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00:00:00 Speaker 1
GG squares is.
00:00:01 Speaker 2
Our BG square channel.
00:00:02 Speaker 2
Everybody knows friends of the pod.
00:00:05 Speaker 2
Brad Gerstner and Bill Gurley give it up for sure.
00:00:11 Speaker 3
Letterwinners ride.
00:00:13 Speaker 1
300.
00:00:14 Speaker 4
In fact.
00:00:18 Speaker 1
As I said, we opened.
00:00:26 Speaker 4
Still, you predicted five of the last three recessions.
00:00:33 Speaker 1
Uh, a broken clock is still right twice as.
00:00:34 Speaker 3
This is.
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This but I mean.
00:00:39 Speaker 2
Here we are again.
00:00:40 Speaker 2
You you sounded the alarm bell.
00:00:42 Speaker 2
And of course you’re right.
00:00:43 Speaker 2
And you’ve seen this movie before for all of us younger capital allocators.
00:00:49 Speaker 2
Who are experiencing it for the second or third time that you’ve experienced it a couple more times?
00:00:57 Speaker 2
I mean, it’s pretty old.
00:00:59 Speaker 2
How does it?
00:01:00 Speaker 2
How does this one measure?
00:01:01 Speaker 2
Up to greatrecession.com bust, you know, 87 and the and the mini ones we’ve seen.
00:01:07 Speaker 5
In between, you know one thing that I think.
00:01:10 Speaker 5
It’s super important to put this into context.
00:01:12 Speaker 5
I’ll try and tell this quick.
00:01:14 Speaker 5
I had a meeting once with Howard Marks so I wanted to meet for a long period of time.
00:01:19 Speaker 5
Famous bond investor that does a lot of writing and for 15 minutes you ask any questions about the venture industry, a lot of structural questions.
00:01:28 Speaker 5
And I told him by answer as best I could, and he said, man, that’s a really ****** industry.
00:01:35 Speaker 5
And I said, well, why do you say that?
00:01:36 Speaker 5
What do you mean?
00:01:37 Speaker 5
He says.
00:01:38 Speaker 5
He says, you know, typical collapse is built into the structure.
00:01:43 Speaker 5
And so we have funds that you know.
00:01:46 Speaker 5
Are taken, you know committed to that have 10 to 15 year life.
00:01:50 Speaker 5
So you have low barriers to entry, but you have very high barriers taxes.
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And so he felt that it just systematically set up to to rise and crash, rise and crash and.
00:02:02 Speaker 5
One thing that.
00:02:03 Speaker 5
That I realized coming out of that.
00:02:05 Speaker 5
Is that it?
00:02:06 Speaker 5
It doesn’t happen like a sine curve, which is what we all imagine when we think of a cyclical business.
00:02:12 Speaker 5
It’s more like a sawtooth.
00:02:13 Speaker 5
It risk risk on is a very slow process, and it and it’s it’s reflexive, so it grows and grows and grows and grows and then risk off tends to be very.
00:02:24 Speaker 5
Brought and we’ve seen that here, right this this cycle risk on was from 09, that’s also two, five months ago.
00:02:33 Speaker 5
That’s really welcome and risk off is 5 months and and the thing that that is really tough about that is it.
00:02:41 Speaker 5
It requires mental.
00:02:44 Speaker 5
Adjustment very quickly, like because it didn’t gradually changed, it abruptly changed.
00:02:50 Speaker 5
And so, you know, CAP charts might have, you know systematic issues that are stuck because too much lick craft relative to the new reality.
00:02:59 Speaker 5
Valuations are shifted.
00:03:00 Speaker 5
Cost capital is radically different.
00:03:03 Speaker 5
You may have.
00:03:04 Speaker 5
You know on the way up as risk got people took more risky trying crazier things you you’re willing to to take take make investments in businesses you might not at the cost of capital is a lot lower.
00:03:17 Speaker 2
You need the stadium.
00:03:18 Speaker 2
For five years as a crypto company.
00:03:19 Speaker 5
They might do that and then but then all the sudden it’s it’s gone.
00:03:23 Speaker 2
And now the commitment to naming the stadium is greater than America.
00:03:29 Speaker 5
Yeah, well I I assume your friends still file.
00:03:32 Speaker 2
Well, that may not be true.
00:03:33 Speaker 2
Press yes.
00:03:35 Speaker 2
Well, I mean just as an example, it might be a.
00:03:37 Speaker 2
Disproportionate value of you.
00:03:40 Speaker 5
Yeah. So anyway, it’s it’s tough and and in this particular case, ’cause, that’s what you asked. So it it turns out 09 wasn’t that bad.
00:03:48 Speaker 5
If we if we have an 09 that would be pretty good. Things got turned around pretty quickly, 01 was very abrupt and we didn’t you know really start to see liquidity again until with a few exceptions.
00:04:00 Speaker 5
You don’t mention PayPal, but like 050.
00:04:02 Speaker 5
This you know.
00:04:03 Speaker 2
It was a long walk in the desert in a lot of great companies were started, but a lot of.
00:04:07 Speaker 2
Founders gave up that time, right?
00:04:09 Speaker 5
And and and look, I mean, I think to the, if you’re an early stage investor or if you’re an early stage founder that’s just getting going or even an early stage company ’cause, you haven’t scaled out yet.
00:04:20 Speaker 5
This probably hasn’t affected you.
00:04:22 Speaker 5
It could be, it could be.
00:04:25 Speaker 5
Like, your access to talent is going to be a lot easier.
00:04:27 Speaker 5
People are going to be more pragmatic and rational, but it’s, uh, it’s usually a long window on the other side.
00:04:33 Speaker 5
The other, the other challenge you have here is.
00:04:36 Speaker 5
In 20 Umm we basically had a mini pull back in March of 2020, but then the Fed hit so hard these things just blasted off again.
00:04:46 Speaker 5
And now and.
00:04:46 Speaker 5
Now you guys have talked about this, but that tool is not in the toolbox anymore.
00:04:53 Speaker 6
So one of the things I I was talking to somebody last night and this audience was amazing.
00:04:58 Speaker 6
Talking somebody last night, they said, you know, so how does it work?
00:05:00 Speaker 6
You just sit together and talk.
00:05:02 Speaker 6
And I said, you know what?
00:05:03 Speaker 6
I’m what I love about this group is there.
00:05:06 Speaker 6
Are hundreds of hours.
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Of like data and research that we’re constantly challenged with.
00:05:10 Speaker 6
We all know where we are.
00:05:12 Speaker 6
We know what just happened and I think grounding ourselves in just a few tasks to try to figure out what the next six months are going to be because we have founders here trying to run their businesses.
00:05:23 Speaker 6
Can I raise capital or are we bouncing straight back from where we work, though very quickly?
00:05:28 Speaker 6
This chart just tells us, you know, the iron law of investing.
00:05:32 Speaker 6
Is interest rates a 1% change in rates leads to a 15 or 20% change in a multiple. And so the reason multiples have collapsed here for all these businesses is because expecta.
00:05:45 Speaker 6
Patients as the inflation and rates have changed dramatically, I hear a lot of.
00:05:50 Speaker 6
Talk about 1999, two thousand so.
00:05:54 Speaker 2
If it’s all.
00:05:55 Speaker 6
About rates, let’s just look at those two things.
00:05:57 Speaker 6
We plotted them here together.
00:05:59 Speaker 6
This is 19 to 22 on the bottom. It shows what rates did. We took him to to 0. the Fed is now saying our neutral rate is 2 to 3%. People are hyperventilating.
00:06:10 Speaker 6
Look at where we were in 2000. Look at what the cost of capital was in 2000, right?
00:06:14 Speaker 5
Crazy, right?
00:06:16 Speaker 6
And so this this. By the way, the delta there right, we went from just above 5 up to 6 1/2, right?
00:06:16 Speaker 2
Second mortgage rate, yeah.
00:06:24 Speaker 6
So we’re talking about going from 2 1/2 back to two and.
00:06:26 Speaker 6
1/2 or.
00:06:27 Speaker 6
Three, but the big question is, are we going back?
00:06:30 Speaker 6
To 2 1/2 or three? Or are they behind the curve, lost in the weeds and we’re going to have to go to four to five to kill inflation?
00:06:36 Speaker 6
Well, everybody was saying inflation, you know, inflation is here to stay forever.
00:06:42 Speaker 6
Remember when we?
00:06:44 Speaker 6
Report on core CPI it’s what happened.
00:06:47 Speaker 6
Last month it is not a forward-looking indicator, so we peaked in core CPI.
00:06:53 Speaker 2
Consumer price index explain what it is.
00:06:55 Speaker 6
Consumer prices, the basket of goods and services that we all go out and spend money on.
00:06:59 Speaker 6
So the Fed is focused on the demand side of the equation.
00:07:02 Speaker 6
They know they hopped us up on a bunch of Red Bull and cocaine to survive the pandemic.
00:07:07 Speaker 6
And now?
00:07:08 Speaker 2
I thought you were talking about last night so fast.
00:07:11 Speaker 1
Ha ha.
00:07:16 Speaker 1
Yeah, yeah.
00:07:19 Speaker 4
I’m gonna get to work together, OK?
00:07:22 Speaker 1
All right.
00:07:22 Speaker 1
So, so this chart, this chart.
00:07:25 Speaker 6
In deconstructed 20 bank models to say what are the components of CPI?
00:07:30 Speaker 6
How do they?
00:07:30 Speaker 6
Differ the red lines where Goldman thinks we’re going.
00:07:33 Speaker 6
The green Line is UBS.
00:07:34 Speaker 6
I just told you the Fed thinks will exit the year at four.
00:07:37 Speaker 6
We just decelerated.
00:07:40 Speaker 6
And when they look at 8 that when they look at May in June, it’s going to be down yet further.
00:07:46 Speaker 6
And here’s why it’s going to be down.
00:07:47 Speaker 6
When the Fed stimulated the economy, all the prices we pay for everything went hey.
00:07:53 Speaker 6
Wire OK, the price for a used car was 20,000 bucks for 10 years and then just coincidentally, but then they give us a bunch of Red Bull and the price goes to $29,000.
00:08:05 Speaker 6
For two months in a.
00:08:06 Speaker 6
Row we’ve had sequential declines.
00:08:09 Speaker 6
You tell me is the price of the used car this time next year?
00:08:14 Speaker 6
Higher than 29 or lower than 29, it’s going to be lower because we’re destroying demand by raising interest rates. Same for home prices. So what’s plotted here is the home affordability index.
00:08:26 Speaker 6
Somebody who can afford to pay $1200 a month in December could afford a $350,000 home.
00:08:33 Speaker 6
Today can afford a $240,000 home, you tell me. Are the number of new home searches on Zillow going up or down? Go run your Google trends. They’re going down because people’s ability to buy homes is going down.
00:08:47 Speaker 6
And then finally, airline tickets, same deal, right.
00:08:50 Speaker 6
And so when you put that all together, you say, OK, sequentially, month over month or we’re looking this stuff starting to tip over.
00:08:58 Speaker 6
If you look at what consumer confidence is, it’s the lowest in 10 years.
00:09:03 Speaker 6
Right.
00:09:03 Speaker 6
Consumer confidence is a leading indicator of slowing down.
00:09:07 Speaker 6
So again, everybody on television is telling us about what just happened.
00:09:12 Speaker 6
It’s like the nightly news.
00:09:13 Speaker 6
Big Red Arrows, inflation going up.
00:09:16 Speaker 6
This is what’s going to happen, and what we all care about is what’s going to happen.
00:09:21 Speaker 6
We destroyed 15 trillion.
00:09:23 Speaker 6
You said this on prod 80.
00:09:24 Speaker 6
We destroyed 15 trillion of household net worth in the last five months.
00:09:28 Speaker 6
So the expected path of household net worth would have taken us from 110 trillion to 125 trillion over the course of the last two years. That was the trend we were on.
00:09:41 Speaker 6
Instead, we got all hopped up and went from 1000 at 142.
00:09:47 Speaker 1
But now we’re all.
00:09:48 Speaker 6
The way back to 127.
00:09:49 Speaker 6
That’s what I call on path on trend.
00:09:52 Speaker 6
So the Fed is not exactly what it wanted to.
00:09:54 Speaker 4
Do it.
00:09:55 Speaker 6
Ruined all the spots that ruined every.
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Took all the juice.
00:10:01 Speaker 6
I did want to alright.
00:10:02 Speaker 6
So it’s just used out of the.
00:10:04 Speaker 6
System giant and consumer confidence.
00:10:06 Speaker 1
Is not valid.
00:10:07 Speaker 6
Tells me forward-looking inflation is rolling. Finally, Bernanke says this morning or over the weekend, he said. Ignore what everybody else is saying.
00:10:18 Speaker 6
Followed the tips.
00:10:19 Speaker 2
No, we’ve been saying this since last year, so.
00:10:20 Speaker 6
This is the break even.
00:10:22 Speaker 6
This is the bond market.
00:10:23 Speaker 6
When that goes positive, that means the bond market.
00:10:27 Speaker 6
Is saying that inflation is rolling over because this is the 10 year less inflation.
00:10:32 Speaker 6
And so now we have anecdotal information about cars, about houses, about we have our common stuff.
00:10:40 Speaker 6
We know that those prices are not sustainable and we have the bond market telling us the same thing.
00:10:45 Speaker 6
That’s why I don’t think you should believe the.
00:10:47 Speaker 6
Hyper inflationary. Got it.
00:10:49 Speaker 2
Any thoughts on it?
00:10:52 Speaker 1
I did.
00:10:52 Speaker 2
Here’s my boarding when you’re going through this and you start to understand the logic of it, you realize what a mirage we.
00:11:00 Speaker 2
Were in that.
00:11:01 Speaker 2
Certain assets that had no underlying value.
00:11:05 Speaker 2
You know, they weren’t cars, airline tickets or homes were also being exacerbated during all of this.
00:11:10 Speaker 2
And and I think that was probably one of the things that made this less fun in this cycle.
00:11:16 Speaker 2
Bill, your fundamental investor, you really think about consumers, you think about the total addressable market, you give a lot of thoughts to that.
00:11:23 Speaker 2
What was the last?
00:11:24 Speaker 2
Couple years, like when you were saying three or four years ago, hey, this is kind of disconnecting from reality.
00:11:30 Speaker 5
You know, back when.
00:11:32 Speaker 5
Come back when I had that conversation with Howard, I I started doing some more research.
00:11:37 Speaker 5
I went back and I talked to some of our fund of funds that have data over a very long period of time.
00:11:43 Speaker 5
And I mean it sounds ridiculous, but what what I realized was that the the IR numbers and the RI numbers on the ventures.
00:11:52 Speaker 5
Capital category were heavily dependent on performance in the in the hottest part of the cycle and so in the tip of that sawtooth.
00:12:01 Speaker 5
And that’s where we came up with this phrase is the best way to protect yourself against the downside is to enjoy every last bit of the upside.
00:12:10 Speaker 5
So while you get anxious about the rollover you actually can’t afford as a venture capital firm.
00:12:17 Speaker 5
Or maybe this contributes to the to the class as fast as it does.
00:12:22 Speaker 5
You can’t afford not to play the game ’cause.
00:12:24 Speaker 5
It’s too hard to predict when it’s going to change.
00:12:26 Speaker 2
So he couldn’t $50 billion of committed capital unallocated into company. What happens in the cycle over the next five years if there is this expectation that we’re not going to be in the good part of the risk on?
00:12:39 Speaker 2
Part of the curve that capital needs to be deployed at this point in the cycle and do we end up having these like crazy bifurcations in the market where high quality companies get PEN X evaluation of the means and all the money plows into a few companies that that are kind of out or what what’s the dynamics of?
00:12:54 Speaker 5
I’ll give you some fresh thoughts, and I know Brad has some features we were talking about this this morning.
00:13:00 Speaker 5
First of all, I’ve never.
00:13:02 Speaker 5
Ever felt as as a venture investor that I have to invest money like, like and if you remember most of it’s committed but not drawn down, right?
00:13:07 Speaker 2
Right.
00:13:12 Speaker 5
And so you’re going to have to go ask for it if you’re, if you’re, if you, you know, deployed 2/3 of your funds into crypto.
00:13:22 Speaker 5
Access with no board seats in the past 12 months.
00:13:26 Speaker 5
Are you going to call Harden 10 and say, hey, I need some more right now?
00:13:30 Speaker 5
I don’t think you’re going to make that call and.
00:13:32 Speaker 6
I would know.
00:13:33 Speaker 6
You’d think they’d let this capital sit.
00:13:35 Speaker 5
There and never call it. Well, here’s what you guys were talking about this on one of the recent pods. You know, in in 01, a lot of people actually return the commitment.
00:13:44 Speaker 5
And it was actually an act of greed, not not an actor.
00:13:47 Speaker 5
It it came across like they were being nice, but they were getting out.
00:13:47 Speaker 1
The wrong way, thank goodness.
00:13:51 Speaker 5
I called the burnt waffle theory.
00:13:53 Speaker 5
They were killing the fun and getting out of the old.
00:13:55 Speaker 5
Hanging and starting fresh just like I guess it was null and attempted to do it as a version.
00:14:00 Speaker 2
It’s like a big cap in a.
00:14:00 Speaker 5
Of that.
00:14:01 Speaker 5
Way where these warnings get started without the overhang of the look back.
00:14:03 Speaker 2
I would suspect that.
00:14:05 Speaker 2
They deployed 200 and 300.
00:14:07 Speaker 6
I I think one thing, you know, build Down syndrome.
00:14:10 Speaker 6
You know the the.
00:14:12 Speaker 6
The assumption of the question was, will they be forced to deploy capital into a really bad vintage?
00:14:19 Speaker 6
Right.
00:14:20 Speaker 6
I actually think the upcoming vintage is going to start getting real.
00:14:24 Speaker 6
It’s going to be a good visit.
00:14:25 Speaker 6
I think that was that, that was those point.
00:14:27 Speaker 6
I think we both.
00:14:27 Speaker 6
Feel that way, I think the vintage of the last 18 months will be lousy.
00:14:31 Speaker 6
So the capital deployed over the last 18 months won’t have a.
00:14:34 Speaker 6
Lot of return all of.
00:14:36 Speaker 6
Our LP’s melted.
00:14:38 Speaker 6
Right, I was.
00:14:38 Speaker 6
Just sitting with an LP, you know one of my investors at lunch today.
00:14:42 Speaker 6
Like imagine this.
00:14:44 Speaker 6
They have 50 investments like benchmark and altimeter, right?
00:14:49 Speaker 6
All of them are going down.
00:14:52 Speaker 6
And now you’re going to call them up and say, I want all this money right now to go invest in a bunch of stuff that still may not yet have corrected enough.
00:15:01 Speaker 6
These are partnerships.
00:15:03 Speaker 6
Partnership means a partnership with me and my partners, all the people who gave me the money.
00:15:09 Speaker 6
We’re not going to put up partners in a headlock and drag their money into the market and put it into things that we don’t think absolutely reflect the new world order.
00:15:19 Speaker 6
If you go back to that first chart, you can underwrite to the five year average to 10 year average where we’ve been.
00:15:26 Speaker 6
I think we’re going back to trend, but you cannot underwrite to where we were last year.
00:15:32 Speaker 6
Disabuse or someone that Bill tweeted this last week, it’s spot on.
00:15:37 Speaker 6
The biggest mistake we will all make is to anchor ourselves to prices that we saw in the world over the last 8.
00:15:44 Speaker 6
Two months pretend you never saw them, not in venture, not in the stock market, because that is a delusional place to think we’re getting back that we’re not unless we have another pandemic or a nuclear war and rates go to zero and then we have bigger problems.
00:16:01 Speaker 6
So re underwrite and underwrite to the five year average.
00:16:05 Speaker 6
Genovo for all your businesses.
00:16:07 Speaker 6
That’s how you survive through this.
00:16:09 Speaker 6
And ultimately come out winning.
00:16:11 Speaker 5
And another, the other point I would make, David, is this the, the the new reality is apparent to all of us because of public comments.
00:16:19 Speaker 5
So, like you just have a new world order and so it’s very hard, I don’t think.
00:16:24 Speaker 5
I mean, there might be someone so sloppy that they just keep investing headstrong, but I think most of them.
00:16:30 Speaker 5
Look at where things are in the type of business that you’re investing in and they feel like they want to.
00:16:35 Speaker 5
Make a return.
00:16:35 Speaker 2
I think I think you’re using the right word.
00:16:37 Speaker 2
It is borderline.
00:16:39 Speaker 2
It’s well, it’s definitely unprofessional, and it’s borderline idiotic.
00:16:44 Speaker 2
For anybody with organized capital right now to be ripping money in because you don’t know what the terminal valuation of a business is like, at the end of the day, investing is like a line.
00:16:55 Speaker 2
It starts here with guys like Jason and ends here with guys like me and Brad today and in the middle of these guys that are helping along the way.
00:17:02 Speaker 2
And it’s all hot potato, but by the time the hot potato.
00:17:05 Speaker 2
Next to us there’s there’s a price, and that price has alternatives. Meaning if you come to me and say this thing is worth $10 and I say actually no, it’s worth 2 because that other thing which is better than you is actually worth 5.
00:17:22 Speaker 2
And that’s what happened in the black market that you put it on the scale there.
00:17:27 Speaker 2
There’s a terminal endpoints evaluation.
00:17:31 Speaker 2
Right at the end of the day, there’s a buyer of last resort and that is the public market investor, and he and she has said no mas.
00:17:38 Speaker 2
That’s what this chart says, no mas.
00:17:41 Speaker 2
You don’t tell me about your thing. Is worth 50 * 80 * 90 times. It’s worth 5.6 times.
00:17:48 Speaker 2
I saw something this morning from Morgan Stanley that said it’s however you are a massive grower, 50% plus grower.
00:17:57 Speaker 2
There’s 30 companies in the SAS index that grow, but only 30 in the entire world that grow above 50%. You know what that multiple is, to take a wild guess.
00:18:05 Speaker 2
8.5, I mean, we’re not talking 50 times, we’re talking 5.6 or 8.6. So all of a sudden.
00:18:13 Speaker 2
Time scale to be clear. This is so go against your pointer over, I mean going by 50% a year, but those of you guys have done build businesses that do it. That is still very hard you know that’s massive compound so.
00:18:26 Speaker 2
The game is.
00:18:28 Speaker 2
And the idea that.
00:18:29 Speaker 2
There’s a quarter, psyllium, I think that that’s a.
00:18:31 Speaker 2
Fallacy or do you think ultimately just deploy to the corner trillion to pick a number recently?
00:18:37 Speaker 6
Over the next three years.
00:18:41 Speaker 6
Of the quarter trillion, I think you’re probably turning 50% of that is private equity or more maybe 70% traditional private equity.
00:18:47 Speaker 2
Yeah, probably right. Yeah, right.
00:18:50 Speaker 6
Leveraged buyout firms are going to have a field day.
00:18:53 Speaker 2
Feel better?
00:18:53 Speaker 6
Field Day, I mean, so Thoma Bravo and all these guys they.
00:18:56 Speaker 6
Will spend all.
00:18:57 Speaker 6
Of that.
00:18:57 Speaker 6
So you tell me what?
00:18:58 Speaker 6
Percentage of that.
00:18:59 Speaker 2
On the beach.
00:18:59 Speaker 2
OK, so let’s.
00:19:01 Speaker 6
I’ve never seen you over three years.
00:19:01 Speaker 2
We should have 100 billion in.
00:19:04 Speaker 2
How much goes in 20 billion goes into the next three years?
00:19:06 Speaker 6
525 or 30% depends on price adjust.
00:19:08 Speaker 5
Well, I wish we I wish we had the numbers from a warning.
00:19:11 Speaker 5
’cause ’cause.
00:19:12 Speaker 5
You had similar things where the raises were growing up.
00:19:13 Speaker 2
So that’s friggin tiny, right? I mean, if you’re saying 25 billion / 3 year?
00:19:17 Speaker 2
That’s like 8 billion of total GP dollars deployed a year.
00:19:21 Speaker 5
Which would you know to your trend line thing and I wonder if you had vast six years where that number was.
00:19:23 Speaker 2
Tiny about less being lost flexi banded well, what number of people at these companies is necessary to run them?
00:19:27 Speaker 5
I don’t have any problems.
00:19:32 Speaker 2
What we’re looking at a square with 1000.
00:19:34 Speaker 2
You’re looking at.
00:19:34 Speaker 2
A Google and even some of.
00:19:36 Speaker 2
The startups they got packing and.
00:19:38 Speaker 1
I think have.
00:19:38 Speaker 2
They lost their salaries and and we don’t know it tends to run away again.
00:19:42 Speaker 2
We just talked about a whole cap ex cycle and a need for hardware and a need for capital equipment.
00:19:46 Speaker 6
Does the whole study to measure space?
00:19:48 Speaker 2
There’s biotech.
00:19:49 Speaker 2
I mean a huge segment of that adventure market states.
00:19:51 Speaker 2
Is not software.
00:19:52 Speaker 2
It’s it’s very capital intensive businesses, which, by the way, are really critical in this slide, in this psychonomics like people have been living high on the hog, let’s be honest.
00:20:00 Speaker 2
No, but like I like for example, like our investing focus, we’ve moved in the last 18 months to focus a lot on these things.
00:20:06 Speaker 2
Lifting in mind, I mean the stuff that we’re doing seems insane.
00:20:09 Speaker 2
If you had asked me would you be sliding a mine in India, you know, and sending our successful and partner to go and make sure the mine is this?
00:20:17 Speaker 2
I never would have thought that it’s possible, but the reason is because of this.
00:20:21 Speaker 2
Part because those trade-offs on dollars make so much more sense to put money into an overgrowth like an.
00:20:27 Speaker 2
Over bloated software business.
00:20:28 Speaker 2
This comes with a lot of baggage, valuation, baggage, team baggage, technical clubs and all of these things have to get balanced.
00:20:36 Speaker 2
And so if you get a really.
00:20:37 Speaker 2
Cheap deal you.
00:20:38 Speaker 2
Do it.
00:20:39 Speaker 2
Interesting, Billy.
00:20:39 Speaker 2
I mean, you’re like the software guru.
00:20:41 Speaker 2
I mean, like, is he still the same way?
00:20:43 Speaker 2
I mean, yeah, we’ll call it.
00:20:45 Speaker 5
Actually I wanted me to quick comment on especially with this slide on fast multiple so.
00:20:49 Speaker 5
So obviously it’s in price to revenue, multiple slides and and price to revenue is like this really crude evaluation tool, right click through disease or possibly asked.
00:21:00 Speaker 5
I publish the blog post once where I took all the Internet stocks and laid him beginning to end on the price of revenue multiple and it was like just a massive diversion.
00:21:09 Speaker 5
There was no such thing.
00:21:11 Speaker 5
And so would.
00:21:12 Speaker 5
Really value companies, you know typically this kind of cash flows and so now all of a sudden the buy side is asking staff companies about net dollar retention, about long term operating margin.
00:21:23 Speaker 5
Whether their free cash flow is greater or less than their net income about SBC as a percentage of free cash flow like, yeah, and also all of a sudden the, you know, everyone brought out the microscope on how they’re evaluating these companies and these crude tools that may be the only like their OS preneurs.
00:21:31 Speaker 2
Truck stop. Base camp.
00:21:44 Speaker 5
You probably think the only way you measure pressure.
00:21:46 Speaker 2
Right.
00:21:46 Speaker 2
And by the way, they’re, you know, the companies that you know in your example where all of a sudden run away with it and get all the money, think about the problem they.
00:21:54 Speaker 2
Have their growth.
00:21:55 Speaker 2
Is going to.
00:21:56 Speaker 2
Work on this.
00:21:57 Speaker 2
You know, nobody grows at 500% earlier. At a billion dollars, you’re lucky to grow at 2530.
00:22:00 Speaker 6
Right.
00:22:02 Speaker 2
Percent, OK. So when your growth is slowing and your valuation is outside, like you’re working again, get to $5 billion. How do they attract more capital this is?
00:22:13 Speaker 2
This is why this.
00:22:14 Speaker 2
Whole game is very complicated.
00:22:16 Speaker 6
Right now there was also something that that took hold over the course the last two years.
00:22:20 Speaker 6
There’s specifically with respect to software that this was an easy business you just send us.
00:22:25 Speaker 6
Your data I.
00:22:26 Speaker 6
Pop out a term sheet.
00:22:27 Speaker 6
It’s formulaire ’cause, though all software companies are created equal.
00:22:31 Speaker 6
And you guys asked the question last week on the pod.
00:22:33 Speaker 6
How many software companies are actually over a billion dollars in revenue?
00:22:37 Speaker 6
How many are over 2 billion?
00:22:39 Speaker 6
Well, we actually went in challenging.
00:22:40 Speaker 6
Oh, good, right. Public software companies, over 2 billion of revenue. We got the 21, OK. There are only 21 that are worth more than $25 billion in all the public markets of all the millions of software companies that have been started. But what happened last?
00:22:57 Speaker 6
Here was you could be making dog walking software.
00:23:02 Speaker 6
OK. And somebody looked at your multiple and slapped 100X on it and said you were worth that, as though that was the equivalent of building a database that would disrupt the entire database market.
00:23:15 Speaker 6
So the thing that is returning to markets is something that we all do for a living, called dispersion.
00:23:22 Speaker 6
Some shifts going to be really great and the rest is going to be below the mean. And if you look at software, the history of software right, is that there are very, very few companies that ever get to a billion dollars in revenue. And so if you were slapping 100X error revenue or multiple on a company.
00:23:42 Speaker 6
You made 50 million in revenue.
00:23:44 Speaker 6
It’s highly likely that they will never see that price again, whatever you paid for that asset.
00:23:51 Speaker 6
Because the dilution and the deceleration in their growth rate will absolutely eviscerate any return you have as an investor.
00:23:59 Speaker 6
And so when you’re looking at this back to your point, you know, not only are we looking at revenue multiples, but we’re also looking at something like Snowflake and say Now they’re doing 15% free trash.
00:24:11 Speaker 6
Well, and expanding those most all that stuff is critical.
00:24:14 Speaker 3
Really? Really do you think?
00:24:15 Speaker 2
It’s weird that VC’s don’t.
00:24:18 Speaker 2
Try to underwrite lower valuations, but the incentive is always to up your valuation.
00:24:22 Speaker 2
Even if the company is performing plan.
00:24:24 Speaker 2
You don’t generally do these like.
00:24:26 Speaker 2
Markets present value. It’s like, oh, you’re worth 500 million last, then we’ll give you a billion dollars this round. And are we?
00:24:31 Speaker 5
That there.
00:24:31 Speaker 5
Going to see more VCs do down around here.
00:24:33 Speaker 5
I just think that what.
00:24:35 Speaker 5
There’s no, there’s no.
00:24:36 Speaker 5
DC club, where they get together and discuss how to behave.
00:24:38 Speaker 1
Yeah, but.
00:24:40
You’re looking at it.
00:24:44 Speaker 5
Keep in mind.
00:24:45 Speaker 5
Is it?
00:24:46 Speaker 3
Is that as?
00:24:47 Speaker 5
That risk on goes slowly up and up and.
00:24:49 Speaker 5
Up and you know and.
00:24:51 Speaker 5
Especially closing valves had a systematic shift of power from the investor to the founder over a very long period of time.
00:24:58 Speaker 5
People are friendly ’cause.
00:24:59 Speaker 5
They want being flow so nobody, nobody does it, nobody when we love.
00:24:59 Speaker 2
Right.
00:25:03 Speaker 2
Talk about that.
00:25:04 Speaker 1
You know, you’ve seen.
00:25:06 Speaker 2
Deals happen where, you know, one term sheet seems great for all shareholders and then this term sheet includes some secondary for the founders and no governance seems pretty great for the founders.
00:25:16 Speaker 2
And somehow this one magically wins, and then somebody wins a deal by not taking a board seat.
00:25:21 Speaker 2
You know, in.
00:25:22 Speaker 2
The three decades you’ve been doing this now?
00:25:24 Speaker 1
I think it’s three or four.
00:25:26 Speaker 6
Going into.
00:25:27 Speaker 5
The forest, I wow. Wow.
00:25:29 Speaker 2
I mean, he’s in the 4th decade and you know when you when you look at governance.
00:25:30 Speaker 5
Within the 4th decade, yeah, no.
00:25:37 Speaker 2
What? What is?
00:25:38 Speaker 2
The mistake we’ve made over this last bull run.
00:25:41 Speaker 5
We once again what should I just where I think is I mean I think what it should be is this the market gets to decide so if you know if someone wants, if someone can raise you know 100 million with no board seat.
00:25:43 Speaker 2
What is partnership?
00:25:56 Speaker 5
You know, right?
00:25:57 Speaker 5
And they want that, I think they should be able to do.
00:25:59 Speaker 5
That right, but what’s in the best?
00:26:01 Speaker 2
Interests of American industry, of all shareholders and employees that they think I’m not doing very well.
00:26:07 Speaker 5
I’m not dodging the question is just super complicated.
00:26:10 Speaker 5
We we put money behind Rich Barton instead both of us did and and he has super voting and but he also I think is very.
00:26:20 Speaker 5
Honorable about his duty to shareholders and so it.
00:26:23 Speaker 2
It’s exact record.
00:26:24 Speaker 5
There, yeah, and it wasn’t it never.
00:26:27 Speaker 5
It never was an issue in the entire history of the company.
00:26:30 Speaker 1
So this is.
00:26:31 Speaker 5
And so you know, but you know, if there’s a first time founder that’s doing that, like, you know it.
00:26:36 Speaker 5
It who knows, who knows what the motivation is and and.
00:26:41 Speaker 5
But but once again it’s a market, it’s a free market and I think that there are certain people or founders that decide hey you bring something to the table that I want and I understand there’s a government requirement to it and we locked into that and you know we’ll environment slowing sales.
00:26:58 Speaker 2
Curly, what do you guys practice?
00:27:01 Speaker 2
What is your attitude when you guys actually have a win?
00:27:05 Speaker 2
You do the job, company goes public.
00:27:09 Speaker 2
And you have the chance to distribute your LP’s.
00:27:14 Speaker 2
There’s been a movement in Silicon Valley where some firms have said, you know what, guys, I’m going to hold this forever.
00:27:20 Speaker 2
I’m going to create permanent capital structures, Evergreen funds.
00:27:23 Speaker 2
You know, if you know you foundations want a distribution from me, just tell me and I’ll give you money magically, somehow, etc.
00:27:31 Speaker 2
What do you guys think about that versus just distributing and walking away?
00:27:37 Speaker 2
Booking the women?
00:27:38 Speaker 2
If you want to hold the sausages, hold it in your own privacy.
00:27:40 Speaker 5
Let me just start by saying that investing is really ******* hard and there’s a lot of ways you can lose, you know?
00:27:49 Speaker 5
And when you guys started the podcast, I just, I was listening to one of the episodes today and it really hit me in the in the song that you put together, David says.
00:27:59 Speaker 5
Lester renters, right?
00:28:02 Speaker 1
There, I remember.
00:28:03 Speaker 5
I remember that so from his brief history of the podcast, from talking about that as a strategy.
00:28:11 Speaker 5
This question that you posed to me which is on.
00:28:14 Speaker 5
On the opposite.
00:28:27 Speaker 3
We have all these great minds here, so I thought I’d give him a chance.
00:28:30 Speaker 3
I feel like people in that party.
00:28:33 Speaker 3
Would like to hear themselves talk a little bit too much.
00:28:35 Speaker 4
He was resting his eyes.
00:28:37 Speaker 4
He’s resting his eyes.
00:28:38 Speaker 3
Right now, in fairness, we have that conversation.
00:28:42 Speaker 3
As I recall, the context was that way back when, like for example when I got.
00:28:48 Speaker 3
But I had Facebook, Instagram, public, the.
00:28:50 Speaker 3
Urge was just saw it all.
00:28:52 Speaker 3
And so I think where we landed on that was don’t throw 100%, keep 20%, keep 50%.
00:28:59 Speaker 3
Was you posers smoke insurance, basically.
00:29:01 Speaker 2
Yeah, but that was me personally as an investment.
00:29:03 Speaker 1
Right.
00:29:03 Speaker 2
What about you as a fund?
00:29:04 Speaker 3
Manager yeah, I think we’re meeting with our manager.
00:29:07 Speaker 3
So I think we, I think we did a pretty good job of the last 6.
00:29:11 Speaker 3
Months distributing out.
00:29:13 Speaker 3
Uh, some gains, some realizations. We actually paid back a whole first fund, but in our second fund, we had about 120 million of a firm saw.
00:29:22 Speaker 3
And we were sitting on it because we believe in the company and still do and we’re still sitting on it and that was that was like $100 million mistake, so.
00:29:31 Speaker 3
So I think, you know, let’s not forget.
00:29:32 Speaker 2
My first dance Mike.
00:29:33 Speaker 3
It from now on honestly matches from.
00:29:35 Speaker 3
Now on it’s.
00:29:35 Speaker 3
Probably going to be distributed.
00:29:36 Speaker 2
Distribute. So my first chance to actually return any real money to our LP’s was when flaccid or direct listing.
00:29:44 Speaker 2
And it was like, you know, there are three or four of us on the board, me, Andrew Broadhead, Excel, John O’farrell, from Andreessen to independence and Stewart.
00:29:56 Speaker 2
They had gone through a couple of direct listings before bringing our bankers, and they go through this whole rigamarole.
00:30:03 Speaker 2
And I remember being so hands up in the whole thing and I thought, oh, I believe in this company, I believe in all of this blah blah blah.
00:30:10 Speaker 2
Long story short, the point is I held the clock.
00:30:13 Speaker 2
I didn’t distribute it.
00:30:14 Speaker 2
The pandemic hit I then.
00:30:16 Speaker 2
Distributed in shape.
00:30:17 Speaker 2
Panic and we left a lot of money on the table that I could have just booked the win for the LP’s.
00:30:23 Speaker 2
And then from that point I said never again.
00:30:26 Speaker 2
I’ll hold it for myself, but the minute that I get a distribution, if I’m in the business of managing money for other people, it’s out the door.
00:30:32 Speaker 2
When it’s liquid and I’m not going to take a I’ll, I’ll say I’ll be happy to take a point of view from my own.
00:30:37 Speaker 2
Here but product problem so I felt so stupid I took a 50% loss trying to be here I mean and then also we we have the issue of selling and secondary when those opportunities arise and we all just lost the we crash documentary. Which one of your partners?
00:30:54 Speaker 2
Plays a role in.
00:30:55 Speaker 2
I don’t know. Obviously it’s probably 5% reality, but.
00:30:58 Speaker 2
Benchmark did make a pretty amazing.
00:31:01 Speaker 2
And trade instelling we work shares early in booking.
00:31:06 Speaker 1
Enormous win, correct? Correct.
00:31:20
Not yet.
00:31:21 Speaker 4
Second option.
00:31:23 Speaker 6
So the to me the most important thing is.
00:31:28 Speaker 6
Tell your partners what you’re going.
00:31:29 Speaker 6
To do and then do it.
00:31:31 Speaker 6
Because you’re making a deal upfront.
00:31:33 Speaker 6
So for us the deal was if we invest in something in our venture fund and it’s real and industrialized, it goes.
00:31:41 Speaker 6
Public if we see venture like returns which we define and they with them as two to three X / A three-year time horizon, we will hold.
00:31:52 Speaker 6
If we don’t, we distributed last year we distributed over $6 billion, which was more than all the venture we raising our first five funds.
00:32:01 Speaker 6
Not because I didn’t like unity or I didn’t like Snowflake.
00:32:05 Speaker 6
Everybody knows how we feel about these businesses, but because we realized that according to the deal we had made with our partners, the framework was triggered.
00:32:15 Speaker 6
And the second thing I would argue is because people are talking about permanent funds now and all this.
00:32:19 Speaker 6
That I’m not.
00:32:20 Speaker 6
Sure, that’s the deal.
00:32:21 Speaker 6
People may yeah.
00:32:22 Speaker 6
For me, if you’re an investor or limited partner in our fund and you want to hold onto it, then also invest in my.
00:32:30 Speaker 6
Bridge fund, because there we haven’t sold a share a snowflake.
00:32:34 Speaker 2
But that is.
00:32:34 Speaker 6
A different including profile and they discovered.
00:32:37 Speaker 2
That where I was getting to, Bill and just let’s put that work on the side.
00:32:37 Speaker 1
This case.
00:32:41 Speaker 2
Just in general, when the opportunities for a firm to do a secondary arises.
00:32:43 Speaker 5
I’m very worried.
00:32:46 Speaker 2
What’s the right?
00:32:46 Speaker 5
That’s rare.
00:32:46 Speaker 2
Thing that we’re doing, yeah.
00:32:47 Speaker 5
I mean, that’s rare for.
00:32:48 Speaker 5
I mean, for an Angel, I think it’s very different.
00:32:50 Speaker 5
But it’s rare for a venture firm to meet a secondary that has the the.
00:32:56 Speaker 5
Firepower to absorb the type that was master.
00:32:59 Speaker 5
I mean, it was.
00:33:00 Speaker 5
Very unique this way.
00:33:02 Speaker 5
We typically distributed over three to six quarters following the lock up release unless there’s some exceptions, yeah.
00:33:11 Speaker 2
Power conservative.
00:33:12 Speaker 5
Yeah, there there have been a few exceptions. We took OpenTable public in 09 at a very low value, knowingly at a low valuation and I held.
00:33:21 Speaker 5
That until we sold.
00:33:22 Speaker 5
To booking because I felt the network effect was there and it was going to keep com pounding and that kind of thing.
00:33:27 Speaker 5
And look at you.
00:33:29 Speaker 5
I mean, look, clearly, you know what Bezos is done.
00:33:32 Speaker 5
Or Zuckerberg.
00:33:33 Speaker 5
Like, if you think you’re sitting on one of those.
00:33:36 Speaker 5
And you, I mean, you have to ask yourself, yeah.
00:33:38 Speaker 2
For both of two.
00:33:40 Speaker 5
I know, I know.
00:33:41 Speaker 5
But if you think you are like, you know, maybe maybe the Carlson brothers or another one.
00:33:46 Speaker 5
If if it’s going to play out the way those did, you’re going.
00:33:50 Speaker 5
To want to.
00:33:50 Speaker 5
Hold it, but they’re.
00:33:52 Speaker 2
Very rare have you and your partner watch.
00:33:55 Speaker 5
Both need process and the Java.
00:33:58 Speaker 5
I can’t speak for all I’ve watched.
00:33:59 Speaker 5
Loco you watched.
00:34:00 Speaker 4
We would practice.
00:34:04 Speaker 5
I think this well I don’t know about accurate ’cause I I only I don’t know we super pumped was not accurate just because they made-up a lot of scenes.
00:34:14 Speaker 5
Like, Drummond wasn’t very active at all, but he’s in a lot of the scenes, so a lot of them were made-up. I think Leto did a better job of.
00:34:24 Speaker 5
Showing you who Adam Newman is, it really got into the character.
00:34:24 Speaker 2
Under pressure.
00:34:27 Speaker 2
He is incredible if he’s.
00:34:28 Speaker 2
So good it doesn’t matter, yeah.
00:34:31 Speaker 5
Yeah, yeah.
00:34:33 Speaker 5
And equally on the other side, I think that Travis is, you know, well is is way more nuanced.
00:34:40 Speaker 5
He is one of the greatest, hardest working investors under founders I’ve ever worked with.
00:34:45 Speaker 5
He’s super intelligent, he can be really charming, and those dimensions weren’t explored in the characters.
00:34:51 Speaker 5
What we’re doing is unfortunate.
00:34:52 Speaker 2
I remember you telling me.
00:34:54 Speaker 2
This is, I don’t know, in the height of work usage.
00:34:58 Speaker 2
Now this is the single greatest children I’ve ever.
00:35:01 Speaker 2
Yeah, you told me.
00:35:02 Speaker 2
You thought you told me also the first time.
00:35:04 Speaker 2
You said the first time Adam even came in, you and your partners, he left the room and you guys spoke to each other.
00:35:08 Speaker 2
You guys were like, we just have to invest in this guy because he can.
00:35:11 Speaker 5
I said we should never invest in real estate.
00:35:14 Speaker 5
We have to.
00:35:14 Speaker 5
Do this for you.
00:35:18 Speaker 2
What? What is it? Let’s.
00:35:19 Speaker 5
Yes, uh.
00:35:20 Speaker 5
Ask Brad question.
00:35:21 Speaker 4
2nd and I were watching you crash like the first two episodes.
00:35:28 Speaker 4
And the only thing?
00:35:29 Speaker 2
I could think.
00:35:29 Speaker 2
Of Bill was what’s Adam Newman next company and where do I send?
00:35:33 Speaker 5
The check because I think I don’t know.
00:35:36 Speaker 4
Yeah, he’s got something brilliant.
00:35:36 Speaker 3
I have a question for Brad.
00:35:38 Speaker 1
So fun.
00:35:40 Speaker 3
So I want to go back.
00:35:41 Speaker 1
Good morning.
00:35:44 Speaker 3
Yeah, I’ve been up here for like.
00:35:46 Speaker 3
8 hours today, Jake.
00:35:47 Speaker 3
I don’t know how much more you want me.
00:35:48 Speaker 3
To do I’m exhausted after an hour.
00:35:52 Speaker 3
I don’t know how you do it.
00:35:53 Speaker 3
You have.
00:35:53 Speaker 3
Around that point.
00:35:59 Speaker 3
Is there any people?
00:36:00 Speaker 3
For like 10 hours I’m like done after an hour.
00:36:02 Speaker 3
And 1/2.
00:36:03 Speaker 3
But Brad, so let’s go back to the 100 times there are, yeah, people were paying last year because these investors, you know, with the benefit of 2020 hindsight, they made less kind of sheepish.
00:36:14 Speaker 3
But we know these investors and that pace car setting the evaluations for the whole industry, you know it’s these big giant hedge funds.
00:36:23 Speaker 3
We always want.
00:36:23 Speaker 3
Talk about they’re.
00:36:25 Speaker 3
Super sophisticated people, I mean, you know, they’re being very successful investors for a long period of time.
00:36:33 Speaker 3
You know what?
00:36:34 Speaker 3
That’s the word used when we talked about it privately was with gaslight.
00:36:39 Speaker 3
Gaslight is that, you know, the market was sort of gaslighting all of us into thinking that their public comps for these companies were much higher than they were.
00:36:51 Speaker 3
Is that why is that?
00:36:52 Speaker 3
Behind the psychology of why these very sophisticated investors made these big mistakes or?
00:36:59 Speaker 3
How do you explain that?
00:37:00 Speaker 3
Yeah, I.
00:37:01 Speaker 5
I think there’s.
00:37:03 Speaker 6
A massive amount of research that’s been done, that Buffett marched and many others have quoted that your ability to calculate risk goes down when you see a bunch of other people doing that thing, right, because your body, your mind telling you, well, I won’t die because I’m just doing what those other hundred people are.
00:37:23 Speaker 6
That’s why there’s herd mentality.
00:37:25 Speaker 6
That’s why the lemming effect.
00:37:27 Speaker 2
Confirmation bias conversion.
00:37:29 Speaker 6
And so it’s not that.
00:37:32 Speaker 6
Yeah, you didn’t name him, but tiger, right?
00:37:35 Speaker 6
We know all the great investors, etc.
00:37:37 Speaker 6
But you have to understand they were playing a different game.
00:37:42 Speaker 6
Right. And so when people who were building portfolios of 20 names, we’re trying to play the same game as a firm building a portfolio of 400 names, right?
00:37:54 Speaker 6
It was like trying to follow, you know, SoftBank in 2017, so I’m not, I mean, listen, we all thought Masa shopping was going to be a Wipeout.
00:38:02 Speaker 6
In vision one, it wasn’t right now.
00:38:06 Speaker 6
I know you just had a huge recent mark.
00:38:08 Speaker 6
We’ll see where it ultimately settles out.
00:38:10 Speaker 6
So I mean, I think from my perspective.
00:38:14 Speaker 6
You know, like Bill said, you get forced onto the field.
00:38:17 Speaker 6
There’s a certain amount you have to do to stay in the game to have the conversation.
00:38:21 Speaker 6
But listen, as far back as you know, last April we were sitting around the table on Thursday, there’s it’s replaced saying this can’t continue, right?
00:38:31 Speaker 6
And then in the fall there was Bezos is selling.
00:38:34 Speaker 6
Musk is selling like all the signals were going off.
00:38:38 Speaker 6
Right.
00:38:39 Speaker 6
And so I think you have to know the game that you’re playing.
00:38:42 Speaker 6
If you’re a seed investor, an early stage investor, it doesn’t matter what everybody else is doing, you have an obligation to play a differentiated game.
00:38:51 Speaker 6
And what I would say today is if somebody calls me up tomorrow and says, Hey, Tiger is doing this deal at 75.
00:38:58 Speaker 6
Unveil our do you want?
00:38:59 Speaker 6
To do it, they would have to apply the.
00:39:02 Speaker 6
Dollar out of my skin with a crowbar.
00:39:04 Speaker 6
I’m not risking my money or my partner’s money doing something that we’re not underwriting, you know, to know, I’m willing to underwrite.
00:39:12 Speaker 6
David, to that five year average, I think what you have in the market now is a huge opportunity because people are in a fetal position under their desk, scared that the world is forever changed because the CEO is a big bank.
00:39:24 Speaker 6
So on CNBC and start hyperventilating about deglobalization and hyperinflation and all this stuff.
00:39:31 Speaker 6
And not one of them is actually.
00:39:33 Speaker 6
Build the model.
00:39:34 Speaker 6
And, you know, deconstructed the components of CPI.
00:39:37 Speaker 6
I think some much more likely explanation is that the trends that existed for 20 years still exists.
00:39:44 Speaker 6
They were interrupted temporarily by us saving ourselves from a catastrophe with Kobe.
00:39:51 Speaker 6
The transient thing that everybody has come to make fun of, right?
00:39:55 Speaker 6
Transient can be a year, two years, three years.
00:39:59 Speaker 6
We will look back at this graph.
00:40:01 Speaker 6
And that inflation will roll over and I suspect that those trends will continue.
00:40:06 Speaker 6
So I’m willing to underwrite to that.
00:40:08 Speaker 6
But if you told me you thought inflation was going to be 5% for the next decade and the 10 year was going to 7%, I would say short every set company, the company in the market.
00:40:18 Speaker 2
No, no, no, for everything.
00:40:20 Speaker 6
Short everything in the market and don’t invest a dollar.
00:40:23 Speaker 6
In venture until you have line of sight and the market has repriced it, that’s what the market is wrestling with right now.
00:40:31 Speaker 6
We have some people who are.
00:40:32 Speaker 6
Saying you know it’s.
00:40:34 Speaker 6
Markets of horror.
00:40:35 Speaker 6
Uncertainty and you have peak uncertainty.
00:40:38 Speaker 6
We have a war.
00:40:39 Speaker 6
We have.
00:40:39 Speaker 6
This is the hardest forecasting job in my career.
00:40:43 Speaker 6
I’ll set up.
00:40:43 Speaker 6
You have filibustering but you know like that is you know, I think that is ultimately the question is if you’re a founder or your investor what are you willing?
00:40:44 Speaker 2
Not bad.
00:40:51 Speaker 6
To underwrite to yeah and so.
00:40:53 Speaker 3
What what are your thoughts in terms of early?
00:40:56 Speaker 5
Stage and Syria is exactly where I was.
00:40:57 Speaker 4
Right.
00:40:58 Speaker 5
Thinking money.
00:40:59 Speaker 5
He said he just don’t take it.
00:41:00 Speaker 5
Like if if we we love to invest in two people in a PowerPoint.
00:41:05 Speaker 5
Like if that investment can happen today and all it doesn’t matter.
00:41:09 Speaker 1
Then everywhere.
00:41:09 Speaker 5
It doesn’t matter if the inflation tops or interest rates go up, it won’t affect them.
00:41:10 Speaker 3
For sure.
00:41:14 Speaker 2
This medication works.
00:41:15 Speaker 5
It might not.
00:41:16 Speaker 5
It might help that to.
00:41:17 Speaker 2
Yes, because you’re hiring people at half price.
00:41:19 Speaker 5
Yeah, that sounds right.
00:41:21 Speaker 5
And there’s less competition.
00:41:23 Speaker 5
I mean, my big.
00:41:24 Speaker 5
Problem of the past six years with hypercompetition.
00:41:29 Speaker 2
Finding it, yeah.
00:41:30 Speaker 2
No, no, it’s.
00:41:30 Speaker 5
Just not just talent.
00:41:32 Speaker 5
I’m talking about.
00:41:33 Speaker 5
Like I remember Uber and Lyft and like hundreds of billions of dollars of money raised in the private market and shot onto the playing field out of a cannon.
00:41:33 Speaker 2
Oh, is that.
00:41:33 Speaker 2
Oh yeah.
00:41:42 Speaker 5
That’s brutal.
00:41:44 Speaker 5
And that’s that’s not happening if inflation is going.
00:41:44 Speaker 1
I mean.
00:41:46 Speaker 1
Right.
00:41:49 Speaker 2
That doesn’t allow the market to really sort out.
00:41:51 Speaker 2
The winners and.
00:41:51 Speaker 2
Losers properly, because the companies that should contract get propped up for a little bit longer.
00:41:58 Speaker 2
There’s some talented people in those companies that don’t then end up in the right home. You know, I I said this last week, the most transformational moment in our company’s history at Facebook history was during the GST.
00:42:09 Speaker 2
Because of the fact that there weren’t any other alternatives to going work.
00:42:13 Speaker 5
We’ve always found an.
00:42:15 Speaker 5
I shared this with my partner that I found through my career, which wasn’t 4 decades but OK.
00:42:20 Speaker 5
Over sister window after this correction is the comma.
00:42:26 Speaker 5
Where there’s least anxiety, for me at least, like everything slows down.
00:42:31 Speaker 5
People talk rationally, people aren’t doing silly things.
00:42:34 Speaker 2
It’s nice, like.
00:42:35 Speaker 2
A walk on the beach.
00:42:36 Speaker 5
There’s a lot more.
00:42:36 Speaker 5
There’s a lot more communication that seems rational and pragmatic.
00:42:40 Speaker 2
But you can also maybe get to know a founder, understand the business over 3, four or five weeks.
00:42:45 Speaker 2
To make a decision as opposed to three 4-5 hours may tell you hey.
00:42:49 Speaker 5
Term sheets think more unit like.
00:42:53 Speaker 5
Think about unit economics in a more reasonable way and you’re not.
00:42:56 Speaker 5
You know.
00:42:57 Speaker 1
This is this.
00:42:57 Speaker 6
Is why I mean the two of.
00:42:59 Speaker 6
You invested in Uber I.
00:43:00 Speaker 6
Know because we’ve had this conversation.
00:43:03 Speaker 5
Well, he mentioned this pretty frequently.
00:43:08 Speaker 2
I did.
00:43:11 Speaker 6
But you know, both talks about, you know the benchmarks are legendary for investing in eBay and it was winner take all.
00:43:19 Speaker 6
Winner take off, yeah.
00:43:21 Speaker 6
And I suspect that when you invested in Uber, you saw similar network effects.
00:43:27 Speaker 6
You said, Oh my God, an even bigger market.
00:43:29 Speaker 5
There’s nothing wrong.
00:43:30 Speaker 6
This is gonna this is gonna be winner take off. Unfortunately, what you didn’t plan on was Massa raiding Saudi Arabia getting $100 billion of free money.
00:43:42 Speaker 6
And then blowing it out of a cannon into the market so whisted everybody else could do this economic things and literally for for seven years.
00:43:50 Speaker 5
I did not foresee that.
00:43:55 Speaker 6
The profit margin of Uber was competed away by stupidity.
00:44:01 Speaker 6
And you tweeted last week, and I noticed it because Jason and I may have a little something on the line here.
00:44:07 Speaker 6
You know, with respect to Uber, for the first time you tweeted after their quarterly earnings.
00:44:11 Speaker 6
Maybe we’re starting to see network effects show up in Uber because if you listen to the lift call, it was a train rejected.
00:44:19 Speaker 2
Right.
00:44:20 Speaker 2
What that money did was it made those businesses what we call the consumer surplus news.
00:44:26 Speaker 2
That’s meaning what is the consumer surplus business?
00:44:28 Speaker 2
It’s when all you win.
00:44:29 Speaker 2
Nobody else wins.
00:44:30 Speaker 2
The employees don’t win.
00:44:31 Speaker 2
The shareholders don’t win.
00:44:33 Speaker 2
The investors don’t win.
00:44:34 Speaker 2
Consumers wins.
00:44:35 Speaker 2
You’re stuck getting subsidized brides.
00:44:37 Speaker 2
You’re getting subsidized food delivery.
00:44:39 Speaker 2
You’re getting some subsidized form of content.
00:44:42 Speaker 2
And there are these consumer surplus businesses that have bound right now that still exists, which are propped up by dollars that.
00:44:50 Speaker 2
Being that they’re not being.
00:44:52 Speaker 2
Allocated because they’re competitive.
00:44:53 Speaker 2
That’s just because they have.
00:44:54 Speaker 2
Things like negative, negative unit unit economics to drive growth.
00:44:57 Speaker 2
Hard facts.
00:44:58 Speaker 6
Let’s start on the call that they.
00:44:59 Speaker 6
Were going to continue.
00:45:03 Speaker 6
Those coupons.
00:45:08 Speaker 1
Yeah, yeah, yeah.
00:45:09 Speaker 6
Sorry Bill, I didn’t ask you.
00:45:11 Speaker 2
The negative unit economics and drive growth trend was a big one for the last eight years, and it certainly seemed to have played out at a Uber, but a lot of other delivery companies.
00:45:20 Speaker 2
Do you think that as a strategy assuming capital availability, negative unit economics to drive growth and then once you have the network and once you grab the market you make money is?
00:45:28 Speaker 2
A reasonable strategy?
00:45:30 Speaker 2
It all depends.
00:45:30 Speaker 5
On whether you can.
00:45:31 Speaker 5
Rein it back in or not, and you know, I think DoorDash did an incredible job and then Jeff Bezos did an incredible job back in 01.
00:45:40 Speaker 5
I think.
00:45:41 Speaker 5
If, if, if.
00:45:43 Speaker 5
50 entrepreneurs try that trick. 49 are.
00:45:46 Speaker 5
Going by the way.
00:45:47 Speaker 6
If you want that’s.
00:45:48 Speaker 2
By the way, that’s the best.
00:45:49 Speaker 2
I think that’s the.
00:45:50 Speaker 2
Key take away? Well, there’s there’s another part about it.
00:45:50 Speaker 1
A beautiful point.
00:45:53 Speaker 2
You can only pull it off as well as if in that moment you have an effective monopoly, which basels effectively did and Tony did in those markets where he was operating.
00:46:01 Speaker 2
Nobody else is competing in Palo Alto, CA and you know.
00:46:05 Speaker 5
Learn from being the way he was.
00:46:06 Speaker 5
They weren’t.
00:46:07 Speaker 5
For sure.
00:46:08 Speaker 2
I have a couple questions for you.
00:46:09 Speaker 2
Guys, what do you guys?
00:46:10 Speaker 2
Think about something like Instacart in a moment like this.
00:46:15 Speaker 2
The $48 billion valuation maybe gets reset to 24. Who knows, they file to go public confidentially.
00:46:19 Speaker 2
To go.
00:46:22 Speaker 2
Are you guys investors?
00:46:24 Speaker 5
Oh, I’m not.
00:46:25 Speaker 6
No, no.
00:46:26 Speaker 6
So candidly what do you, what’s going on?
00:46:28 Speaker 5
Here, I mean, I think it’s a I think it’s a provocative question.
00:46:31 Speaker 5
’cause, you have a you have a business that’s raised a ton of capital that was born of the air that we’re talking about that probably did things that were unnatural.
00:46:40 Speaker 5
It were, if they weren’t negative, united signed off, they were close and they talked about it.
00:46:44 Speaker 5
’cause they would say publicly we’re going to roll in advertising and then that’s going to bring us.
00:46:50 Speaker 2
I got.
00:46:51 Speaker 2
I got in trouble once I was uh, this is on Bloomberg, so I think you can find.
00:46:55 Speaker 2
This clip but.
00:46:56 Speaker 2
I was.
00:46:57 Speaker 2
I was talking to Emily Chang and she said something to the effect.
00:47:02 Speaker 2
Did you see this latest Sequoia round?
00:47:05 Speaker 2
And I said I need this joke if this complete joke is not realistic.
00:47:08 Speaker 2
Yeah, I went to Instacart about one man.
00:47:11 Speaker 2
So I had.
00:47:12 Speaker 2
It delivered for.
00:47:13 Speaker 2
Then I bought a second mango.
00:47:14
Right.
00:47:14 Speaker 2
I sent an e-mail to Doug Leone.
00:47:16 Speaker 2
Thanks for the second mango.
00:47:17 Speaker 2
I do.
00:47:19 Speaker 2
I bought 4 grades.
00:47:24 Speaker 2
I will.
00:47:25 Speaker 6
Get 4 grades whenever you want.
00:47:26 Speaker 1
Not what?
00:47:27 Speaker 5
It’s hard to hard to judge company from the outside ’cause you can’t look at the financials, but from the product experiences evolved over a very long period of time, it’s actually pretty good and I suspect there’s an asset value there and whether that can match.
00:47:36 Speaker 2
Can I?
00:47:40 Speaker 5
Up with what someone can afford to pay it.
00:47:42 Speaker 2
But we got, we got, we got around here.
00:47:43 Speaker 6
But I think.
00:47:45 Speaker 2
Bill, just final question here.
00:47:50 Speaker 2
Well, not quite.
00:47:51 Speaker 2
Here are the markets are tight.
00:47:55 Speaker 6
Where is the.
00:47:56 Speaker 2
Market going to be at this time next year?
00:48:00 Speaker 2
Get the doctor.
00:48:00 Speaker 6
We we will be higher for growth stocks this time next year, but we may very well get there by way of lower and potentially meaningfully lower.
00:48:13 Speaker 6
Because the counter factual to the hyperinflation argument is not, you can’t deliver the counter factual for at least four to five months.
00:48:23 Speaker 6
The facts don’t exist until we actually see the facts play out, but my suspicion is we’ve returned to trend.
00:48:30 Speaker 6
Things become more predictable and investable.
00:48:33 Speaker 6
Again and we bounce back up to.
00:48:34 Speaker 6
The five year average right back now for your bill.
00:48:37 Speaker 6
Final question.
00:48:38 Speaker 5
I don’t get that.
00:48:39 Speaker 5
One no.
00:48:40 Speaker 2
She can answer if you like, but I got.
00:48:42
A more important one.
00:48:42 Speaker 5
6.385% higher, OK.
00:48:46 Speaker 2
I I know you’re not going to answer.
00:48:48 Speaker 5
It so I got a better one.
00:48:49 Speaker 2
You you’re not in the.
00:48:51 Speaker 2
Next benchmark fund.
00:48:53 Speaker 2
Essentially, that means retirement of the Spurs.
00:48:57 Speaker 6
Now the market is down.
00:48:59 Speaker 1
You seem like you’re a little bit.
00:49:02 Speaker 2
Are you going to get back into early stage investing, yes or no, and are you missing it?
00:49:08 Speaker 5
I think I don’t know what that was.
00:49:10 Speaker 5
I I think I I I might get intrigued with doing Angel stuff the way Bezos did.
00:49:17 Speaker 5
I don’t think I want to practice.
00:49:19 Speaker 5
This the art taking board seats.
00:49:21 Speaker 5
I’m still on 10 that I’m serving dutifully and and I’ve played that game.
00:49:26 Speaker 5
You know, maybe similar to what David said about operating business.
00:49:29 Speaker 2
You need a great founder.
00:49:30 Speaker 5
I’ve I’ve played that game.
00:49:31 Speaker 2
They got a good idea, you vibe you.
00:49:32 Speaker 2
Put in a 500K chance.
00:49:33 Speaker 5
Yeah, I’d be open to that.
00:49:35 Speaker 2
You want to.
00:49:35 Speaker 5
And I’m very excited about public stocks here, actually.
00:49:40 Speaker 2
Continue to publish stuff, let’s.
00:49:41
Right.
00:49:41 Speaker 1
Over there.
00:49:43 Speaker 5
Like devaluations are are getting super interest rates.
00:49:44 Speaker 6
Pretty crazy.
00:49:45 Speaker 1
Stuff to build.
00:49:54 Speaker 2
Great question.
00:49:58 Speaker 2
I’ve been investing for the better part of three or four decades before and ten boards ideally served.
00:50:08 Speaker 1
Started all games.
00:50:11 Speaker 2
After chatting with the net tends to disconnect.
00:50:18 Speaker 4
Ideologies look at the public market.
00:50:22 Speaker 4
I’ll just have.
00:50:28 Speaker 4
Ladies and gentlemen, BG squared.
00:50:34 Speaker 3
You let your winners ride.
00:50:36 Speaker 1
2nd we open source.
00:50:38 Speaker 2
Raymond Davis at.
00:50:58 Speaker 1
Second room and just have one big 2 doors because they’re also using like this, like sexual tension that they just need to release that option.
00:51:13 Speaker 1
What you’re about?
00:51:16 Speaker 1
Where your feet.