flip side for price. 

00:31:40 Speaker 4 

For private markets and I think this is. 

00:31:41 Speaker 4 

A really important maybe point for us to have a conversation about. 

00:31:46 Speaker 4 

Over the past decade. 

00:31:47 Speaker 4 

As you guys know, there have been a. 

00:31:49 Speaker 4 

More venture money. 

00:31:50 Speaker 4 

Raised than in any kind of histories. 

00:31:52 Speaker 4 

The numbers have been going up every year, the number of funds, total capital rates. But at the end of 2021, if you look at the total funds raised and the total capital deployed by venture funds, we have a $230 billion capital dry powder hangover. 

00:32:05 Speaker 4 

So there’s a. 

00:32:06 Speaker 4 

There’s a quarter trillion dollar. 

00:32:08 Speaker 4 

The cash sitting in venture coppers that they can call and write and checked into. 

00:32:12 Speaker 4 

So I think it provides a really interesting contrast that sets us up for a dynamic over the next few years of what’s going to happen in private markets. 

00:32:20 Speaker 4 

Because you’re going to have the haves and the have nots. 

00:32:22 Speaker 4 

Haves are going. 

00:32:23 Speaker 4 

To have a lot of cricket money available to them ’cause these venture funds need. 

00:32:26 Speaker 4 

To be deployed over the next few years. 

00:32:28 Speaker 4 

The have nots are. 

00:32:29 Speaker 1 

The ones that don’t have proof points to. 

00:32:31 Speaker 4 

A viable outcome in their. 

00:32:32 Speaker 2 

Business, but the haves are going. 

00:32:34 Speaker 4 

To have a lot of capital. 

00:32:35 Speaker 4 

Available to them and it can be changed. 

00:32:36 Speaker 4 

With one caveat. 

00:32:39 Speaker 4 

Pricing evaluation. 

00:32:41 Speaker 4 

So what do you guys think Ohio grown up with two tablets process of everyone saying, hey, there’s no capital available, so capital available, that’s not true. 

00:32:42 Speaker 3 

Like in the. 

00:32:46 Speaker 4 

There’s more capital than has ever been available. 

00:32:48 Speaker 4 

So how does it get allocated? 

00:32:50 Speaker 4 

The first thing is to multiply at what valuation, and so there’s going to need to be disciplined and they’re going to do right so that money will go to the winners. 

00:32:59 Speaker 4 

Other things to remember is during the great financial crisis. 

00:33:03 Speaker 4 

For about a year, maybe even two, many venture firms did not want to call capital from LP’s whose portfolios are crushed in, LP says. I know we’re on the hook, fullness, but I would appreciate it if you don’t make a ton of investments right now, ’cause, we don’t want to clear our already, you know, demolished portfolios to then fund your venture fund. So those are commitments. 

00:33:24 Speaker 4 

Not cash in the bank. 

00:33:26 Speaker 4 

And those commitments only come from Harvard, GAIL, CalPERS, Ford Foundation, whoever morals on credit Kettering, if the GPS could ask the LP for that. 

00:33:36 Speaker 4 

And the last time this happened, and I don’t know if it’ll happen this time, but I think you remember churchmouse the LP specific web. 

00:33:42 Speaker 4 

Hey, pump the brakes. Yeah, let me build on how you faced in 2000. The more extreme measure happened with which is that most of the venture investors return the money and just cancels and pull up the LPI. 

00:33:54 Speaker 4 

Now what? They do that? 

00:33:55 Speaker 4 

Why would you tear off conditions for 1/4 trillion dollars? It’s because your portfolio is trash. 

00:34:02 Speaker 4 

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. 

00:34:15 Speaker 4 

And so, you know, it’s very hard for you to look at from our PM line all of a sudden. 

00:34:19 Speaker 4 

Say, you know what? 

00:34:20 Speaker 4 

I’m going to deploy this fresh capital. 

00:34:22 Speaker 4 

And I’m in a psychologically good state of mind to do that well. 

00:34:26 Speaker 4 

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. 

00:34:37 Speaker 4 

The returns are not captured by the same people and the reason is because they have the psychological baggage of a horrible portfolio or horrible marks. 

00:34:46 Speaker 4 

So for example, there was a tweet from alpha on this device. 

00:34:50 Speaker 4 

This is from guiding master. 

00:34:52 Speaker 4 

He says to put the depth of the reset in contact. 

00:34:57 Speaker 4 

To justify a $1 billion value valuation, $1 billion valuation. 

00:35:02 Speaker 4 

A cloud uniform today would need to plan on doing $178 million in revenue in the next 12 months. 

00:35:12 Speaker 4 

If you apply the current median cloud software multiple of 5.6 times forward revenue. Now let’s put. 

00:35:19 Speaker 4 

It in a different way. 

00:35:20 Speaker 4 

If you’re a company that’s worth 10 billion. 

00:35:24 Speaker 4 

That means that you have to come up with $1.78 billion of annual recurring revenue for the market to give you a median multiple. 

00:35:33 Speaker 4 

How many S companies in Southwood socks? 

00:35:35 Speaker 4 

You’ll notice how many S companies even get close to. 

00:35:38 Speaker 4 

2 billion as they are. 

00:35:40 Speaker 4 

Probably a lot less than the number of fast companies that are worth 10 billion. 

00:35:44 Speaker 4 

On paper, so you know. 

00:35:46 Speaker 4 

By the way, we should also talk about who’s the bag holder in that transaction is the employees and we should, we should explain why that is in a second. 

00:35:53 Speaker 4 

Let’s just to build on what you know Jason is saying and free booklet listing is. 

00:35:57 Speaker 4 

In moments like this, I would ignore all of the dry powder and all of that stuff. 

00:36:03 Speaker 4 

I think that there are a lot of venture investors today who’ve deployed way too quickly, and if they want to have any reputations over the next 10 years, we’ll have to rehabilitate their portfolio. 

00:36:13 Speaker 4 

And credit return. 

00:36:14 Speaker 4 

One, let me just say one thing. 

00:36:15 Speaker 4 

I saw an analysis. 

00:36:17 Speaker 4 

From one of the biggest venture firms in the valley over a 14 fund cycle, so they they looked at data from 14. 

00:36:25 Speaker 4 

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 supported her down rounds or you know some other sort of situation where at the time it was let’s support our portfolio 40% of their capital. 

00:36:44 Speaker 4 

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. 

00:36:54 Speaker 4 

Around kind of. 

00:36:54 Speaker 4 

Business it. 

00:36:55 Speaker 4 

Was a declining business. 

00:36:57 Speaker 4 

And in that support, they lost half their money, the other 60% they make like 3X, right. So it kind of averages out that they made kind of whatever, there’s two, 2, 1/2 X on the whole portfolio. 

00:37:07 Speaker 4 

But I think it really speaks to the conditions that a lot of venture firms may make some 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 needs to support of capital, and I know it can get there, but that’s the least ultimately cost the LP’s and costs to fund more, and it’s why we saw such negative return cycles happen afterthe.com crash. 

00:37:28 Speaker 4 

With the start of. 

00:37:29 Speaker 4 

This since 1994. 

00:37:32 Speaker 4 

OK. 

00:37:33 Speaker 4 

Just just how many funds, private equity growth trends or funds even existed that are greater than a billion dollars? 

00:37:42 Speaker 4 

So this is over you know 30 years, so how many, how many funds you can even existed over a billion dollars since 1994 today, how many funds? 

00:37:51 Speaker 4 

Like how many funds have been raised that are over a billion? 

00:37:53 Speaker 4 

Are the brand. 

00:37:55 Speaker 4 

Yeah, since 1994, how many do you think 442? 

00:37:59 Speaker 4 

1270. 

00:38:01 Speaker 4 

Six or you’re including private equity and? 

00:38:03 Speaker 4 

Oh, it’s the other essentially. OK. So now also is 1276 private equity funds or growth funds for crossover funds or direct refunds, how many do you think have actually managed to return more than 2.3 times the money 2.3 points? 

00:38:21 Speaker 4 

10 percent 10% five percent, 10%. 

00:38:24 Speaker 4 

22 of them. 

00:38:25 Speaker 4 

Plug under. 

00:38:26 Speaker 4 

Under 2%, wow. So here’s the point that I’m trying to make. You know, investing it very hard, setting up everybody looks like a genius. 

00:38:35 Speaker 4 

All of these sons come up with all of their nonsensical ways of showing errors and all of these fake gymnastics. 

00:38:43 Speaker 4 

But the truth? 

00:38:44 Speaker 4 

Is in the data. 

00:38:45 Speaker 4 

And what the data says is that in the last 30 years, the minute you get over ski trips at a billion dollars, very few people know what they’re doing. 

00:38:53 Speaker 4 

Very few. 

00:38:54 Speaker 4 

It’s hard. 

00:38:55 Speaker 4 

It’s hard. 

00:38:55 Speaker 4 

So the multiples compressed as you get to bigger deals early where the value is deny this miracle truth, yes. 

00:39:04 Speaker 4 

So again I go back to you know. 

00:39:06 Speaker 4 

The person that’s always been talking about this, and who again, may be proven right yet again, is Bill Gurley. 

00:39:13 Speaker 4 

You know, everybody would make fun. Why is benchmark only waiting $450 million? Why would they only raised? 

00:39:18 Speaker 4 

$500 million. 

00:39:20 Speaker 4 

And they always were consistent because over the last 30 or 40 years, over multiple cycles, we have teams. 

00:39:27 Speaker 4 

But this is the best way to optimize, both for return the incremental quality and for making our LT’s happy. 

00:39:34 Speaker 4 

Every variable is optimized at around 550 focus and then you see 5 billion, six billion, $10 billion funds funded, 5 billion, six billion, 10 billion, $20 billion private companies and I think. 

00:39:47 Speaker 4 

What we have to do is put two and two together and realize that it’s going to be very difficult flooding from here for a lot of servers and when the venture or crossover investor. 

00:39:58 Speaker 4 

Has this mental baggage that they’re dealing with, they’re not going to be able to provide fundamentally sound advice to the CEO. 

00:40:05 Speaker 4 

They’re going to optimize for making that portfolio of terminating the bleeding in the portfolio. 

00:40:10 Speaker 4 

The CEO will make a bunch of suboptimal decisions. 

00:40:12 Speaker 4 

It’ll probably lead to a bunch of layoffs, bad technology decisions, things slow down. 

00:40:17 Speaker 4 

And the cycle is reflected in that sense. 

00:40:19 Speaker 4 

And so, you know, we’re going to go through a few years of saving this loss. 

00:40:22 Speaker 4 

Rounds liquidation preference is nonsense. 

00:40:25 Speaker 4 

Next will be. 

00:40:27 Speaker 5 

So, so look, I I agree with that point that these mega funds are very hard to repaint because they require you to have multiple winners, not just winners of mega winners. 

00:40:35 Speaker 5 

So you know, we’ve always kept our funds in that 5 to $600 million range where you really only need one winner per fund to basically return the fund. So we go back to this point about dry powder. 

00:40:44 Speaker 4 

Do you have friend Matthew explained the method that you took around 1520% of a winner. Stone, it’s Marcus, is not subject to 10%. 

00:40:49 Speaker 5 

Yeah, I mean like, even less by. 

00:40:51 Speaker 5 

The time, the research project. 

00:40:53 Speaker 5 

Right, exactly. So you know if you own 10% of 1 decade corn that a billion dollars and if the funds are funds you. 

00:41:02 Speaker 5 

Doubled your funds. 

00:41:03 Speaker 5 

But if it’s a? 

00:41:04 Speaker 5 

One or $2 billion funds you haven’t even paid. 

00:41:06 Speaker 5 

Back the funds yet so. 

00:41:09 Speaker 5 

I mean, The thing is. 

00:41:09 Speaker 4 

And how hard is it to hit a jackpot? 

00:41:11 Speaker 4 

Corn horse. 

00:41:11 Speaker 3 

Party cards are real hard. 

00:41:12 Speaker 4 

The colors are so real. 

00:41:14 Speaker 4 

I I hit two, hit two. 

00:41:17 Speaker 4 

I’ve had two in a decade, I. 

00:41:19 Speaker 4 

Thought you in an exact same time period. 

00:41:20 Speaker 3 

Let me go back. 

00:41:21 Speaker 5 

To this point about dry powder, something is actually important. 

00:41:24 Speaker 5 

This will be a little bit more of a of a bright spot. 

00:41:27 Speaker 5 

So in a weird way, so there’s a I think stunning article in TechCrunch just two days ago. 

00:41:34 Speaker 5 

That said that Tiger global, you know, with the hedge fund, as of the end of April, the hedge fund had lost about 45%. 

00:41:41 Speaker 5 

And then may the 1st week of May have been even worse. 

00:41:43 Speaker 5 

Who knows what they’re. 

00:41:44 Speaker 5 

At now, but they. 

00:41:45 Speaker 5 

Had a separate venture vehicle and their their history, their venture vehicles is that they raised. 

00:41:52 Speaker 5 

3.75 for a fund in 2020, then 6.65 billion in 2021. 

00:41:59 Speaker 5 

And then just this year, they closed the $12.7 billion fund in March and I think that fund was raised as early as September last year, but maybe there’s some money that’s still trickled in and they finally closer than March. 

00:42:12 Speaker 5 

But basically what this article said is that this $12.7 billion fund that they just raised is already nearly depleted is something like 2/3 of the Fund has already been deployed. 

00:42:25 Speaker 5 

So this idea that they felt like a lot of dry powder sitting on the sidelines, I don’t think they do. 

00:42:29 Speaker 5 

And then meanwhile you’re the other big crossover funds, D1CO2, they are completely ripped off. I don’t think they’re ever glasses as tigers, so they’re not in as bad shape as tiger, but they’re just basically sitting on the sidelines told this thing sorts itself out. So basically. 

00:42:45 Speaker 5 

All of this capital that flooded the venture markets, this gross capital that came in over the last couple of years, it’s gone. 

00:42:52 Speaker 5 

I mean that place is right up. 

00:42:52 Speaker 4 

I didn’t learn so fast. 

00:42:54 Speaker 4 

What was their thinking? 

00:42:55 Speaker 4 

’cause you and I met with these folks, we saw them marking up our company. 

00:42:59 Speaker 4 

So you and I. 

00:43:00 Speaker 4 

YouTube Video series overseas possibly be seed interferes. 

00:43:03 Speaker 4 

How you doing today they were coming in and marking up our in the BMC rounds. 

00:43:07 Speaker 4 

What was their thinking? 

00:43:08 Speaker 4 

What was their mistake here? 

00:43:10 Speaker 5 

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. 

00:43:19 Speaker 5 

The only problem was. 

00:43:21 Speaker 5 

And by the way they generate it. 

00:43:23 Speaker 5 

I think they did a good job sort of prioritizing that solution. 

00:43:25 Speaker 5 

I mean, if you set up your numbers in a certain format and do a meeting, they were like a term sheet generator, I mean. 

00:43:31 Speaker 5 

They figure out some machines couple of days. 

00:43:31 Speaker 4 

Listen, at your original idea to Microsoft, you had funding as a surface. 

00:43:35 Speaker 4 

At one point I did this thing called Capital as a service for you that you would send us, but you send us your data or we would plug in to whatever you use. 

00:43:45 Speaker 4 

Save with Stripe or Shopify, we would suck out the data. 

00:43:47 Speaker 4 

We would run it against a bunch of. 

00:43:48 Speaker 4 

Models, we do a few sensible questions and then we would just index you and then send your transfers. 

00:43:54 Speaker 4 

So we did do that all around the world, but we did it on very small dollars. 

00:43:57 Speaker 4 

You know, we did a $500,000 checks, 250K checks. It was called capital level service. It’s still a phenomenally. 

00:44:04 Speaker 4 

Good idea, but you. 

00:44:05 Speaker 4 

Would want to cheer that business for probably 10 years. 

00:44:09 Speaker 4 

I would want us to do that on 10 years, on my own money. You know, 1015203050 million bucks before I would even dare raise LP money around that idea. Because. 

00:44:17 Speaker 4 

I mean about it, I guess the machines doing the work and you have to really be sure your models are right. 

00:44:21 Speaker 5 

You ask the question, sort of what? 

00:44:23 Speaker 5 

Was wrong with it. 

00:44:24 Speaker 5 

I think that the thing that was wrong with it actually was just at the public comps were all along right. 

00:44:30 Speaker 5 

So they were modeling that to the public valuation, either had some guys, right? 

00:44:34 Speaker 4 

Their output is. 

00:44:35 Speaker 4 

Wrong, yeah. 

00:44:36 Speaker 1 

Well, no, it’s it looks. 

00:44:37 Speaker 5 

Their hedge fund guys, so they’re looking at, they’re looking at the public valuations they’re looking at. 

00:44:41 Speaker 5 

Last private rounds and they see a spread, a large spread, and they’re like, we can alter this so they go in with a massive amount of money, create a trumpchi generator and they are the spread. 

00:44:51 Speaker 5 

The problem is that all the public valuations we now know were inflated. 

00:44:55 Speaker 5 

I actually think they did a reasonably good job in creating a great approach for founders who want. 

00:45:01 Speaker 5 

Late stage capital, if the valuations have been correct, I think it would have worked. 

00:45:06 Speaker 4 

Problem right now, Paletton and Coinbase are both their market caps are trading at lower than their last private market valuations. 

00:45:15 Speaker 4 

So let that sink in like. 

00:45:17 Speaker 4 

If we did that. 

00:45:18 Speaker 4 

Last drive around were underwater big times in those. 

00:45:21 Speaker 4 

Names or I I don’t know if Coinbase question. 

00:45:22 Speaker 3 

Right, but they were. 

00:45:23 Speaker 5 

They were taking their signals from the public markets, and this is a problem with the shed and the administration and Congress basically flooding the zone with all this fake money is that it distorts all the signals in the economy. 

00:45:35 Speaker 5 

And then people start making investment decisions that don’t work and then you have this massive corrections. 

00:45:40 Speaker 4 

How long have we been doing this now? 

00:45:42 Speaker 4 

How long have we been overfeeding the market? 

00:45:45 Speaker 4 

It obviously happens under Biden and Trump. 

00:45:48 Speaker 4 

Does it go back to Obama or no? 

00:45:50 Speaker 4 

Yeah, it started in 2008, nine. This part of the allocation of Troubled Asset Relief Program which is basically a fund you know to create market liquidity essentially but. 

00:46:03 Speaker 4 

What it also did on the heels of the great financial crisis was. 

00:46:08 Speaker 4 

We introduced. 

00:46:11 Speaker 4 

Comfort around this idea of qualitative easing or, you know, having what’s called the Fed push, you may feel that a lot. 

00:46:17 Speaker 4 

What does that mean? 

00:46:18 Speaker 4 

Which is us. 

00:46:19 Speaker 4 

When market conditions get true, you know. 

00:46:22 Speaker 4 

But stiff or rigid or inflexible. 

00:46:26 Speaker 4 

The Fed will generally step in with liquidity, typically into the credit market. 

00:46:31 Speaker 4 

Into the equity. 

00:46:31 Speaker 4 

Market, but what that does is it that also flows into the equity market. 

00:46:35 Speaker 4 

So everybody behaves. 

00:46:37 Speaker 4 

Like there’s a downside price at which the feted guaranteed to act and. 

00:46:40 Speaker 4 

That will allow. 

00:46:41 Speaker 4 

The to build that really started to be in people psychology after the great financial crisis and then through the, you know 2010 we had several instances where we had that where we had moments of sort of like market volatility and all along the way will be also. 

00:46:56 Speaker 4 

Had with academics that started to, you know, promote things like modern monetary theory, this idea that, you know, money printing was a good idea. 

00:47:05 Speaker 4 

And so we had this against very reflexive loop where, you know, anointed experts, you know, you know, did top pieces and thought pieces and books and then pseudointellectuals with Paris. 

00:47:16 Speaker 4 

This document, you know, the government infrastructure would behave like this is a reasonable thing to do, and it’s built on itself for decades, so we’ve been doing this for searching. 

00:47:25 Speaker 4 

14 years now. 

00:47:26 Speaker 4 

And now we’re trying to undo it and put the genie back in the bottle. 

00:47:29 Speaker 4 

And it’s proving much, much harder than we thought because people are unforeseen, got addicted to crack they’re addicted to, the drug fails. 

00:47:35 Speaker 4 

And if you try to take the oxy away, and that’s A and people are gonna go through some really, really bad withdrawal. 

00:47:45 Speaker 3 

Yeah, if you have 1/4. 

00:47:46 Speaker 4 

Trillion dollars of dry powder. 

00:47:48 Speaker 4 

Let’s assume no one gives their money back and they don’t do stupid stuff like Chase losing companies in their portfolio. 

00:47:54 Speaker 4 

And they allocate it in a smart way to winning companies. 

00:47:57 Speaker 4 

Does that not mean that we end up being a significantly kind of outsized amount of capital going through a few highly successful businesses that will end up seeing this kind of supercharging of a small set of businesses as opposed to this rise of the Unicorn, which is what we saw over the past? 

00:48:14 Speaker 4 

Call it, you know, 878 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. 

00:48:26 Speaker 4 

But the, you know, top decile get overfunded and they become, you know, kind. 

00:48:31 Speaker 4 

Of the next, the next mega. 

00:48:32 Speaker 3 

Yeah, yeah, yeah, I mean. 

00:48:34 Speaker 4 

He said it did not happen in this moment. 

00:48:37 Speaker 5 

Well, so look, if we look at had chores for a year I had a. 

00:48:40 Speaker 4 

Where can I say, well, let’s take, let’s take a perfect company, which is quite OK, so now $50 billion. 

00:48:47 Speaker 4 

Mega cap. 

00:48:47 Speaker 4 

Of course, right, $50 billion of horrible, he sings. Who’ve made horrible decisions heretofore knocking on the calls and oil change. Can we please take my $50 billion ’cause? I’m trying to be money good. 

00:49:01 Speaker 4 

Why did the column and want to take on this? 

00:49:03 Speaker 4 

Headache? Why do they? 

00:49:04 Speaker 4 

Want to slaughter, you know, mess? 

00:49:07 Speaker 4 

Set their cap table logs of all these folks and then have blood price. 

00:49:11 Speaker 4 

So if you’re sitting at the board of any really good well run company a place, you’ll take some bright sides, you know amounts of very decisive capital in these moments if you think you can market, consolidate or whatever. 

00:49:23 Speaker 4 

But I think the point that all of these companies are going through is largely the same. 

00:49:26 Speaker 4 

It’s it’s the best companies. 

00:49:29 Speaker 4 

Are doing what we just talked about? 

00:49:30 Speaker 4 

I would be shocked as well. 

00:49:31 Speaker 4 

The best company here thinking let’s batten down the hatches and let’s not distract ourselves. 

00:49:36 Speaker 4 

And so I’m not sure that this is a moment where a really horrible VC, we’ve got a horrible track record in just blunder through $5 billion is going to be able to put in a billion dollars. 

00:49:50 Speaker 2 

40 days. 

00:49:50 Speaker 5 

Back we see kind of the environment that I think is going to happen over the next few years and then what founders will succeed? 

00:49:57 Speaker 5 

I think you’re right, Freeburg that the VC’s are going to come much more discriminating and there’s going to be a much more polarized outcome here for companies. 

00:50:06 Speaker 5 

I had a tweet storm that Elon actually gave it nice boost to by saying he agreed with it. 

00:50:11 Speaker 5 

Where I basically said look source with high growth and moderate burn will get funded. 

00:50:15 Speaker 1 

Through this downturn. 

00:50:16 Speaker 5 

Source with moderate growth and high bird will not get funded. 

00:50:20 Speaker 5 

So what’s going to happen? 

00:50:21 Speaker 5 

Is that the sort of mediocre 1? 

00:50:24 Speaker 5 

Are going to, we’re going to get some very polarized outcomes very quickly where you know I think a lot of founders think that if their numbers are just OK and not great then they’ll be able to raise their the lower valuation or they’ll be able to raise something but maybe not as much as they wanted. 

00:50:38 Speaker 5 

And what will happen is the middle cases kind of go away in an environment like this and everyone? 

00:50:43 Speaker 5 

Supposed to fund the best companies so certain things. 

00:50:46 Speaker 5 

Become absolutely fatal for startups in this environment. 

00:50:50 Speaker 5 

One is obviously if they’re just not growing, not ability to raise, and good growth really starts in early stages in terms of doubling year over year. 

00:50:57 Speaker 5 

Second, negative or low gross margins are actually fatal. 

00:51:01 Speaker 5 

Nobody wants to fund businesses that may not even be real businesses and I would say accessible growth. 

00:51:06 Speaker 5 

Margins really start at 50%. 

00:51:09 Speaker 5 

It’s third half past people want to know that you can pay back yourself acquisition costs in a year or less. 

00:51:16 Speaker 5 

And then, like I mentioned, the burn. 

00:51:17 Speaker 5 

You know, a boring multiple of 1 is really ideal where you’re burning not more than your net URR, but certainly not more than two. 

00:51:27 Speaker 5 

I think burn multiples over 2. 

00:51:29 Speaker 5 

Where you’re spending it. 

00:51:30 Speaker 5 

You’re burning $2.00 to add 1. 

00:51:32 Speaker 5 

Dollar of growth. 

00:51:34 Speaker 5 

That’s where I think, you know, companies start becoming an fundable, so I think routers are going to have to pay a lot more attention to these disqualifiers. 

00:51:44 Speaker 5 

So I think that for companies who meet the criteria, who have good growth loburn good business fundamentals, they will. 

00:51:53 Speaker 5 

Be able to raise. 

00:51:54 Speaker 5 

Look, here’s what’s going to happen. 

00:51:56 Speaker 5 

The crossover investors are washed out of the system, build on. 

00:51:59 Speaker 5 

I mean, tigers already deployed all this capital and I don’t know when they’re gonna be back. 

00:52:03 Speaker 5 

So the so-called tourist money they’re they’re basically the big investors who weren’t in the system a few years ago. They’re basically Annalisa system. However there will be the big traditional venture funds will have. 

00:52:14 Speaker 5 

Large funds, but they’re gonna deploy them much more slowly these one year pace of deployments, they’re going to stop that. 

00:52:19 Speaker 2 

That’s a brace. 

00:52:20 Speaker 1 

Will be fun. 

00:52:21 Speaker 5 

So we’ve got to free exactly she can think about that even if you had the same amount of money being raised and deployed, but it’s happening over three years before that one, there will be a 2/3 reduction in the availability of capital in the system, so which would cause insert. 

00:52:33 Speaker 4 

I think. 

00:52:34 Speaker 4 

I can agree to. 

00:52:35 Speaker 4 

You’re not putting that. 

00:52:36 Speaker 5 

In a strong feelings on talking about so. 

00:52:38 Speaker 4 

You’re not going to go to somebody who’s. 

00:52:39 Speaker 4 

Going to blow through it in nine months, he’s playing every hand like you cannot play. 

00:52:41 Speaker 3 

Right. 

00:52:44 

That way. 

00:52:44 Speaker 2 

In March. 

00:52:45 Speaker 5 

So what we’re telling our founders is, number one, you gotta loosen your runway, like the days of raising a new round every 12 months or over. 

00:52:51 Speaker 5 

You gotta plan on not raising for two to three years if you can. 

00:52:55 Speaker 5 

Help it and then you really have to sharpen your pencil and work on these business fundamentals. 

00:52:59 Speaker 5 

And you know, one thing you need to do is you can have a realistic conversation about am I really able to raise another round in this environment with the. 

00:53:07 Speaker 5 

Metrics that currently have. 

00:53:08 Speaker 5 

And if the answer is no, you. 

00:53:10 Speaker 5 

Need to cut your bone to give yourself the time to fix the business? 

00:53:14 Speaker 3 

And that fixed. 

00:53:15 Speaker 5 

The business normally takes two or three years, so you know if you’ve got less than two years or even 2 1/2 years of burn and you have one of. 

00:53:22 Speaker 5 

Those two qualifiers I. 

00:53:23 Speaker 5 

Talked about you better or like. 

00:53:25 Speaker 5 

Cut your bone quickly to give. 

00:53:26 Speaker 5 

Yourself the time to fix those disqualifiers. 

00:53:29 Speaker 4 

Yeah, but I mean, I wish people, we’ve been talking about this for years, folks, and you know, some founders that are not accepting the reality of the situation. 

00:53:37 Speaker 4 

And 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. 

00:53:49 Speaker 4 

Joke like Bill Girl is called five of the last three recessions, you know, and it’s like, well, I mean we have scar tissue and it’s that’s the the velocity of the downturn. 

00:54:00 Speaker 4 

All those kids dunking angrily. 

00:54:01 Speaker 4 

Well, guess who’s gonna have the last? 

00:54:03 Speaker 4 

Laugh, nothing thing. 

00:54:04 Speaker 4 

I I checked it girly last night, he said the loud. 

00:54:07 Speaker 4 

Right. Literally DM listen, the borders. Great. Right now I am doing deals back at 6 to $12 million in the seed space with you know, 200K in revenue and real founders and disciplines start investing again. It’s gonna wait now because the deals are now taking as a food. 

00:54:25 Speaker 4 

Spring so. 

00:54:25 Speaker 4 

In fact, but the deals went from taking 2-3 days. Now they’re back up to four to six weeks and we’re having very thoughtful discussions. 

00:54:33 Speaker 4 

We’re meeting the third time with founders were talking about their virtual market strategy. 

00:54:37 Speaker 4 

We’re getting to talk to three or four customers. 

00:54:39 Speaker 4 

I have farmers who said you can’t. 

00:54:42 Speaker 4 

Be in this deal if you want. 

00:54:43 Speaker 4 

To talk to my customers, and that wasn’t one founder. 

00:54:45 Speaker 4 

Multiple founders said if you are software customers then you don’t get an allocation. 

00:54:50 Speaker 4 

And I I said OK, the thing to keep in mind goes. 

00:54:54 Speaker 4 

But that was how we dysfunctional, dysfunctional. 

00:54:56 Speaker 4 

The thing that keep in mind is that all these late stage companies in this place doesn’t matter whether you’re the bottom but file or the top. 

00:55:02 Speaker 4 

I thought you were massively mispriced and there needs to be some correction between 30 and 70% on valuation 30 and 90%. 

00:55:11 Speaker 4 

How do you? 

00:55:11 Speaker 5 

Solve other point of view on that last year because so like there’s a major difference I think between evaluation multiple collapse in the public markets for supplier bug, it’s gone down South, valuation multiples have gone down 7080%. There’s no disputing that it around. 

00:55:27 Speaker 4 

What are they? 

00:55:29 Speaker 5 

Look, it used to be that the public markets were trading at 15 times. 

00:55:33 Speaker 5 

They are for the medium fast company, now cycling 6. 

00:55:37 Speaker 5 

So yeah, we’re talking about 2 thirds, 7080% reductions. If it happened in the public stock, it deserves happening the private stocks too. She also has to be right about that and a lot of people aren’t recognizing that. 

00:55:48 Speaker 5 

However, here’s the difference. 

00:55:50 Speaker 1 

The median fast. 

00:55:51 Speaker 5 

Company is very maybe 15 to 20%. When you’ve lost 80% of your value and you’re only going 15 to 20%, it’s gonna take you a decade to grow back into your old valuation. 

00:56:01 Speaker 5 

However, private, good private companies, not all of them, but the great ones, they’re still growing 3X year over year. 

00:56:06 Speaker 5 

So if you’re able to grow through X year over year and you. 

00:56:09 Speaker 5 

Do it two years in a row. 

00:56:10 Speaker 5 

You’re 9X where you were. Even if there are multiple collapse 80%, you can still get enough. 

00:56:16 Speaker 5 

Ground, it’s not going. 

00:56:17 Speaker 5 

Be the that minus up around. 

00:56:19 Speaker 5 

It might be a Trex as well. 

00:56:21 Speaker 4 

I know how that’s mathematically true, but listen, if you are $100 million allbusiness, let’s just say you were able to raise at 10 or 11 billion. 

00:56:31 Speaker 4 

Yes, you’re mathematically right that you know 100,000,000 * 9 is 900 million. But I think it’s important to first say how many actual software companies are there that generated billion dollars of ALR. 

00:56:45 Speaker 4 

Remember when Salesforce first passed a billion dollars of AOL? 

00:56:48 Speaker 4 

We thought, Oh my God, and then they said within the business entities. 

00:56:51 Speaker 4 

So this is exceptionally rare, and I think that it behooves people to understand that law of large numbers aren’t often violated. 

00:57:01 Speaker 4 

And so, you know, before you go and do that simple math and convince yourself that it’s possible, maybe you should actually not. 

00:57:07 Speaker 4 

I’m not saying that you saw something next to the founder over the boards. 

00:57:10 Speaker 4 

Maybe you guys should actually just go in and have somebody run the screen and say how many actual companies exist that have actually managed to generate more than a billion dollars if they are, especially in a moment where people are cutting back. 

00:57:21 Speaker 4 

Unspent, how did that? 

00:57:24 Speaker 5 

Yeah, look, I agree. Getting from 100 to a billion is really hard, but you. 

00:57:24 Speaker 4 

Are you? 

00:57:28 Speaker 5 

Know is there, Jerry? 

00:57:28 Speaker 4 

That is an. 

00:57:29 Speaker 4 

M Billion dollar company supposed to do because in this map they have. 

00:57:32 Speaker 4 

To get to. 

00:57:33 Speaker 4 

$2 billion of our our to be worth 10 billion. 

00:57:36 Speaker 1 

I do think a lot of how. 

00:57:37 Speaker 3 

Do we do? 

00:57:37 Speaker 1 

Right there. 

00:57:37 Speaker 4 

That how does the engine fast company that you and I have never heard of? 

00:57:42 Speaker 4 

How do they generate 2 billion available? 

00:57:43 Speaker 4 

I can tell you that handful of companies that generate 2 buildings, there are, there are. 

00:57:47 Speaker 4 

Some incredible companies today that. 

00:57:48 Speaker 4 

Don’t even let. 

00:57:49 Speaker 4 

You know, look at an incredible company, like in Unity. Incredible. The backbone is all, you know, gaining. And you know the move to TD this year. If they crush, they’ll be 1.3 bill. 

00:58:02 Speaker 4 

Credible business? 

00:58:04 Speaker 4 

Assuming strategy, consumers, competitors. 

00:58:05 Speaker 5 

He just went out 35%. It went down 35%. Unbelievable. 

00:58:09 Speaker 4 

It’s holding a full time driving you guys. Some of these things are hard to believe like open door has 2.3 billion in cash and a $3.7 billion market cap that enterprises hockey 1.4 and they I think they also have a couple of billion in real estate, 20 basics learning cash, $12 billion market cap. So I guess in this part of the discussion. 

00:58:29 Speaker 4 

Even with all these headwinds, we give the protective mechanisms for employees right again as yet. 

00:58:34 Speaker 4 

Good. Good point. Let’s see. 

00:58:35 Speaker 4 

When you start a company in your founder, you have hope you’re taking the most risky or the person with the idea you should be just seeing rewarded for that, the way that that happens economically in the company as you get founder shares. 

00:58:50 Speaker 4 

The basis of those founder shares are effectively 0. 

00:58:53 Speaker 4 

And you’re able to do a bunch of structuring when you first start a company that gives founders specifically some incredible tax advantages. 

00:59:03 Speaker 4 

You can you know, do an 83 B election which is effectively buying the soft starting the clock on long term capital gains, et cetera, et cetera. 

00:59:11 Speaker 4 

Then you have stocks that you give to employees. 

00:59:15 Speaker 4 

They’re one of two kinds. 

00:59:16 Speaker 4 

Non qualified stock options and incentivized stock options in Essos and prices. 

00:59:22 Speaker 4 

And you know, those have different tax treatments. 

00:59:25 Speaker 4 

But again, you know, when you’re a very early employee, you get a mixture of these things also hugely accretive. 

00:59:33 Speaker 4 

It has a very low basis you’re building value. 

00:59:37 Speaker 4 

But here’s what people don’t understand. 

00:59:39 Speaker 4 

When the venture investor like myself or Jason decides. 

00:59:41 Speaker 4 

The way for. 

00:59:43 Speaker 4 

People for the paperless office space here and you’re in, the price of your stock is effectively 0. 

00:59:49 Speaker 4 

We don’t have a penny for it or something. 

00:59:50 Speaker 4 

Yeah, let’s let’s windows my socket Facebook calls like Apple. 

00:59:55 Speaker 4 

Yeah, because public is $1520, you get to stretch our we get suspended. 

01:00:00 Speaker 4 

Can you pay long term capital gains on that if? 

01:00:02 Speaker 4 

You’ve been able to. 

01:00:03 Speaker 4 

But in production and then shifted to run from chat. 

01:00:08 Speaker 4 

OK, so now tracks or Jason or myself come and invest in your company? 

01:00:13 Speaker 4 

What happens? 

01:00:14 Speaker 4 

We actually don’t get equity, we don’t get common stock, we actually get a synthetic form of debt called the preferred share. 

01:00:22 Speaker 4 

OK. 

01:00:23 Speaker 4 

And typically the way that it works is when we invest in a company and this is how the entire venture ecosystem works. 

01:00:29 Speaker 4 

We actually create what’s called a preference stack, which means we get an instrument that is senior. 

01:00:38 Speaker 4 

To the common equity. 

01:00:39 Speaker 4 

Now, what does that mean? 

01:00:40 Speaker 4 

Well, it means that if your business goes out of business. 

01:00:44 Speaker 4 

We get our money back first. 

01:00:46 Speaker 4 

We also get an interest rate and we’re able to convert all of that at some point, said magical moment when a company goes public. 

01:00:53 Speaker 4 

Into common stock and we give a preferred price and we now have the same instrument as everybody else in the company goes public. 

01:01:01 Speaker 4 

That’s the typical. 

01:01:02 Speaker 4 

Mechanism. Why did that? Is this by the way the preferred translate explaining why writer VP’s need that protection? 

01:01:08 Speaker 4 

To be honest, I don’t know why it started, but it’s a historical artifact of, you know, the 1960s and. 

01:01:14 Speaker 5 

70S and I think I know why it started. 

01:01:16 Speaker 5 

Yeah, OK, so this got lawyer because. 

01:01:19 Speaker 5 

Let’s say you start. 

01:01:20 Speaker 5 

A company and just. 

01:01:22 Speaker 5 

Do some round numbers. A investor wants to give you $10 million off the company and for 10% of the company, $100 million. 

01:01:29 Speaker 5 

Valuation if you didn’t have preferred share. 

01:01:32 Speaker 5 

First, then the founders could basically on the day after the money comes, they could say, hey, we want to liquidate the company, we shouldn’t do this anymore. 

01:01:40 Speaker 5 

And they are. 

01:01:41 Speaker 5 

Nice to the. 

01:01:41 Speaker 5 

Company and they could basically then distribute up to 10 million to all the shareholders that they would keep 9 and 1,000,000 would go back to the investor. So that’s why lawyers came with this idea of seniority. 

01:01:52 Speaker 5 

So that OK, if you disband the company with the investors money still in there, it goes back first to the people putting the money? 

01:02:00 Speaker 4 

That was the idea and one. 

01:02:01 Speaker 4 

And the second piece was if the company has sold for less than the cash put into it, at least the people with the cash and get their money. 

01:02:07 Speaker 4 

At first. 

01:02:08 Speaker 4 

If it’s over 10 million. 

01:02:08 

So the. 

01:02:10 Speaker 4 

You get your 10 million back or 11. You get 1,000,000 after that. 

01:02:13 Speaker 4 

I like to say Jason does the first million, so they’re not as annoying as preferred. 

01:02:17 Speaker 4 

In fact, says the Series A and he puts in 10. 

01:02:20 Speaker 4 

Now there’s 11 million preferred, even if it’s at a much higher valuation. 

01:02:24 Speaker 4 

And then I come in and I give 100 at an even higher valuation. So now there’s $111 million of preferred shares. 

01:02:32 Speaker 4 

Now, if the company goes through all kinds of complications and math and let’s say we have to sell it to somebody else for $200 million, well, guess what happens. 

01:02:42 Speaker 4 

The 1st 111 of it comes back to myself, Jason and David Flushing trips. So This is why venture investors have an incentive to pay and set these crazy valuations. 

01:02:52 Speaker 4 

Because they don’t really care what the valuation is as much as they care how much of all this preference is building and why. 

01:03:00 Speaker 4 

Rationally believes that the liquidation value of the company is at least that much money. So if I think that feeble company was at least $111 million, I’ll do it. Then I add my 100. Now why is this important for employees? 

01:03:14 Speaker 4 

Before you join a startup, especially in this moment, I think it’s very important for you to understand. 

01:03:21 Speaker 4 

How much money have they raised? 

01:03:24 Speaker 4 

How much is this preference staff that exists? 

01:03:27 Speaker 4 

And do you believe that the company is going to be worth much more than that because that’s the only way that user actually participate in the equity. 

01:03:36 Speaker 4 

And we know now what the public market says. 

01:03:39 Speaker 4 

If you go back to that tweet, you know. 

01:03:41 Speaker 4 

If it’s a 10 or $11 billion companies, OK, well, you need to generate $2 billion of revenue. And if you’re at 100 millions, that means that the 20X the revenue. 

01:03:52 Speaker 4 

For the valuation to be worthwhile for you to believe that this valuation is with. 

01:03:57 Speaker 4 

So this is just a little guide for employees. 

01:03:59 Speaker 4 

I just think it’s very important that you guys start to do the math and start to figure this out, ask the hard questions of the. 

01:04:04 Speaker 1 

How many shares? 

01:04:05 Speaker 4 

Are outstanding. 

01:04:06 Speaker 4 

How many preferred shares? 

01:04:07 Speaker 4 

What’s the overhang? 

01:04:08 Speaker 4 

What’s my strike price referenced at? 

01:04:09 Speaker 3 

That should work. 

01:04:11 Speaker 4 

Yes, you know how much is a total press fat? 

01:04:13 Speaker 4 

How much revenue are we generating now and you should go and do the work to figure out what the public market concerts over widely available or through somebody for attaching this create a website that. 

01:04:23 Speaker 4 

Helps you do this. 

01:04:24 Speaker 4 

But all of these things are going to be very important for you. 

01:04:27 Speaker 4 

Otherwise what will happen is if you join a company in this moment. 

01:04:31 Speaker 4 

At a fake valuation and valuation gets reset. 

01:04:35 Speaker 4 

You can effectively assume your options are with zero, so that was an important part of how you made the decision to join that company. 

01:04:43 Speaker 4 

You’re being somewhat misled in a moment like this, and you need to have your own rational sense of what that company work. 

01:04:50 Speaker 4 

Conversely, I think boards and CEOs have a real responsibility now to do the hard work of resetting this and explaining it to their employees if they want to retain them, because in a moment like this, if you have a valuation reset. 

01:05:02 Speaker 4 

You don’t allow people to understand this and you don’t figure. 

01:05:04 Speaker 4 

Out a way to allow them to participate in some incremental way. 

01:05:07 Speaker 4 

I think it’s going to be very problematic for employee retention you’re going. 

01:05:10 Speaker 5 

You know in. 

01:05:11 Speaker 5 

Those contacts look at. 

01:05:12 Speaker 5 

There’s a couple things that. 

01:05:13 Speaker 5 

I always support. 

01:05:15 Speaker 5 

You know, if if you need to reprice the options, you know you can reprice the options and gives employees the benefit of a new foreign a. 

01:05:22 Speaker 5 

So the company? 

01:05:23 Speaker 5 

Doesn’t set the option twice. That’s set by an external foreign a audit, but if that 498 goes down. 

01:05:32 Speaker 5 

Because of these factors we’re talking about, you can basically the board can vote to replace their most options. 

01:05:38 Speaker 5 

At least they get the benefit of the. 

01:05:40 Speaker 3 

Lower flying edge. 

01:05:40 Speaker 4 

Explain what a 409 was just broad strokes. 

01:05:43 Speaker 3 

It’s a, it’s. 

01:05:44 Speaker 5 

Basically, with stock options are issued, the law requires that the strike price of the option B, the fair market price and because of some accounting. 

01:05:56 Speaker 5 

Shenanigans a while back that got companies in trouble. 

01:05:59 Speaker 5 

It is now the case that companies don’t step don’t determine their own fair market price. 

01:06:04 Speaker 5 

They go out and they get some external auditor to do a 498 audit and then the foreign aid that gives you the after market. 

01:06:11 Speaker 5 

Price and specifically? 

01:06:13 Speaker 5 

It’s a fair market price for the common. 

01:06:14 Speaker 5 

Stock because when investors. 

01:06:16 Speaker 5 

Buying is preferred because with dynamics such monsters talking about word first before it gets paid back first, the common stock is worth less per share to discuss this over there. 

01:06:26 Speaker 4 

Typically a fraction of a fifth attempt something in that range is simply so if the shares are worth a dollar for. 

01:06:28 Speaker 3 

Right. 

01:06:32 Speaker 4 

Heard the fair market value of the common could be 5 cents, 10 cents $0.50 depends on if the company is going to run out of money how many months of runway to have on a profitable and so it is a fair thing to do and but you have. 

01:06:44 Speaker 4 

To know that in this down market like this. 

01:06:46 Speaker 3 

OK. 

01:06:47 Speaker 4 

If you had massive compressions boards need to look at that pharmacy children say they listen. 

01:06:52 Speaker 4 

If not, if we stack, multiples come down so. 

01:06:55 Speaker 4 

Much. But our fair market value should come down that much. The fair market value might be worth 50% less. 

01:07:01 Speaker 4 

75% Mr ** 

01:07:03 Speaker 5 

Yeah, I mean so the way it works is. 

01:07:05 Speaker 5 

That when a company IPO’s, you get rid. 

01:07:07 Speaker 5 

Of all the different classes of stock. 

01:07:08 Speaker 5 

Here the everything basically preferred. 

01:07:10 Speaker 5 

Converts to common in an IPO. 

01:07:12 Speaker 4 

One class of shares, yeah. 

01:07:15 Speaker 5 

Digital signage may change control by three economic perspectives. 

01:07:18 Speaker 5 

You basically collapse into common stock. 

01:07:21 Speaker 5 

So whether you IPO comments or with the same and so economically they’re converging to 1 to one as the company gets more and more mature and heads towards an exit. 

01:07:32 Speaker 5 

The earlier that you are, the riskier the company is, the more that the press track matters, the more overhang that creates. 

01:07:40 Speaker 5 

But the benefit to employees, it creates a larger discount on their strike price on the floor and I know so that is the offsetting benefit if the foreign aid goes down because the market changed then the board. 

01:07:52 Speaker 5 

The boats are applying news 498 of the employees. That’s a beneficial thing to do for everybody. 

01:07:58 Speaker 5 

So that’s that’s something you know I’ve always supported. 

01:08:01 Speaker 5 

The other thing is that if you’re in a terminal situation where you’re actually worried that the press 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 that exit, then what you need to do because then then there’s nothing for the employees, there’s no incentive anymore what you need. 

01:08:17 Speaker 5 

To do is create a uh, basically. 

01:08:22 Speaker 5 

And employing participations, you create a corridor where you say, OK, 30% of any acquisition price for this company is going to go to the employees. 

01:08:31 Speaker 5 

You create them. 

01:08:32 Speaker 5 

A management or employee carve out really should be an employee carve out. 

01:08:35 Speaker 5 

Not just management, but all the employees of the company should benefit from an acquisition and sometimes you’ll see boards. 

01:08:42 Speaker 5 

Be either unrealistic or stingy. 

01:08:45 Speaker 5 

They’ll be kind of Pennywise and pound foolish. 

01:08:47 Speaker 5 

They won’t create. 

01:08:48 Speaker 5 

The incentive for the employees to get that sort of overcapitalized company across the finish line and you know it can be pretty frustrating to see when that when. 

01:08:57 Speaker 4 

That happens. 

01:08:58 Speaker 4 

It’s a good time for employees to understand this is a giant reset that’s occurring. 

01:09:02 Speaker 4 

I think there is some good news here. 

01:09:06 Speaker 4 

I think we have a lot more people who are going to go back to work ’cause they need to. 

01:09:10 Speaker 4 

And that’ll be just for monetary velocity for these jobs, 11 million jobs. 

01:09:14 Speaker 4 

I don’t know if we’ve ever had this. 

01:09:15 Speaker 4 

I mean, so records the number of jobs we’ve. 

01:09:17 Speaker 4 

Had and we’re bouncing. 

01:09:18 Speaker 4 

Along record low unemployment, those two things to do. 

01:09:20 Speaker 4 

What saves us could save us from this regression is something distinctly unique about this recession to job openings from low. 

01:09:28 Speaker 4 

We’ve never had a recession like this. 

01:09:31 Speaker 4 

So that that’s fascinating themselves, but for employees and for companies, the new discipline might be there’s not going to be four or five offers for every. 

01:09:39 Speaker 4 

Tech employee if people are going to cut 10 to 25%, this is the contagion moment. I think maybe. 

01:09:45 Speaker 4 

Just talking about. 

01:09:46 Speaker 4 

Layoff, contagion intact, and how that works, because Facebook’s on hiring freeze and we’re starting to see the series, BC companies all do tend to 25% layoff a Uber, Dara said. We’re going to look at hiring as a luxury. It’s probably not going to happen. 

01:10:01 Speaker 4 

The only person who said they were going to hire into this was Google, Sundar Terry today said. Maybe as many as 12,000 people over the next couple years, couple of 1000 a year. 

01:10:11 Speaker 4 

And Apple stunningly had almost locking this. 

01:10:16 Speaker 4 

They have told people we’re one day a week now, two days a week in two weeks, and then by the end of this month, may there be three days a week in the office, mandatory, the head of machine learning said. 

01:10:26 Speaker 4 

Said that doesn’t work for my team and they said OK. 

01:10:29 Speaker 4 

And he said, OK, we don’t have to do it. 

01:10:30 Speaker 4 

And they said no, OK. 

01:10:31 Speaker 4 

We structure recognition, so I think. 

01:10:33 Speaker 4 

Even the mighty apple with some limited. 

01:10:35 Speaker 4 

Casters or saying you. 

01:10:36 Speaker 4 

Know what if we have to shed some people? 

01:10:37 Speaker 4 

Who don’t want to come back to the office. 

01:10:39 Speaker 4 

That’s like a D factor. 

01:10:40 Speaker 4 

Or else we may be talking about this. 

01:10:42 Speaker 4 

Contention. Because if. 

01:10:43 Speaker 4 

You’re a company. 

01:10:43 Speaker 4 

That doesn’t layoff people. 

01:10:45 Speaker 4 

You’re gonna look pretty weird in this market. 

01:10:47 Speaker 4 

To your investors and everyone is wired. 

01:10:49 Speaker 4 

And then people ask how I feel like an old guy now. I’ve been working in Silicon Valley for 20 years, 2021 years. 

01:10:50 Speaker 2 

OK. 

01:10:56 Speaker 1 

Then I remember like in. 

01:10:58 Speaker 4 

01 There was kind of this. 

01:10:59 Speaker 2 

Period of time when there was a bunch. 

01:11:00 Speaker 4 

Of layoffs and a bunch of companies. 

01:11:03 Speaker 4 

Reduce headcount and you know there were other industries and people stayed employed and then in the years that followed like when two happened and people kind of came back. 

01:11:12 Speaker 4 

But what was interesting is like the tech industry, which at the time was Silicon Valley but is now fairly. 

01:11:17 Speaker 2 

Kind of. 

01:11:18 Speaker 4 

You know, well dispersed attracted a lot of people from other industries, right? 

01:11:23 Speaker 4 

It used to be cool to get a job in financial services or investment banking out of college, and then all of a sudden working at a startup was the cool thing again. 

01:11:29 Speaker 4 

There are a lot of people that moved from New York in the last couple of years to assess leading up to the most recent Crest after the pandemic. 

01:11:37 Speaker 4 

And so, you know, look, there is an ebb and flow in and out of this industry. 

01:11:43 Speaker 4 

I do think that this capital overhang however, this quarter trillion dollars of dry powder that’s sitting in DC coppers is going to be significantly simulatory in a. 

01:11:52 Speaker 4 

Very good way. 

01:11:53 Speaker 4 

I think it will create real jobs and enable real progress. 

01:11:57 Speaker 4 

It’s not just about the companies that are on the brink of profitability or the companies that are profitable trying to juice profits. 

01:12:02 Speaker 4 

If you take a step back, take how you you said something earlier. 

01:12:06 Speaker 4 

That I thought. 

01:12:06 Speaker 4 

Was kind of a really important statement, which is like you’re doing deals, right? 

01:12:11 Speaker 4 

You’re making investments in startups? 

01:12:13 Speaker 4 

And I’m more excited than I’ve been in years. 

01:12:16 Speaker 4 

This is my. 

01:12:17 Speaker 4 

With your time, it’s time to go and so I talked earlier about how the the capital stimulants that came out from the Fed. 

01:12:25 Speaker 4 

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. 

01:12:34 Speaker 4 

But it’s not about all of that capital finding its way into productive assets, if enough of this, find its way into productive assets, productive assets needing businesses that create something of value for customers and make money. 

01:12:45 Speaker 4 

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. 

01:12:53 Speaker 4 

There’s enough growth in the economy and enough new jobs that are created that really rationalizes all of the money. 

01:12:59 Speaker 4 

That was friggin wasted on speculative nonsense over the past few years and I think the fact that we’ve got 1/4 trillion dollars sitting in DC coppers, more than we’ve ever had such a quarter trillion dollars ready to fund the next generation of technology businesses. 

01:13:14 Speaker 4 

That can build new jobs and create new areas of the economy, new areas of growth that we’ve never seen before. 

01:13:19 Speaker 4 

And that’s what’s happened in the past. 

01:13:21 Speaker 4 

How do you think a person, let’s say you’re playing poker and you just get punched in the face 7 rounds in a row. 

01:13:29 Speaker 4 

You’re stuck 3 binds. 

01:13:31 Speaker 4 

How did that? 

01:13:32 Speaker 4 

Person make that good next decision. 

01:13:34 Speaker 4 

Now someone will tell you three stories from my last week ’cause. 

01:13:34 Speaker 3 

I will, I? 

01:13:37 Speaker 4 

My last week has been filled with these. 

01:13:39 Speaker 2 

Experiences hard. Sorry, go ahead. 

01:13:40 Speaker 4 

So let me let. 

01:13:41 Speaker 4 

Me just talk about the the business of investing in the psychology of investment. 

01:13:46 Speaker 4 

So look at probably who has been the most incredible performer this year is Ken Griffin in Citadel. 

01:13:54 Speaker 4 

And right underneath him is the sky evening wonder at FS, who runs a place called Millennium. 

01:13:59 Speaker 4 

And then, you know, upholstered will probably determine. 

01:14:04 Speaker 4 

But as you. 

01:14:04 Speaker 4 

See now how do these guys run their business? 

01:14:07 Speaker 4 

They have hundreds and hundreds of teams. 

01:14:10 Speaker 4 

Investing in all kinds of different things. 

01:14:13 Speaker 4 

And what they’ve figured out over time. 

01:14:16 Speaker 4 

It’s hard 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. 

01:14:32 Speaker 4 

And so. 

01:14:33 Speaker 4 

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 where the folks who are. 

01:14:42 Speaker 4 

As a result, they are always winning. 

01:14:46 Speaker 4 

And I just want you to react to that because I think there is one thing that we can say, oh, venture is a special thing. 

01:14:51 Speaker 4 

Not like anything. 

01:14:52 Speaker 4 

Else, I personally don’t think so, operating across the entire lifecycle. 

01:14:57 Speaker 4 

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. 

01:15:05 Speaker 4 

I think why Jason is firing a little bit of a hot hand was he mostly let his company get marked up and he was mostly frustrated in the last couple of. 

01:15:14 Speaker 4 

Years in valuations. 

01:15:16 Speaker 4 

Early stage valuations, lack of discipline to operate effectively in safe, but I don’t think it’s a binary condition from us. 

01:15:23 Speaker 4 

I think generally what you’re saying is right. 

01:15:26 Speaker 4 

I’ll tell you the reaction I’m seeing in the market, unless in fact using and on top of that there are only seven or eight people who actually made money in this entire market. 

01:15:37 

Perfect. 

01:15:38 Speaker 4 

Investors have done well. 

01:15:39 Speaker 4 

Early stage investors have down St investors. 

01:15:40 Speaker 5 

We were turned off first time. 

01:15:42 Speaker 5 

So that was nice. 

01:15:42 Speaker 2 

Yeah, I’m in. 

01:15:43 Speaker 4 

The black box you clearly. 

01:15:46 Speaker 4 

I mean, what about all the other thousands of people? 

01:15:49 Speaker 4 

We gotta distribute. 

01:15:50 Speaker 4 

People don’t distribute shares. 

01:15:52 Speaker 4 

We’ve talked about this a couple of times from all sides. 

01:15:53 Speaker 4 

It’s so hard to make money and you when you have a chance to distribute. 

01:15:57 Speaker 4 

I feel really good that some of these companies, you know, I think I have a Bloomberg at my desk and you want things that I look. 

01:16:04 Speaker 4 

Every now and then the ownership cable and subsequently tried buying stuff. 

01:16:08 Speaker 4 

And you’ll see some incredible things, which is these folks have held on. 

01:16:13 Speaker 4 

There is, there are holding billions of dollars now of people losses if they have to go back to their LP’s and say in hard conversations, Mrs Foundation, I know that you wanted to fund Cancer Research. 

01:16:19 Speaker 2 

Both must be perfect. 

01:16:24 Speaker 4 

You know, I had $9 billion of gains and. 

01:16:27 Speaker 4 

Now it’s 2. 

01:16:30 Speaker 4 

So, look, I think what you’re saying generally is right. 

01:16:34 Speaker 4 

People are psychologically tainted when they take a big hit in the face. 

01:16:37 Speaker 4 

Everyone has this experience. 

01:16:40 Speaker 4 

My observation over the past two weeks, I have seen a lot of PM in public PM portfolio managers as well as private DC all we asked to me in the same way when opportunities have kind of been discussed which is I’m sitting on my hands, I mean there’s a PM I saw this week of a. 

01:17:00 Speaker 4 

But yeah, anyway, I would say I’ve never seen him jars like I’ve never seen him. 

01:17:05 Speaker 4 

Just shocked, like we were talking about something that was so obviously up his alley, you know, such a great fit for him. 

01:17:05 Speaker 3 

OK. 

01:17:13 Speaker 4 

But he is just not doing anything and there’s. 

01:17:16 Speaker 5 

’cause they’re worried about careers now. 

01:17:18 Speaker 5 

So no, I mean I. 

01:17:19 Speaker 5 

I had, I had a crossover investor told me, told me that, look, I think that things are oversold right now. 

01:17:25 Speaker 5 

This is an attractive times reply. 

01:17:26 Speaker 2 

But they won’t take it out. 

01:17:27 Speaker 2 

But they won’t. 

01:17:27 Speaker 5 

Right, because because, look, if I’m right, that’s. 

01:17:30 Speaker 5 

Or oversold when it goes. 

01:17:31 Speaker 5 

Up great. 

01:17:32 Speaker 5 

I make a little bit of money, but if I’m wrong, I’m not not. 

01:17:34 Speaker 5 

Just losing money I’m risking. 

01:17:35 Speaker 4 

Two mistakes in a row. 

01:17:36 Speaker 5 

I’m risking my career. 

01:17:37 Speaker 5 

I’m cutting. 

01:17:38 Speaker 1 

Why not? 

01:17:39 Speaker 1 

Yeah, so why would I do? 

01:17:40 Speaker 5 

That I’m still. 

01:17:40 Speaker 5 

Sitting on the opposite right. 

01:17:42 Speaker 4 

Now guys, the same is true in Vt, so I had several meetings this week who kind of shared the same point here, which is our partnership meetings. 

01:17:49 Speaker 4 

I don’t know what you guys are doing. 

01:17:51 Speaker 4 

Taxes were fun, but they’re like our partnership meetings. 

01:17:54 Speaker 4 

We just cannot align on whether or not we’re paying the right direction, and so we’re at a standstill. 

01:17:58 Speaker 4 

We’re just waiting to see when the quote market settles out and then we’ll make decisions ’cause. 

01:18:03 Speaker 4 

I don’t want to be the guy in the DC context passing knives, but look, that’s a near term psychological phenomenon. 

01:18:09 Speaker 4 

I think the reaction from us is everyone sitting on their hands. 

01:18:12 Speaker 4 

But overtime 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 * a billion dollars. 

01:18:22 Speaker 4 

It’s not near term. 

01:18:23 Speaker 4 

That’s not the point I was I was trying to make earlier which was there’s a quarter trillion dollars. 

01:18:27 Speaker 4 

We got back to the macro point about the fact that there is going to be funding. 

01:18:32 Speaker 4 

It doesn’t matter if these guys are going to make money or not, or they’re going to make city investments or not. 

01:18:38 Speaker 4 

There is going to be a stimulus artifact. 

01:18:40 Speaker 4 

All you need is one of the next trillion dollar mega caps to emerge from the quarter trillion messaging, so the entire industry looks fantastic. 

01:18:46 Speaker 2 

Wonder Woman. 

01:18:49 Speaker 4 

And for that business to transform the landscape of these. 

01:18:53 Speaker 4 

Features going away. 

01:18:54 Speaker 4 

Would be great. 

01:18:56 Speaker 4 

Well, we, but we’ve never, by the way, we’ve never seen that in history. 

01:18:58 Speaker 4 

We’ve never had this much dry powder sitting on the sidelines. 

01:19:01 Speaker 4 

And this is where the free money should go. 

01:19:03 Speaker 4 

It should go to creating new companies that create new jobs. 

01:19:06 Speaker 4 

And it is. 

01:19:07 Speaker 1 

It found its way there. 

01:19:08 Speaker 1 

There’s the trillions. 

01:19:09 Speaker 4 

Of dollars that have fueled crazy asset bubbles less than. 

01:19:12 Speaker 4 

Some amount of it’s made its way into funding the creation of new companies that are going create jobs. 

01:19:17 Speaker 4 

And that is. 

01:19:18 Speaker 4 

The good thing of what’s happened over the last couple of years, despite the asset implosion of all these bubbly things that have happened. 

01:19:25 Speaker 4 

Team up. 

01:19:25 Speaker 4 

I wanted to answer your question. 

01:19:26 Speaker 4 

So what do you do if you get punched in the face 7 times you were running bad in a poker game? 

01:19:30 Speaker 4 

Yeah, if you look at so homeless or other people who. 

01:19:34 Speaker 4 

I think when you take a break, go. 

01:19:36 Speaker 4 

For a walk around the pool. 

01:19:39 Speaker 4 

Smile for him. 

01:19:40 Speaker 4 

One thing I like. 

01:19:41 Speaker 4 

To think about. 

01:19:42 Speaker 4 

Is hey, I’m going to play a better play, better cards to start your hand, then maybe play in position. 

01:19:47 Speaker 4 

And in, in, in. 

01:19:48 Speaker 4 

The analogy here playing better cards. 

01:19:51 Speaker 4 

You know, backing better founders and better products and then playing your position knowing where in the life cycle of a company value is. 

01:19:57 Speaker 4 

Created in a necklace evaluation, so I’m laser focused right now on. 

01:20:01 Speaker 4 

It’s, you know, World Quest teams that are running their business as well and that I can invest in early. 

01:20:06 Speaker 4 

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 cycle, but maybe two weeks ago. 

01:20:15 Speaker 4 

So listen, your last valuation last year is a great valuation this year and if you have people who wanted to invest. 

01:20:21 Speaker 4 

Let’s see who couldn’t get in going back to your $30 million valuation last year and topping off 3,000,000 with the people who couldn’t get in. 

01:20:28 Speaker 4 

And you told them you all. 

01:20:29 Speaker 4 

Come back to you. 

01:20:30 Speaker 4 

When it’s 90 million could go through if they still want to put that bet in and then for the VC’s are out there in the early stage. 

01:20:36 Speaker 4 

You know making decks on sub $15 million, sub $12 million companies in the seed round if they’re focused on customers and products even got a couple of 100K in revenue, it’s I think it’s a good bet and and I’m I’m going to increase our investing in those types of companies under 20 million, under 15 million focus teams. 

01:20:57 Speaker 4 

Who understand that the climate change if you’re not taking the medicine. 

01:21:02 Speaker 4 

You had to fax his excellent tweetstorm, your DT from funding. 

01:21:06 Speaker 4 

I think it’s very important that people understand what’s accent. 

01:21:09 Speaker 4 

If you do not accept the reality of EC, who has lived through one, two or three of these cycles is going to disqualify you. 

01:21:17 Speaker 4 

And they’re not telling you why they’re disqualifying, which is not a fit. 

01:21:19 Speaker 4 

Couldn’t get my. 

01:21:20 Speaker 4 

Partners around it. 

01:21:21 Speaker 4 

You know, let’s keep in touch. 

01:21:22 Speaker 4 

Let me know how it can be helpful. 

01:21:23 Speaker 4 

The other thing is an entire generation of investors. 

01:21:27 Speaker 4 

Have been coddling entrepreneurs and in moments like this, sometimes you need to actually have hard conversations. 

01:21:34 Speaker 4 

Yes, yes. 

01:21:35 Speaker 4 

I don’t know how you tell that entrepreneurs and you need to be actually five days a week in the office. 

01:21:40 Speaker 4 

You need to do a 25% service. You need to solve all the extreme with spend. Forget the exposed brick wall and the kind bars. We need to get down to just ones and zeros. 

01:21:51 Speaker 4 

So that’s also an entire generation of capital, capital allocators who don’t know how to do this job in a moment like this. 

01:21:58 Speaker 4 

They’ve never had those conversations. They’ve never had those conversations fit to build on people’s point. If you ideal that you would be at a standstill about price in a moment like this, to me is shocking. If I mean if I was an LP. 

01:22:11 Speaker 4 

In that venture fund, I would write it to zero. 

01:22:14 Speaker 4 

There should be no intellectual standstill whatsoever. 

01:22:17 Speaker 4 

In a moment like this. 

01:22:18 Speaker 5 

Right. 

01:22:19 Speaker 4 

You know if. 

01:22:19 Speaker 5 

Yeah, I agree. 

01:22:19 Speaker 4 

It’s true, obviously see obvious that the prices are. 

01:22:20 Speaker 5 

We’re slowing down. 

01:22:22 Speaker 5 

Yeah, we’re so investing. 

01:22:24 Speaker 5 

It’s just that lower valuation. 

01:22:25 Speaker 4 

There should be no stand. 

01:22:26 Speaker 4 

So for example, this is the time to invest, tax, write any. 

01:22:26 Speaker 3 

Right. 

01:22:29 Speaker 2 

Yeah, I want to. 

01:22:30 Speaker 5 

Say for any sort of positive shift, a lot of founders watched the show. 

01:22:34 Speaker 5 

It’s like, look what Jason said. 

01:22:36 Speaker 5 

If you use your cell reality, and if you don’t, you’re gonna have a bucket of, you know, very cold water. 

01:22:41 Speaker 5 

Jumps on your head when you got in, fundraise and realize that you’re not going to make it and then you know all of a sudden. 

01:22:45 Speaker 5 

He’s packing up shop very quickly, so you gotta get. 

01:22:48 Speaker 5 

But you gotta get a reality check and understand. But look, great companies are built during downturns. You know PayPal is built duringthe.com crash. 

01:22:58 Speaker 5 

My company gamble, is built during the Great Recession. 

01:23:00 Speaker 5 

Google Uber totally and losers online, so it’s junctions are great chance to build companies because the war for talent subsides. 

01:23:06 Speaker 3 

We have. 

01:23:08 Speaker 5 

There’s so much easier recruit people. 

01:23:10 Speaker 5 

There’s a lot fewer competitors getting funded, so there’s way less noise. 

01:23:13 Speaker 5 

In the ecosystem, the only thing that gets harder is fundraising. 

01:23:17 Speaker 3 

So you need to. 

01:23:17 Speaker 5 

Make sure that your money lasts. 

01:23:19 Speaker 5 

You do the right things, you folks something, some fundamentals. 

01:23:22 Speaker 5 

You don’t dequeue yourself and. 

01:23:24 Speaker 5 

If you do. 

01:23:25 Speaker 5 

That you’ll be. 

01:23:25 Speaker 4 

Fine, you just brought up something incredible. I remember we raised money from Microsoft at a $15.3 billion valuation. 

01:23:33 Speaker 4 

The great financial crisis took hold and marked his credit reset the valuation. 

01:23:40 Speaker 4 

We were already profitable, so we didn’t necessarily need to raise that money, but we, I think we raised a billion dollars at like a $9 billion valuation so we could, uh, you know, 3340% haircut jahraus. 

01:23:52 Speaker 4 

Facebook had a down round. 

01:23:54 Speaker 4 

We pattern our balance sheets and we said we are now going to go and flush and to your point we were really able to compete. 

01:24:00 Speaker 4 

That’s more effectively coming out of the GFC against Google for talent and against everybody else in that moment. 

01:24:06 Speaker 4 

Yeah, and so if this is what people like Brock are willing to do. 

01:24:10 Speaker 4 

You have to really hold people’s feet to the files. The founders who are not here. What is the fast Doc Co founder willing to do? 

01:24:13 Speaker 3 

It’s not urgent. 

01:24:19 Speaker 4 

You know, like you shut it down. 

01:24:20 Speaker 4 

Like like literally the some. 

01:24:22 Speaker 4 

I find this very disturbing, but there are some founders who are still unwilling to make the config change the medicine that they would rather run the ******* car into the wall then. 

01:24:30 Speaker 4 

Hit the brakes. 

01:24:31 Speaker 4 

Must hit the ******* brakes. 

01:24:33 Speaker 4 

Save your company lives to fight another day. 

01:24:35 Speaker 4 

If you have six months of runway, get the trolls and then try to live a fight. 

01:24:39 Speaker 4 

Another is waiting for prices. 

01:24:41 Speaker 5 

You’re totally right every. 

01:24:42 Speaker 5 

Single company that hits the wall and goes. 

01:24:44 Speaker 5 

Out of business that didn’t do. 

01:24:46 Speaker 5 

A round of layoffs 12 months before. 

01:24:48 Speaker 5 

Was asleep at the wheel. 

01:24:50 Speaker 4 

Because they were literally tapping and driving. 

01:24:52 Speaker 4 

They were texting and. 

01:24:52 Speaker 5 

Driving we’re was around the layouts a year before they ran out of money. 

01:24:56 Speaker 5 

That at least gave them more runway. 

01:24:58 Speaker 5 

They didn’t. 

01:24:59 Speaker 5 

Do it so. 

01:24:59 Speaker 4 

They just assume this is David if you think about it. 

01:25:02 Speaker 4 

Your experience, your C brown was hard getting into Y Combinator. 

01:25:05 Speaker 4 

Regards there. 

01:25:06 Speaker 4 

So you say, OK, it was it was hard to do 25 meetings, but you got a term sheet, your series B, you have five people offering the term sheets, your series VC&D where people begging you to take their money and same name a price. 

01:25:19 Speaker 4 

So what does that? 

01:25:20 Speaker 4 

Founders think the next round of funding, maybe each round, became less work and higher valuations. 

01:25:26 Speaker 4 

And you know what a generation also. 

01:25:29 Speaker 4 

Well, there’s a group of founders who became better at selling VC’s on investing in their company than selling customers on buying more product. 

01:25:38 Speaker 4 

You have to take the same focus you have of selling people on buying squirt in your company and put that into a product, the actual service, and raise your prices. 

01:25:46 Speaker 4 

So many people are charging so little. 

01:25:48 Speaker 4 

For their staff. 

01:25:49 Speaker 4 

Product the software and like, I can’t make this business work and we save them. If you doubled or tripled surprises you lose what percentage of customers regions they say we lose like 10% or more. 

01:25:58 Speaker 4 

Did you just, you have a million of revenue, 2 millions, 10% off 2,000,000, you’ve got 1.8? 

01:26:05 Speaker 4 

Would you rather make 800,000 more and be break even right now and their shots? Sometimes founders just have this amazing moment. 

01:26:10 Speaker 4 

Like I mean, I guess we could charge more and if we lost some customers that. 

01:26:13 Speaker 4 

Wouldn’t be the end of the world. 

01:26:14 Speaker 4 

That would be possible. 

01:26:15 Speaker 4 

I think this speaks to the fact that you know. 

01:26:18 Speaker 4 

It takes a very specific skill to be a very good founder. 

01:26:22 Speaker 4 

You need a level of intellectual curiosity. 

01:26:25 Speaker 4 

You need some at some moments to listen, but at some moments to know just when to do what you feel is right. 

01:26:30 Speaker 4 

But it takes a lot of skill to be an investor, and I think we’ve glossed over how hardback businesses as well, because the reality is this is this Michael Morris word to tell you that you do it. 

01:26:39 Speaker 4 

You’d be hard pressed to not to not say that for so clearly told you to do that and you would do it because you know these are people’s over the big, the big means in our industry. 

01:26:48 Speaker 4 

But the reality is, the fact that it’s not happening also speaks to the fact that there’s probably there shouldn’t be 1/4 trillion dollars of funds that are probably stranded. 

01:26:56 Speaker 4 

In the hands. 

01:26:57 Speaker 4 

Of really inexperienced allocators who are gonna lighted on silent, for the most part trend. 

01:27:04 Speaker 4 

They’re not going to have the courage to sort of lead these. 

01:27:06 Speaker 4 

It happens. 

01:27:08 Speaker 4 

All you need is all you need is 1. 

01:27:10 Speaker 4 

But everybody should think about what, I don’t know where, how you phrase it to founders facts, but I say to them, when I invest in the company system, whenever things get really hard and you have a conversation that is the hardest conversation, that’s maybe the most nervous. 

01:27:22 Speaker 4 

It’s making you stare at the ceiling and grind. 

01:27:24 Speaker 4 

Your ******* teacher orgams. 

01:27:26 Speaker 4 

I want you to just call me. 

01:27:27 

And I can. 

01:27:28 Speaker 4 

Tell you like you. 

01:27:29 Speaker 4 

Know nothing return here. 

01:27:30 Speaker 4 

But you know Travis called me, wants to close on a Saturday and. 

01:27:32 Speaker 4 

Said hey, we’re. 

01:27:33 Speaker 4 

Struggling with axe, what do? 

01:27:34 Speaker 4 

You think? 

01:27:35 Speaker 4 

And Travis knows how to run a business 1000 times better than me. But being a sounding board and giving your Founders permission to come to you when things are fuct up, it’s critically important as an investor and being able to have an intellectual honesty or French model. 

01:27:48 Speaker 4 

Discussion about the hardest. 

01:27:49 Speaker 4 

She’s she’s really what the job is, in my mind. 

01:27:52 Speaker 4 

What is going to spend this company off the rails? 

01:27:55 Speaker 4 

What is the big fear you have? 

01:27:57 Speaker 4 

And let’s just put it on the table and rest. 

01:27:59 Speaker 4 

As Travis said, let’s have a jam session. 

01:28:01 Speaker 4 

Let’s jam on that until we solve the problem. 

01:28:04 Speaker 4 

So if you’re suffering out there, you’re scared. 

01:28:06 Speaker 4 

You know it’s gotta be an investor in your group. 

01:28:08 Speaker 4 

We will have a candid. 

01:28:10 Speaker 4 

Tried to give a punch list of things. 

01:28:11 Speaker 4 

If I was a founder right now, here, here, the things that I would do is I would sit down and really look at your growth from your burn and have an honest conversation with your co-founder or this one or two of your trusted board members. 

01:28:23 Speaker 4 

And really say, what is the real valuations of Business Today and what could it actually be? 

01:28:28 Speaker 4 

And if there’s a big gap between mass and where you’ve lost waste money, the right thing? 

01:28:33 Speaker 4 

To do is. 

01:28:34 Speaker 4 

To think about in one bucket resetting the valuations in a second bucket making their employees flow and deferred bucket managing with burns. 

01:28:43 Speaker 4 

That you extend your runway. 

01:28:45 Speaker 4 

I think if you could do those three things and take the hard medicine now, you will be much better off for it. 

01:28:51 Speaker 4 

You’ll be. 

01:28:52 Speaker 4 

Appreciated by your employees and will have shown some real metal. 

01:28:57 Speaker 4 

It’s still Crucible moment to use a secure. 

01:29:00 Speaker 4 

How do you guys think the market is going to settle out? 

01:29:02 Speaker 4 

Do you have any predictions? 

01:29:03 Speaker 4 

On the bottom. 

01:29:04 Speaker 4 

I will tell you a statistic. 

01:29:06 Speaker 4 

I think Michael Bury put this out yesterday. 

01:29:08 Speaker 4 

He did not. 

01:29:10 Speaker 4 

He deletes his tweets everyday. 

01:29:12 Speaker 4 

Very interesting character by the way. 

01:29:14 Speaker 4 

But he pointed out how. 

01:29:17 Speaker 4 

From top to bottom. 

01:29:19 Speaker 4 

During the kind of O2 era or one, you know, 2000 era and then during the 2009 era, you know, kind of those big drawdowns in the market. 

01:29:31 Speaker 4 

You looked at companies like Microsoft, JP Morgan, I forgot which others, but highlighted that you know on average it took six times their total shares outstanding for them to go from top to bottom, meaning that the shares ultimately turned over success, the total, you know, diluted share graph and so far. 

01:29:52 Speaker 4 

In those stocks, we’ve only seen half of the total shares outstanding turn over to. 

01:29:56 Speaker 4 

Speak so his and he’s been making this case for, you know, kind of a few days in a few weeks now, which is like, you know the dead tap down state where the market’s going to be tanking for quite a while. 

01:30:05 Speaker 2 

And he says there, that’s a big. 

01:30:07 Speaker 4 

Update everyone trying to call. 

01:30:08 Speaker 4 

The bottom he’s like no this. 

01:30:09 Speaker 2 

Is a dead cat bounce moment. 

01:30:10 Speaker 1 

And he’s like. 

01:30:11 Speaker 4 

If you look at kind of the structural rotation, that’s. 

01:30:13 Speaker 4 

Necessary for these markets to ultimately find their bottoms. 

01:30:16 Speaker 4 

You know, we’ve got several multiples still to go with respect to volume. 

01:30:20 Speaker 4 

That needs to. 

01:30:20 Speaker 4 

Trade before you find what the true. 

01:30:22 Speaker 2 

Market bottom is. 

01:30:24 Speaker 1 

So, you know, it was a really. 

01:30:25 Speaker 4 

Interesting kind of insight to. 

01:30:26 Speaker 4 

This kind of statistical insight that he pulled together and. 

01:30:29 Speaker 2 

Put on Twitter. 

01:30:30 Speaker 4 

I wanted to see if you guys kind of think that that might be the right way to think about it and. 

01:30:33 Speaker 2 

How you react? 

01:30:34 Speaker 4 

To, you know, these conversations around where’s the bottom going to be? 

01:30:37 Speaker 5 

Can I swap this one charge return to speak 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? 

01:30:48 Speaker 5 

I shared it with you guys in the chat. 

01:30:50 Speaker 5 

The the two has. 

01:30:52 Speaker 5 

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. 

01:31:00 Speaker 5 

So Fed funds and inflation sort of move in lockstep. 

01:31:03 Speaker 5 

If you look at what’s happened over the past year, these two things have moved violently out of sync with each other. 

01:31:09 Speaker 5 

You have inflation now going all the way up to. 

01:31:11 Speaker 5 

8% meanwhile, the Fed funds rate still moves down at like 1%, even with all the rate hikes from the talk of rate hikes that we’ve had. 

01:31:20 Speaker 5 

Well, we have. 

01:31:21 Speaker 5 

A 1%, you know, Fed fund. 

01:31:25 Speaker 5 

Now the expectation is it’s going to go higher the. 

01:31:28 Speaker 5 

Tenure tables 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’re cut rates. 

01:31:37 Speaker 5 

But then we’ve got inflation demanding that we Jack up rates far more. 

01:31:42 Speaker 5 

And I think this is a problem and this is what’s going to be very tough about our current situation is if we go into recession. 

01:31:48 Speaker 5 

Over the next six months, what is the? 

01:31:49 Speaker 5 

Fed do about. 

01:31:50 Speaker 5 

That I mean. 

01:31:51 Speaker 5 

They don’t really have much. 

01:31:52 Speaker 5 

Dry powder here in previous assessments. 

01:31:54 Speaker 5 

Like the GSP and. 

01:31:56 Speaker 5 

08. 

01:31:56 Speaker 5 

I mean interest rates around 5%, so when? 

01:31:59 Speaker 5 

They saw us into zero. 

01:32:00 Speaker 5 

They had some serious. 

01:32:01 Speaker 5 

Yeah, that was some serious for a week here at 1%. What do you do you? 

01:32:05 Speaker 5 

Top left is 0. 

01:32:05 Speaker 5 

And then new walls, inflation still rampaging at 5%. This is what’s so hard about it. Then look at this other chart, which is the skin from a blog, A blog post called. 

01:32:16 Speaker 5 

The most reckless fed ever. 

01:32:18 Speaker 5 

During this most reckless fed ever, they basically just took the Fed funds rate of subtracted inflation to get their real fed funds rates. 

01:32:27 Speaker 5 

the Fed funds rate debt of inflation. 

01:32:29 

And what you. 

01:32:30 Speaker 5 

Could see here is that starting around 2018, nineteen the real Fed funds rate started going negative and then very, very negative to the point now where it’s not there basically -, 7%. 

01:32:41 Speaker 5 

So, you know why is that? 

01:32:43 Speaker 5 

Because the Fed waited way too long to basically take over the punch bowl and start reacting to inflation. 

01:32:49 Speaker 5 

You had. 

01:32:50 Speaker 5 

Pal say a year ago that inflation was transitory and then they didn’t react to it. 

01:32:55 Speaker 5 

So at the end of the year they should have stopped the QE right then and there and then gradually started raising rates in some of these violent moves that we’ve had this year that are plunging the economy into recession that have caused the stock market crash. 

01:33:08 Speaker 5 

Now what does PAL just say a week or two ago? 

01:33:10 Speaker 5 

He said he doesn’t see a wistful assessment. 

01:33:12 Speaker 5 

On the horizon. 

01:33:14 Speaker 5 

It’s like, what are you smoking? 

01:33:15 Speaker 5 

I mean, this is just like his inflation of sensory comment a year ago. 

01:33:19 Speaker 5 

You’re wondering, like, do we have better data than the than the Fed show does because it’s so well worth sitting wishing a stock market crash at planet and a recession and he. 

01:33:28 Speaker 1 

Doesn’t even see. 

01:33:29 Speaker 4 

It it’s like denial is not just a river in Egypt. 

01:33:32 Speaker 4 

This is crazy look. 

01:33:33 Speaker 4 

I mean, we call it a crash, but you know, some people might just say that investors are violently reacting to the shifting tides on capital availability. 

01:33:42 Speaker 4 

But I will tell you, I’ll say this one more time because I think it’s so important and it’s my kind of. 

01:33:49 Speaker 4 

Prediction of the week. 

01:33:50 Speaker 4 

I really think we’re going to run into a consumer credit bubble here. 

01:33:54 Speaker 4 

I do not think that consumers are going to slow down their spending or change their lifestyle as quickly as investors are changing their investing style. 

01:34:03 Speaker 4 

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. 

01:34:10 Speaker 4 

Some of the stories we shared today, but consumers are taking on. 

01:34:13 Speaker 4 

More credits, they’re opening credit. 

01:34:15 Speaker 4 

Cards they’re taking out bigger loans. 

01:34:16 Speaker 4 

Prices are going up 10% year over year for them. And so the concern is if we actually do hit a recession that we don’t see real wage growth and the consumer credit bubble continues to grow, we’re going to face a credit crunch. 

01:34:28 Speaker 4 

He can call it 9 to, you know, nine months to a year where we’re all going to wake up and be like, wait a second, how are consumers going to be able to afford all? 

01:34:35 Speaker 4 

This put and that whole. 

01:34:36 Speaker 4 

Very simple and end of the great resignation. 

01:34:40 Speaker 4 

That whole concept of like fun employees and I’m going to flip and I’m not going to go to work that’s out the window. 

01:34:46 Speaker 4 

But I mean, we’ve been enjoying this. 

01:34:48 Speaker 4 

People are going to need jobs. 

01:34:48 Speaker 5 

It’s like that there are. 

01:34:50 Speaker 5 

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. 

01:34:56 Speaker 5 

Yes, and meanwhile, you’ve got a Fed chair in denial about what’s happening, and you gotta press the United States. 

01:35:02 Speaker 5 

He’s more focused on Ukraine. 

01:35:05 Speaker 4 

So what’s happening, United States? 

01:35:05 Speaker 1 

There we go. 

01:35:06 Speaker 5 

We’ll let me have Tweedledee and Tweedledum on this case. 

01:35:10 Speaker 5 

Biden and power going to go down as the worst president and fed chair of all orange. 

01:35:13 Speaker 3 

Oh, Joe, here he goes. 

01:35:15 Speaker 1 

No, it is. 

01:35:16 Speaker 1 

It is like the. 

01:35:17 Speaker 5 

Anti Reagan Volt or combination? 

01:35:19 Speaker 5 

I mean that caused this problem. 

01:35:20 Speaker 4 

Well, first of all, it’s all like, I don’t know if I agree for longer conversation. 

01:35:24 Speaker 4 

I gotta run. 

01:35:25 Speaker 4 

But yeah, like, you know, I think we all blame someone. 

01:35:27 Speaker 4 

Bit of money to we all want to blame someone. 

01:35:29 Speaker 4 

The reality is there was a massive leveraging that happened going into. 

01:35:33 Speaker 4 

2000. 

01:35:34 Speaker 4 

And we gotta work it. 

01:35:34 Speaker 4 

We thought we were delivering and I don’t think we’ve been delivering. 

01:35:38 Speaker 4 

Since 2008. 

01:35:39 Speaker 4 

And all of a sudden the chickens coming home to roost or whatever the term is, and we’re all sort of waking up to the fact that wait a second. 

01:35:44 Speaker 1 

They flooded the system with 10 trillion of money in the last two years after card was not, fortunately, consumers and all of those 14 years ago. 

01:35:48 Speaker 4 

So we are. 

01:35:54 Speaker 4 

So 14 years ago from last 30 years, there’s a long cycle here, but not so if you look back through time, we’ll see if you look at like. 

01:36:03 Speaker 4 

The average mean peeing. 

01:36:04 Speaker 4 

For the S&P 500, it can go down to this low of 3000. 

01:36:08 Speaker 4 

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 releasings up, which we waited for, equity markets continue to retrench, the side will be forced to step in with liquidity and move back to where we were before. 

01:36:23 Speaker 4 

So you know I actually think we’re probably close to a near bottom hinge. 

01:36:28 Speaker 4 

Here, 3800 ish in the S&P 500, you’re actually starting to see some of these early green sheets. 

01:36:36 Speaker 4 

Of the market bottom water those it’s runs the most. 

01:36:39 Speaker 4 

Heavily shorted stocks start to rip up. 

01:36:42 Speaker 4 

You know, sort of the gains *** GameStop like rallies and we’re seeing that attitude today. 

01:36:47 Speaker 4 

So it’s a, it’s a really interesting day when those market is roughly flat, slightly down, but some of these companies you know. 

01:36:54 Speaker 4 

What block? Just square five? 6%. Rather build 5%. Even lift one of 5%. 

01:37:01 Speaker 4 

So it exists. 

01:37:02 Speaker 1 

There’s certainly some panic selling yesterday and. 

01:37:02 Speaker 4 

I did this bouncing along the bottom, yeah. 

01:37:05 Speaker 1 

There was so much panic selling yesterday that. 

01:37:07 Speaker 5 

The markets bouncing up from that? 

01:37:09 Speaker 5 

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. 

01:37:17 Speaker 5 

And the risk right now? 

01:37:18 Speaker 5 

Is the stock market is telling. 

01:37:19 Speaker 5 

Us something about where the real economy is headed. 

01:37:21 Speaker 5 

And the problem is that the Fed and the central government don’t really have the tools to fight for this session because. 

01:37:27 Speaker 5 

Interest rates already so well. 

01:37:29 Speaker 5 

And, you know, by already spent all the money, I mean, they broke the glass in case of emergency. Last year they spent that last $2 trillion of emergency relief, which when looked really summers told them they didn’t need to do it, remember? 

01:37:41 Speaker 5 

That very, so much told that would lead to inflation. 

01:37:43 Speaker 5 

Nobody I know. 

01:37:44 Speaker 5 

No one wants to listen. 

01:37:45 Speaker 5 

Larry Summers. 

01:37:46 Speaker 5 

He’s like 1. 

01:37:46 Speaker 5 

Of those guys you? 

01:37:47 Speaker 4 

Crazy grandpa. 

01:37:47 Speaker 5 

Never wanted there, so it’s it’s correct. 

01:37:49 Speaker 5 

But Larry Summers was correct. 

01:37:51 Speaker 5 

The administration did. 

01:37:52 Speaker 5 

Not listen to him. 

01:37:53 Speaker 4 

Hey, who I know very well and otherwise who I love. 

01:37:56 Speaker 4 

It’s like girly as well. 

01:37:57 Speaker 4 

He’s he, generally. 

01:37:58 Speaker 4 

Right in the end. 

01:37:59 Speaker 4 

And so I would just, you know, you know who is. 

01:38:01 Speaker 4 

I mean, we do need to get back from the Clinton, you know, moderately balanced the budget, stop spending some austerity measures like we should only work our way out of this. 

01:38:11 Speaker 4 

And I think what we’re going to learn from this is the concept of free money and printing money is not sustainable, and the concept of Americans not going to work is not going to make the economy that Americans. 

01:38:21 Speaker 4 

Want to live in? 

01:38:22 Speaker 4 

I know this sounds ******* crazy, but if you want to spend money and you want to enjoy life, you gotta work. 

01:38:29 Speaker 4 

But you can’t. 

01:38:30 Speaker 4 

We can’t have this kind of Labor participation. 

01:38:33 Speaker 4 

We can’t have people flipping FT training must not work. 

01:38:36 Speaker 5 

There you are, Jason grows up. 

01:38:39 Speaker 4 

I saw this thing where? 

01:38:40 Speaker 4 

Uhm, there’s, uh, 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 biology. 

01:38:49 Speaker 4 

Is bad. 

01:38:51 Speaker 4 

But and and I thought. 

01:38:54 Speaker 4 

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. 

01:39:02 Speaker 4 

That their mindset, you know, especially if you’re like a social scriber like you can signal that you’re different from everybody else by living this lifestyle. 

01:39:10 Speaker 4 

But that looks interesting though world where there’s lots of free money and when that free money. 

01:39:14 Speaker 4 

It’s taking away, I’m not sure that you’re renting castles to spend a week here in a week there. 

01:39:20 Speaker 4 

But we all want to talk about you be I I think it’s a very virtuous, signaling thing to do, and it’s a very, like, real positive thing to do. 

01:39:25 Speaker 4 

All this could be so much money that we can just drop it from the heavens and everybody going to get a private jet, everybody is going to get to flip their NFT and you’re bored. 

01:39:34 Speaker 4 

It’s gonna become worth a million. 

01:39:35 Speaker 4 

Dollars or. 

01:39:36 Speaker 4 

Bitcoins maybe $1,000,000. 

01:39:37 Speaker 4 

Each this is not reality, folks. 

01:39:39 Speaker 4 

Greater than. 

01:39:40 Speaker 4 

You make it up in the world when you write code, when you. 

01:39:42 Speaker 4 

Build companies when? 

01:39:42 Speaker 4 

You go to work, but it’s going to take. 

01:39:43 Speaker 3 

Right. 

01:39:45 Speaker 4 

I mean, at some point maybe we’ll have some energy source and, you know, robots building everything for us, but we gotta wrap here. 

01:39:51 Speaker 4 

We’ll see everybody all instrument. 

01:39:53 Speaker 4 

There’ll be a bunch of stuff dropping, just a couple of program, you know, please, please, please or no more. 

01:39:58 Speaker 4 

Take us off. 

01:39:59 Speaker 4 

Do not try and press the party, the service, security there, everybody with a bag. 

01:40:02 Speaker 4 

Then we’ll be. 

01:40:03 Speaker 4 

Tracking the badges. Tomas. 

01:40:04 Speaker 4 

Everybody got a photo on their badge. 

01:40:06 Speaker 4 

Please don’t bring a + 1 and please, please, please do not try to crash. 

01:40:10 Speaker 4 

Thank you. Love you. 

01:40:11 Speaker 4 

Love you. 

01:40:12 Speaker 4 

Talk to you soon. 

01:40:12 Speaker 4 

Everybody will see you next time on. 

01:40:13 Speaker 4 

The All in podcast bye bye. 

01:40:16 Speaker 5 

Let your winners live. 

01:40:19 Speaker 4 

Brain man here. 

01:40:19 Speaker 3 

2nd we open source this to the fans. 

01:40:47 Speaker 4 

We should all just get a room and just have one big huge. 

01:40:49 Speaker 1 

Gorgeous that we’re also missing. 

01:40:51 Speaker 4 

Type it up. 

01:40:52 Speaker 4 

Sexual tension, but. 

01:40:53 Speaker 3 

We just need to release that house. 

01:40:55 Speaker 3 

What your? 

01:40:57 Speaker 3 

What? Your face? 

01:41:00 Speaker 4 

When do you think that merges are bad?