Fabrice Grinda: The First Person to Predict the Collapse of Credit Suisse? | 20VC #886

Harry Stebbings 0:00 Three, two, one, zero. You have now arrived at your destination.

Fabrice Grinda 0:08 Maurice, it has been seven years since our last show.

Harry Stebbings 0:11 (laughs)

Fabrice Grinda 0:11 I cannot believe it. I said to you five. You co-correction me seven.

Harry Stebbings 0:14 (laughs)

Fabrice Grinda 0:14 I am horrified. But thank you so much for joining me after all this time.

Harry Stebbings 0:19 Thank you so much for having me.

Fabrice Grinda 0:20 Not at all. But I wanna start, and for those that missed our first episode, which to be fair, I'm sure many (laughs) did, uh, hit me. How did you make your foray into the world of investing, and how did you come to found FJ Labs most recently?

Harry Stebbings 0:33 So I, I, I made my, my foray into the world of investing through being a tech founder. So by virtue of being a visible consumer internet-facing CEO, a lot of, like, other founders started approaching me. So when I built my first company, I was 23, back in '98, it was an eBay of Europe called, uh, Okland. And I was, like, one of the public faces in the internet revolution of France especially. And so all the other, like, young founders were looking up to me and was like, said, "Hey, can you invest?" And at that point in time, I thought long and hard, sh- is it a distraction from my core mandate as founder and CEO to be investing in other startups? And upon reflection, decided that if I can articulate lessons learned to others, uh, it means I've internalized them, making me a better founder. And at the same time, meeting all these other extraordinary founders to help their dreams come true kept my fingers on the pulse of the market, also made me a better founder. And so back in '98, when I first started out as a CEO founder of tech startups, I'm like, "Okay, I'm gonna be an angel investor at the same time." At that time, I had very little capital. Um, and that continued throughout my life, to the point that when I sold OLX in 2013 and, a- a- a- and left it, I'd already made over 150 investments. And so basically, I've always had the dual track founder, investor, of course focusing... And because I was so busy as a tech founder of like, "Okay, I need to only invest in things I understand innately," and I was building marketplaces and thinking about marketplace, so I'm like, "Only gonna do marketplaces." And because I could not be distracted, I, I set up back then the same heuristics I did to apply to my own companies I would pick to others, adding, of course, the, the variable of, um, the team evaluation and, uh, a- a- and deal terms. And so I created a setup for a process for deciding in a one-hour meeting if I would invest or not in a startup. And that's essentially one that we still use to this day, you know, with refinement over time. So I've basically been a, a tech investor since 1998.

Fabrice Grinda 2:29 Oh, man, I have so many questions. Um, first off, when you look back at how you invested in 1998 when you started, what would you say is the biggest change to how you invest today?

Harry Stebbings 2:40 (inhales) So funnily enough, um, n- not that much has changed, right? Like it, it's always been the fa- s- same four criteria. Do I like the team? Which for me are the extraordinary storytellers who know how to execute. Do I like the business, you know, economics and total addressable market size? Do I like the deal terms? Uh, nothing's cheap, but is it fair? Uh, and does it meet my thesis where the world is heading? Now, the... what's funnily different is it used to just be me. And over the years, I've kind of, like, l- randomly (laughs) ra- randomly, I don't know if I lucked into, but, like, ended up creating a structure that became a venture fund. And so today, there's 31 of us. There's an entire back office team. I mean, for, for t- 15... actually, probably for 15 years, every document that was ever sent to me, legal document that was, uh, uh, sent to me, SPA, anything, like company selling, et cetera, I auto signed, or my... uh, actually, my versio- my virtual assistant in the Philippines who had my signature would auto sign for me all the docs that I never even read.

Fabrice Grinda 3:39 (laughs)

Harry Stebbings 3:39 So I would take the call of the founder. We'd agree on evaluation, the terms, how much I would invest, and that is the last thing I would ever do. I would never read any docs ever sent to me ever. And as far as I can tell, I never got screwed, because people are well-intentioned. And so today, we actually have, uh, a team, and people are actually doing legal reviews. And, uh, we (laughs) we actually have a back office system. And so there's processes and structure, and instead of one one-hour meeting, today we have two one-hour meetings. So usually, the inbound deals that we get, about 200 a week, they go to someone else first, and the team reviews, takes the first call, and I take the second call. So we went from one-hour decision-making process to two w- two one-hour meeting decision-making processes over the course of a week and, uh, with a full team. And now we actually have a back office, whereas before, I auto-signed every legal doc ever sent to me.

Fabrice Grinda 4:32 Uh, when someone comes to repossess your house, you have no grounds to push back. (laughs)

Harry Stebbings 4:38 (laughs) It would be worse than that. I might, I might have signed away, uh, you know... (laughs) "I give you... hereby give you everything I own." You know? (laughs)

Fabrice Grinda 4:44 But I, I have a question for you. I have no problem with you as the successful CEO investing your own money. What I do have a problem with is hypergrowth founders raising $10, $20 million funds from external LPs and investing that. When you take money from someone, it is a very big responsibility, and you owe them your time and dedication. T- how do you feel about these external LP-funded founder funds?

Harry Stebbings 5:11 Uh, i- i- the... so it's a question of how people are allocating their time, right? Like, to the extent that founders... to, to the extent it's, like, their name and someone else is doing the day-to-day and, and maybe... and it's just, like, people investing, they're sending their deal flow, I, I think it's okay. Like, I think Oren Hoffman did one recently, and I know that Oren's day life, you know, I- is 100% dedicated to his startup. And, and even though his name is on the fund, there's a full team, there's an investment committee. So, so I think i- if you look at this time allocation to these external L- L- LP-funded funds, it's like a couple hours a week. Uh, but that's also the deal that he set with the LPs. He's, he goes to the LPs and he says, "Look, I'm getting this deal flow. I think, uh, a couple hours a week, I can help decide, I can be in the investment committee, I can help make decisions. I'm not the one running it. If you're comfortable with that, that's fine." Um, and I think it's an... it's, it's this, the sales pitch, but to the LPs, and, and it, and it's internally consistent, and it's also the sales pitch to the VCs, his VCs, because he's raised tens of millions of capital. Uh, now that said, if you're completely distracted and, and, and you're not n- y- you're, you're not...... delivering on your underlying mandate and you're splitting your time between the two, I don't think that's appropriate. And so, I think on a case-by-case basis of it, I would evaluate whether it would- you should do it or not. Look, in general, I would just say focus, right? Like, it's so hard to do one thing well in life, let alone do two. Uh, but I have seen people m- make it work. And frankly, I was, myself, a, a counter-example of that, right? Because re- even though I didn't have any external capital, um, I did have tens of millions of dollars of VC money, and I was building my own company. And so you could argue maybe angel investing is a distraction, and there was a period of time where I was doing, like, you know, multiple investments per week, which is multiple hours per week. But I actually always felt that being an angel investor made me a better founder. Like re- really, I was- I, I understood what the latest trends were, what the latest, um, wha- what the, what the latest approaches were in, in terms of, uh, you know, everything from SEO to SEM to verticalization. You know, I was running a mult- a horizontal, uh, marketplace and I was seeing all the verticals emerge, and I had to think through, "Okay, which ones should we be verticalizing or acquiring?" I, I really thought it made me a better founder. And so, in my case, I thought it was a, a, a... there wasn't a conflict between the two. And I always o- always disclosed it to my VCs that I was doing that.

Fabrice Grinda 7:30 Yeah. No, I totally get your non-disclosure, and I think that's important. I, I do wanna move into the

Fabrice Grinda 7:35 meat of the show though, 'cause you wrote the most brilliant piece in terms of where we're at today, and then multiple different kind of outcome scenario plans. And so, I wanna start on where we are today. Um, let's start with that. So where are we now, and how do you analyze the current situation for Bruce?

Harry Stebbings 7:49 So, so this is a macroeconomic piece we're talking about. So here, we're talking about, like, where do we sit in the macro cycle, and what are, what, what are its implications and conclusions? And the piece is called The Great Unknown. And, and by the way, I probably should mention, I'm kind of an armchair economist. I studied economics, and I've been writing and thinking about macro for fun. Uh, and also talk about the limitations of macro at some point in, in this conversation. But the reason I think today is the great unknown is there were periods in, in, in, in history where I think it was pretty obvious where we were, right? So in the late '90s, to most observers, it was obvious we were in a tech bubble, uh, that at some point would burst. Um, it was unclear when that would be, but it still laid the foundations for the grade to come. In the mid-2000s... Uh, and I actually wrote a number of articles at that time on that. In the mid-2000s, I was... I wrote a few b- articles, and m- many others that predicted, you know, it was explaining that real estate prices were too high, uh, and that some point, uh, we were in a bubble that some point would burst, and that led to the Great Recession. A year ago, I wrote a piece called, uh, Welcome to the Everything Bubble. And I made the argument, and so that was in March, uh, 2021, that a, a, a combination of extraordinarily low, loose monetary and fiscal policy was fueling an asset bubble in every asset class simultaneously, like bonds, stocks, um (laughs) , crypto, SPACs, which was a full-on bubble. Um, we... We- we're, we're seeing frothiness across the board, I mean, definitely in tech, in, in our sector. Uh, and that at some point i- i- it was gonna end. And there were a lot of things suggesting that we were near or at the top. W- we were seeing, uh, a bubble in SPACs, which of course since then has blown. We were seeing a... this weird volatility and crazy retail short squeezes, yeah, as you may remember. Um, and so it was kind of obvious we were in this everything-bubble, extraordinary-foamy environment. Now today,

Harry Stebbings 9:47 the reason I call it The Great Unknown is I can make a reasonably compelling argument or case that we have three outcomes ahead of us, uh, and I can make a good argument for all three of them. And I can make an argument for why actually there is an optimistic case or scenario, which, by the way, in our world today, no one believes in. Uh, we are probably at, like... we're not quite peak uncertainty and peak, you know, end of the world, but a lot of people are, are not... no one can believe in an optimistic outcome here. Uh, number two, uh, I guess, the great stagnation where we have a big sideways move, and I can explain how and why we get that, and it's probably the most probabilistic case. And number three, why actually a lot more pain could yet come. Uh, a- a- a- and, and again, all of these have double-digit percentage probabilities a- assigned to them. So, I think of the world in probabilistic terms, and where, whereas historically I would s- I would have said, you know, last year, "Oh, we're in, like, every asset class kind of bubble. There's gonna be a correction." Today, in my probabilistic terms, I'd say there's a 20% scenario that we... probability that we end up with, uh, a optimistic outcome from where we are, and I can explain why. Maybe a, a 60% scenario of like what I call The Great Stagnation, uh, and another 20% scenario of like, The Worse Is Yet To Come, and things can get a lot worse.

Fabrice Grinda 11:07 So, I wanna break this down. I'll, I'll break it down in order. I think it's nice to start with the positive, then we can go to stagnation-

Harry Stebbings 11:12 (laughs)

Fabrice Grinda 11:12 ... then we can go to, you know, where, you know, truly shit hits the fan and, uh, you know, I'll be coming to you for a job. Um-

Harry Stebbings 11:17 (laughs)

Fabrice Grinda 11:18 ... so, le- let's start with the optimistic case. What is the optimistic case? How do you look at this and argue that we will return to good times?

Harry Stebbings 11:25 So let's look at what is causing the... a lot of the issues that we're facing today. And, and what is leading to an asset price correction is an expected increase in interest rates. So, the inc- increase has not even happened yet. It's an expected increase in our interest rates. And of course, when, when interest rates are extraordinarily low, it means that expected long-term future cash flows are valued highly, right? Imagine you're in a zero rate environment and you have a company that is expected to throw a billion in cash flow in 10 years. Well, that, that will add a billion in the value of the company. And so for these high-growth startups where cash flows are way into the future, very low rates, um, fuel extraordinarily large valuations. You can justify extraordinarily large valuations. Now, imagine we're in a 10% discount rate environment, that same billion in cash flow in, in 10 years is gonna w- only be worth 386 million.

Fabrice Grinda 12:17 Mm-hmm.

Harry Stebbings 12:18 And so, it doesn't take a very large movement in interest rates to actually justify much lower valuations. And so, as in- f- ... Be, as i- uh, interest rate execution has gone up, inflation's, uh, marked multiples have compressed. So risk assets and, and that's especially tech stocks, uh, and crypto ... And by the way, this goes to show that crypto is not an inflation hedge, it's still, it's still a risk asset, uh, have been marked down dramatically. And, and why ... So let's go look at why, or we, or why do we have these expectation of increases in rates, and it's because of inflation. So inflation, which is basically at 8%, is at a 40-year high from a, uh, one-year, uh, p- w- one-year on price and price increase. And, uh, the last time it happened in 1981, Volcker increased rates to 20%. I mean, people, people forget. And right now, we're talking about g- uh, have rates going to 1.5% a- and it's scaring people a lot. Um, now, what needs to happen, uh, for things to be okay? Um, so basically, we need that impr- th- w- currently, what is priced in? What's priced in is five raises, uh, by the Fed this year, um, and, uh, to 1.5%, and further raising going forward, going forward basis where people are expecting 2 to 3% interest rates. Um, now, imagine that instead of inflation sp- being, uh, spiking and remaining at 8%, we get a return to the status quo ante of, like, 2%, uh, 2 to 3% inflation. And, and I think that is actually a possible outcome. I'm not saying it's the most likely outcome, I'm just saying it's possible. So what has driven inflation is really two things. When COVID happened and there was a massive lockdown, we saw an unprecedented shift from a percentage of GDP allocated to goods over services, and our underlying infrastructure is just not flexible. The number of truckers, the number of, uh, the number of ships, the number of people working at docks, the number of slots for the ships to align were all not flexible. And, and, and so that unprecedented shift, uh, put massive pressure on our supply chains, which has led a massive increase in shipping costs and, and, and i- and all the underlying raw materials that go into the making of all the things that we order. So people have been buying goods at a crazy unprecedented level because they couldn't, they could not travel, they could not go to restaurants, they couldn't go to the gym, they couldn't go to the movies. Um, and, and, and, and, and by the way, we're not gonna fix these supply chain constraints, it's kinda the way the d- s- the w- the, the system is designed, so I don't expect that to, to shift. But COVID is perhaps on, on the way out, right? People are triple vaxxed or have all gotten COVID, and restrictions are loosening. People are starting to travel again. I mean, not maybe a- quickly enough, but i- if all the restrictions end by the summer, you know, with, like, 'cause you still need, like, a COVID test to enter the US, but maybe that goes away as it has in many other countries, you can make a case that we're gonna go back to the scenario of the same level of consumption of services which existed before. It's gonna remove all the pressure on the supply chains, um, and, and will abate infla- uh, inflationary pressure. At the same time, if we reach some level of status quo in Ukraine, and I'm not saying it's a good one or a bad one, but I'm just saying if the geopolitical uncertainty of Ukraine ends in some way, shape, or form ... And again, I'm not saying it's the, highly the most probabilistic scenario, I'm just saying if it does happen, um, maybe we see a return to lower energy prices, which have, uh, have exa- exacerbated, um, inflationary pressures. Now, you put these two int- into play and at the same time, uh, perhaps Xi Jinping will be less im- uh, given the difficulties Putin has had in Ukraine, will say, "Okay, maybe Taiwan, uh, is, is not on the cards." And so we regain a level of geopolitical stability, we go back to the ex enti- uh, status quo order of, uh, of services and goods which removes the inflationary pressure, while at the same time re- we start getting the benefits of the productivity revolution that technology is bringing to the f- to the fore in categories hither t- to, uh, hither therefore to, uh, untouched by the technology. So before COVID, people weren't, were ... Healthcare, education, public services, none of these were being touched by the pub- technology revolution, and technology is ex- actually extremely deflationary. And so you have economists like Tyler Cowen who had called the, the Great Stagnation saying, "We are going to see an extraordinary deflationary productivity-led revolution by technology." And so if all these things happen, and of course it's a lot of, like, stars aligning, I can make a case that in that world, interest rates don't need to rise nearly as much as, uh, we expect, and it's about the expectation of interest rate that matters, in whi- in which case the good times can keep on rolling because then we're less likely to have a recession that's caused by higher interest rates. And you need to remember that the underlying situation is actually pretty good. We're at full employment. We're at 3.8% unemployment, which is full employment. You have company balance sheets that are pretty strong. You have corporate profits that are pretty strong. Things are actually reasonably good if you remove the inflation, the inc- increasing interest rates and the geopolitical, um, overhang. And at the same time, right now you have c- not near peak uncertainty, but you have so much negativity, um, that the contrary to me suggests, and when everyone thinks, like, the world is about to end is actually the time that you, that you should start being, thinking about, like, "Hey, i- it's now the time to start making investments," because it's not the case.

Fabrice Grinda 18:01 Do we continue to see unprecedented capital flows into crypto and Web3?

Harry Stebbings 18:06 So that actually, you know, is also interesting because the capital flows into (laughs) Web3 are continuing, and they were maybe unprecedented last year, but i- if you think about, like, the long-term vision, will there be ... Do we think Web3 and crypto will be higher as a total percentage of asset allocation in a decade or tw- or two decades given that everyone from-... family offices to social investors to maybe even central banks want some allocation there. Capital flows are gonna continue. And by the way, Web3, I mean, I, I think crypto is the- Web3 is probably the better, um, moniker because crypto, I mean, they're not currencies. Most of them actually have a use case, uh, as just a decentralized web. And there are be- there are applications that benefit from decentralization. Um, doesn't mean that you can't see a massive correction in the price of, of, uh, crypto assets, especially NFTs which have been in a full-on bubble for the last year or so. Um, and, and especially the art-related NFTs, I mean, I'm a much big more, big, big believer in, like, utility or gaming NFTs, uh, at low- at lower prices. Um, but I suspect that allocate capital continues to go into the category. And we're actually seeing capital flows to be continuing despite the correction in pricing. And so, I'm, I'm reasonably optimistic here as well that, uh, uh, th- this is, um, yeah, it's a temporary sideways. I mean, look, it could go down 90%. I, I don't think it matters. I care about, like, in 10 or 20 years, will we have laid the foundations for the next decentralized internet? And I think the answer is yes.

Fabrice Grinda 19:40 So we're gonna talk about, uh, stagnation, um, before we do that, probability-wise, remind me, what would you peg on the optimistic?

Harry Stebbings 19:50 So pe- perhaps he- herein lies the issue is if you'd asked me last October, pre- (laughs) Putin invading Ukraine, fr- a, a, a- and oil prices going above 100, um, the... Actually, or frankly even last December, actually I thought Omicron was gonna be good because it was so light and it infected, it so viral, like i- it infected everyone but no one really got sick. There was like, "Okay, the wor- we're gonna have herd immunity, it's gonna be the end of this." So if you'd asked me in December, I would've told you 50%. Now I'm at 20% and declining, um, which is, uh, but it's not 0%, right? Like if you talk to, if you look at the sentiment in VC today, I, I, I was looking at, like, tweets where Keith Ravois and a few others, it's like, it's like the end of the world. Like people think we're in, like, you know, pre-bu- either rip good times of the Sequoia presentation from 2007 or like you know dot-com bubble crash type territory, um, because the public market correction has been real. I mean, the, it, you don't see it in the NASDAQ so much because it's dominated by the high, by the, by the big tech stocks, uh, which haven't fallen too much, but if you look at like all the smaller, the smaller m- market cap companies, they're all down like 50 to 80%, uh, across the board. I mean, it's been a bloodbath if you're a, if you're an, a, a, a tech investor.

Fabrice Grinda 21:11 A total bloodbath. I think one thing that's really interesting that's different this time compared to 2008 and any other prior recession is actually the proliferation and speed of news delivery through Twitter. Now Peter Boy, David Sachs, you name it-

Harry Stebbings 21:24 Yeah.

Fabrice Grinda 21:24 ... they tweet anything and thousands and millions and millions see it. Before in 2008 where you maybe have BBM groups with Blackberries but Twitter was not-

Harry Stebbings 21:33 Yeah.

Fabrice Grinda 21:33 ... taking off. You speak in the papers or on TV but it's not as real time, it's more polished. It's very different now.

Harry Stebbings 21:40 Yeah. Yeah, but look, it's sentiment. And, and, and to me it's interesting, like the more the sentiment goes negative, (laughs) the more intuitively I'm like, "This is good." And by, and by the way, I don't know if I should make the point now or later but like history trumps macro, right? Like the, i- the last 200 years have been a, uh, have been a history of technological progress that has led and i- innovation that has led improvements in the human condition. And over the last 200 years despite World Wars, the Great Depression and frankly even the last 40 years of like, uh, the Black Monday, the massive recession of '81, '82, uh, a recession in '92, a, a, a recession in 2001, well, but the dot-com bubble imploding, the 2001 post 9/11 recession, the Great Recession of '07, '09, the, the recession at the, in March of 20- or April of 2020. Despite all of that, it's still been a, a, if you bet on technology both financially and as something to deliver good for the world, you would've won. And so, I don't, I, I try to so- sometime think of the macro in terms of like what to do with the existing portfolio companies, h- how to do capital allocation, but th- as a C, as an early stage investor like pre- CC to A, it doesn't really impact me too much because the macro I care about is the macro seven, 10 years in the future. So for new investments, current negative macro, it's not too bad, uh, except that you need to think about, like, making sure you have follow-on capital, you wanna make sure the valuation you commit is reasonable. But it's not hugely impactful. Some of the best investments of, of the last... The most interesting companies in the last decade were all created in the '07, '09 recession. I mean-

Fabrice Grinda 23:22 I, I don't

Narrator 23:22 Yeah.

Harry Stebbings 23:23 ... Uber, Airbnb. Okay, you disagree?

Fabrice Grinda 23:25 Well, no, I agree, but I think people conflate the reasoning around why the timing. The timing was because of the platform shift to mobile and the rise of the App Store and the consumer-

Harry Stebbings 23:34 Correct.

Fabrice Grinda 23:34 ... dominance of Uber, Instagram, you name sa- Snapchat, you name the incredible companies. It was not predicated around a recession. It was conveniently timed around that and so the prices-

Harry Stebbings 23:45 Correct.

Fabrice Grinda 23:45 ... were better. But it's not like-

Harry Stebbings 23:45 But, but that's the point I'm trying to make right now is like the, the, the macro I, the current macro we're in has very little bearing on whether or not those companies will do well in the coming decade relative to, were they solving the problems that humanity faces in a meaningful new way? And, you know, so the tide of decentralization Web3 I think is, is unstoppable. I think green g- the fact that we need to deal with climate change and so, and decarbonizing our e- our economy is unstoppable and, and will have to happen. And we need to address the inequality of opportunity and social injustices, uh, o- of the modern system. And I think most of the startups that we're backing are addressing these fundamental problems. And so, these opportunities are there.

Fabrice Grinda 24:27 I do worry about the follow-on capital element though. I've seen a complete exodus from the As and the Bs. I mean, pullback like I've never seen before.... that war has been.

Harry Stebbings 24:36 The, you could argue too much capital (laughs) was-

Fabrice Grinda 24:38 Yeah.

Harry Stebbings 24:38 ... was being deployed before. I mean, look at it, how many startups were, used to be funded? There used to be 5,000 seed funded startups per year in the US that would raise 500K or more. Um, and last two years, it was almost 20,000. So we tripled, we more than tripled, I mean, it was over 15,000. It was between 15,000 and 20,000. So we tripled to quadruple the number of startups created. Um, and, and we had more capital. It used to be venture capital was 50 billion a year, and all of a sudden became 150 billion a year, right? We tripled also the capital available. What is the correct number? Uh, are we gonna see a return to the me- to the median, the hist- long term, or is this a new status quo of people are more entrepreneurial, we're now attacking categories, um, that were not previously attackable because of rules, regulation, history, et cetera? Um, and I don't know what the answer is yet. And so actually, I'm keeping an eye on it because it'll, that'll dr- dramatically impact whether I'm, I make 100 investments a year, which has been my long-term average, or 300, which has been last year's number, uh, on a go-forward basis, which then will impact how big my fund should be. 'Cause if, if we go back to the earlier numbers, my fund should be three to 500 million. If we were at the current numbers, my fund should be a billion five. Uh, but I don't know the answer to that yet, and I can't, I think we're gonna know the answer in the next two years.

Fabrice Grinda 25:54 How do you feel about Insight at the end of the day? They've got 20 billion, they've got 20 billion that they raised last year.

Harry Stebbings 26:00 (laughs) .

Fabrice Grinda 26:00 They can essentially dominate the market like no one's ever dominated the market before, but also destroy the asset class.

Harry Stebbings 26:07 The... P- people have said that, um, o- of others before, right? People have said that of SoftBank, people have said that of Tiger, uh, and many of the crossover funds. I mean, there, there is a lot of capital on, on, on the sidelines. The thing is, do I really think that Insight's bread and butter is gonna be series As? No. I mean, you, you had the conversation with Harley, uh, I think a week ago or a few, uh, or a few weeks ago, and he, you don't... If you're deploying 20 billion, you really don't get out of bed and write a $10 million dollar A check (laughs) very often, because it just doesn't move the needle. Like, there's a, there's no, you're not deploying enough capital. It's not gonna return enough capital that you can make a dent. And so they're going to be, ha- to have to write much larger checks. Frankly, even the Bs are gonna be, uh, other than the very large Bs, it's gonna be too early for them. They're gonna have to write much larger checks than the Cs, Ds, Es, FGs, et cetera. And they're gonna be able to keep the companies thriving for a long time. That said, the companies are becoming bigger than ever before. You can deploy more capital for longer than ever before and frankly, as a founder, I used to dream as a kid, I wanted, I mean, because I was crazy, I wanted to be a public internet CEO. I don't wanna be, I, today, the, I don't think, I don't know there's an A, A, A, well, maybe there is some amount of money, but like, it's, it, it, it... That would not be my ambition. I'd rather be a private (laughs) internet CEO than a public one. You have to be insane and want to be in the public eye, uh, and so I don't think they're gonna screw up the A and B market and, and ask the class because that's, that's not where they're gonna, they're going to play. It's not gonna be the bread and butter.

Fabrice Grinda 27:34 Uh, listen, uh, that's fascinating to hear, I, and I think you're probably right.

Fabrice Grinda 27:39 I do, I do wanna talk about the case for, uh, stagnation though. So if we think about the case for stagnation, you mentioned this is probably the most likely. What would cause the case for stagnation here for briefs?

Harry Stebbings 27:49 To have the case, the optimistic case, right, like you need the inflation expectations to, to not get entrenched. And so right now, you know, last year we saw a 5.1 increase in the, in wages and a 7.9% increase in inflation, and as long as people s- perceive it to be transient, um, they don't negotiate automatic 7% wage increases every year, then we're okay. But if all of a sudden the expectation is, "Oh, we have this inflation, therefore we need to get 7%, 8%, 9% wage increases every year," you start entrenching inflation expectations. And then it becomes really, really, really hard to deal with. And because we don't have the political courage to do a Volcker Two and go to 20% interest rate, not that we necessarily should, but, um, I suspect that, uh, what, what, what happens is we have an unprecedentedly large level of public debt, right? Like, so we have, uh, global debt is now at an all-time high of 250% of GDP. And it's actually rather sensitive to rates, to nominal rates. And so there's a really strong temptation not to increase rates as much as they shou- uh, they should be increased and to accept higher long-term inflation.

Fabrice Grinda 29:01 Mm-hmm.

Harry Stebbings 29:01 And so I could see a world where we end up with five, six, seven, eight, and 9% inflation kind of forever, which has a lot of downsides, but one of the upsides if you keep interest rates low enough is that you're eroding your, your, your, your overall debt level if you have negative real rates. And, and there, there are enough historical precedence for this. So if you look in times of war, World War I, World War II, the Vietnam War, um, states rid large, in the US especially, were willing to tolerate higher inflation. Higher (clears throat) inflation than the, the, the expectations of, of, of price stability at like two (coughs) 3%, uh, set by the Fed. And so in light of what's going on in Ukraine, in light of the fact that we have super high debt loads right now, we're doing, you know, US debt to GDP is over 100%. Um, could I see a world where we have five, six, seven, 8% inflation on a go-forward basis with rates that remain at three, four, 5%, so below the, the, the rates? Absolutely. And, and, and, and at the same time, imagine you have continued geopolitical uncertainty because the, the Ukraine conflict drags on, which I could see dragging on kind of forever given the quagmire, uh, that, that, that, that the Russian forces are in. I mean, not necessarily forever, but for years to continue. And so in that world, the US and, and, and a lot of the West frankly starts l- kind of looking like many of the Latin American countries, uh, where historically they have reasonably high nominal inflation, mid t- lower rates that are lower than probably should be, um-... and you will not, you will see, maybe you don't see nominal falls in, in, in asset prices, uh, especially things like real estate, et cetera, but in light of the fact that we have high inflation, it'll be real re- real decreases in asset values. And that, that great stagnation, it's different from the great stagnation that Japan has gone through, which in their case was deflationary. This one, in this case, will be inflationary. But it'll be s- it'll, it'll, it'll, it'll be pretty similar and in that t- and it will not feel great. You know, you will see your, your purchasing power eroded as your, as your, a- a- as, as employees, uh, fr- from reasonably higher inflation. You will not see asset prices recover. They'll basically go sideways on a normal basis, but, I mean, real decreases. And it'll, it'll kind of suck. It won't be great, it won't be bad, uh, but it'll be sideways and it'll kind of suck. And I suspect that that's the high, most likely scenario today, because for the optimistic scenario to happen, you need things to reopen pretty quickly, so, so inflation actually occasionally will get a reset and political f- forces move reasonably slowly. Uh, they're more reactive than proactive. Uh, and I think you need the end of the un- uh, geopolitical uncertainty in Ukraine, which I just don't see happening any time soon. So, I suspect the sideways move where we increase rates but not enough, we still have j- too much more inflation than we probably should, is the l- default likely, most likely outcome.

Fabrice Grinda 32:11 You said you wouldn't be a public market CEO for, for a l- m- yeah. It would have to be a lot of money to put you back in that seat.

Harry Stebbings 32:18 (laughs)

Fabrice Grinda 32:18 Tell me, if you were in the government seat, if you were in the seat of the Fed or Bank of England, how, how should they act? What would you do then?

Harry Stebbings 32:27 Well, the problem is I wouldn't have gotten to where we are today, right? Like (laughs) if I was a, if I ... And there, and, and also there's a problem being the head of the Fed, the thing is, what, what led to the everything bubble is a combination of overly loose monetary policy and fiscal policy. Right? So you had both, we were pushing the pedal to the metal, um, at the same time. Um, the ... Um, the ... You, you n- you would've needed a more responsible fiscal policy and, and, and monetary policy, um, simultaneously. Now, at this point, you do need to re- to raise rates carefully. Um, but I would try to find a way, n- to find ways to remove the inflation pr- the inflationary pressures that, that, with that pad needing to put, p- push in the breaks too much. And that means changing the rules that a lot o- a lot of our harbors, right? Like, the fact that at Long Bay you can only stack containers too high. Right? Like, there's a lot of productivity improvements to be had that could be deflationary, um, that I would try to unleash. Now, these are way harder, right? Like, you have so much nimbyism, you can't really build in the US, which has led to real estate being in massively inflationary because we don't have enough increased supply, and all these problems take a lot, a lot of time to, to fix. But I would actually try to do the structural changes that would lead a deflation in, in the underlying economy while slowly tapering off. I would definitely remove all the COVID restrictions insta- instantaneously, by the way. Uh, like ma- everything from mask mandates to, to, to vaccine require ... Not vaccine requirements, but to, actually, yeah, probably even vaccine requirements and, and COVID test requirements on entry at this point, um, to enter the US, to, like, really accelerate the shift back to services. Um, and, yeah, well, m- moving more, trying to decisively, um, end the, the conflict i- i- in Ukraine. Now, the Fed, I don't think you have a choice, but the problem, uh, that ... You don't have a choice at this point about to raise rates. The thing is, (laughs) it's gonna be a very fine balancing act to make sure it happens without causing the next recession. I mean, right now, more likely than not, we are going to have a recession. Right? Like, consumer and business sentiment is going down dramatically. Every time in the past where that oil price has gone over $100 we've had a recession post that. And slowing down the, the overheating of the economy without causing a recession is extremely hard. It's, we've done it, I think, only three of the seven times, uh, that we've increased rates have we been able to avoid a recession. So, it's, I think, more likely than not we're gonna have a recession. Um, and the thing is, to prevent it from happening, the delicate balancing act that you need between, l- l- you know, municipal, state, federal governments and the Fed, it just doesn't happen. Right? Like, they're all driven by different political forces that have completely different incentives. Um, I ... So it's, it's really, really hard.

Fabrice Grinda 35:18 What probability would you assign to this case happening?

Harry Stebbings 35:22 Oh, 60%. It, it's by far the most likely scenario. Uh, the, where we're gonna have higher ex- inflation for years, and rates that will be higher than they are today but lower than they would need to be to tame inflation. And that means probably a big ... And because it'll be kind of be what's built into the system, um, it'll be, like, sideways movements, if you want, on nominal prices that'll probably be negative real, real, decrease in a- in real asset prices for many years. And the economy is just gonna feel yucky. Um, nothing great and nothing bad.

Fabrice Grinda 35:57 If this is 60% likely, I have to ask this (laughs) just being, uh, purely self-interest, what does this, like, stagnation yucky mean for our business in the startup market?

Harry Stebbings 36:09 So you, you have to think through, in that world where would you rather be? Uh, w- what asset classes do you wanna be in? And the reality is, you wanna be in the asset classes that are gaining share and, and for e- relative to the rest of the economy.

Fabrice Grinda 36:22 Sure.

Harry Stebbings 36:22 And so I think tech remains the place to be. My asset allocation, my personal net worth, is still 60% basically early stage startups because they are grow, they can grow very dramatically, and I think tech companies have pricing power. You know, they, they, they ... When inflation fears first appeared, people were like, "Oh, that, that impacts"... tech companies more because their, their cash flows are in the future.

Fabrice Grinda 36:46 Yeah.

Harry Stebbings 36:46 To some extent, that's true, obviously. The, the, the higher rates, uh, the, e- ... It ... Or inflation erodes future, future ... Well, so actually, so no. Higher rates definitely decreases the value of future, of future cash flows. Uh, but I think higher inflation in itself, not necessarily so, because tech companies have pricing power. Um, and, and so I think for us it doesn't really change anything. Uh, it means we have fewer exits in the next few years. It means the valuations at which these exits happen are lower, um, which means that the IR we get are, are lower. But where would I rather be? I w- ... There's no place I would rather be other than in tech. And m- and b- and m- and e- and frankly being in tech does not even ... I don't even do it for selfish, you know, financial monetary reasons. It's like, how do we make the world a better place given the challenges that we face? And we do face massive challenges, right? We face a, a, a climate crisis. Uh, we have an inequality of opportunity and social injustice crisis, and we have a m- mental and physical well-being crisis. And politics and politicians are structurally incapable of addressing the world's, uh, the problems of our day, and the only way I think we rise up to the challenge ... And by the way, there's a ... The degrowth movement is bullshit. Like, the, no one wants to go back to being a farmer and having a life expectancy of 29, starving multiple times a year. So the only way we solve the problem is actually through technology-led productivity growth and deflation, and that add- ... That, that solves the solution. And so the reason I do what I do is because I wanna bring technological solutions to the world's problems, a- and I think that's what drives, frankly, most technologists and investors, uh, today. Like, the, the bigger the problem, the bigger the opportunity. And so this is the place to be. In, in ... Frankly, it's the place to be in all three, uh, scenarios. It's just the, the, the day-to-day life in all three is rather different. And I'd rather live in the optimistic scenario than the, the stagnation or the pessimistic one, where it would be extraordinarily unpleasant.

Fabrice Grinda 38:42 Well, let's touch on that (laughs) -

Harry Stebbings 38:44 (laughs)

Fabrice Grinda 38:44 ... before we leave. Let's touch on the unpleasant, um, which is very non-British of me. But what are the

Fabrice Grinda 38:50 one or two scenarios that could lead to catastrophic outcomes? What is the oh-shit, Fabrice?

Harry Stebbings 38:55 So first of all, everyone today in the world is preparing for a world of, like, 3% interest rates. No one's really thinking of, like, 8% interest rates, but they're actually very possible. But if you start th- thinking, uh, like, "What are the asset prices that you can justify and the investments you can justify in the 8% interest rate world?" they are very fundamentally different from a lot of things that people are underwriting today, and y- and you could, you could justify another 50% fall in current asset prices. But to me, that's one of many scenarios that could lead to something way worse. One of the ... I could see a ma- massive flight to safety driven by the fact that because of COVID, states have become more indebted than ever before. And, you know, look at, look at debt-to-GDP of Italy, right? It went from 100% to 150%. It's a deep ... In Greece, in '08, '09, the, uh, crisis of confidence and the debt of Greece almost brought down the entire financial system, crashing down and, like, almost brought down the EU. Imagine that Italy, which is 10X the size of Greece, there was a crisis of confidence on, on, on, on, um, on Italian debt. I actually think that you could, you, you would see, you could see the entire EU, the euro blow up and the Eurozone blow up and the, and the financial, and a financial crisis the likes we've never seen. And all it takes is people starting to wonder, "Hey, these governments have been accumulating so much debt. None of them are running ... Or, or, or they're all running deficits. Um, how do they intend to resolve that problem, and do they have the political willpower to deal with it?" And so I- I think of the public's attention and the press as like the eye of Sauron. They can only deal with one issue at a time. So for a long time, it was, like, Trump, then it became COVID. Now it's, like, the Ukraine. But maybe at some point it becomes the, the sustainability of government debt. And when that happens, I could see a massive flight to safety. Now, i- ironically, in a way, would, like, help prolong the y- the dollar hegemony for a while, because people ... one of the assets that is deemed safe would probably be the US dollar. But it would be massively bad, like, for the banks that own all the debt of these, uh, these countries. And I'm using Italy, but it could be, it could be a- the ... an emerging market. And frankly, one of my bear case scenarios is, uh ... Like, like last year as I was thinking through where, "What are safe havens for cash?" I was thinking of putting a lot of my cash in Swiss Francs in Switzerland. And I did an analysis and I realized ... I ... And I, and I actually came to the conclusion that it's the opposite. I think, I think Switzerland is a house of cards. I think Switzerland could default. And, and peop- ... And when I say that, people were like, "Are you, uh, completely insane?" It, it has, like, very le- low data GDP, a stable homogeneous population. They're extraordinarily wealthy. Uh, they're, they're politically stable. Uh, they are the safe haven of all safe havens. And if you look at the credit default swaps, they're priced accordingly. Uh, the issue is, I think it's ... They're a house of cards. Um, in 2006, if you looked at Iceland, the ... Iceland looked like an amazing ... They were the, uh ... They were, uh, an IMF, uh, like, uh, or World Bank, like, oh, amazing example of wha- the way you should run your economy is doing well, et cetera. But what people had not realized is that their banks had accumulated, like, 10X of GDP in, in, in bad assets, eh, and assets that ultimately proved to be bad assets in the '08, '09 crisis. And the default of the banks basically made the country default, and, like, the stock market may have fell 90%. The, the krona fell 35%. And there are two big banks in, in Switzerland, UBS and Credit Suisse, that have been at the center of every one of the bad underwriting crises of the last, like, decade. Like, Archegos, Greensill, Luckin Coffee, you name it. I think just on paper, I think they have foreign currency denominated loans of, like, 400% GDP, and I think it's probably, if you include off-balance-sheet, it's like nine- 10X.... GDP. And imagine that you have, for whatever reason, a massive crisis of confidence in those and may- maybe repricing these assets, like default of some of their underlying assets. They're too big to bail. So it's not too big to fail, they're too big to bail. They're so big, uh, they're bigger... The, the, the, the Swiss government does not have the underwriting power to underwrite it. And I could see them failing and bringing down Switzerland with them, and no one, no one would say go... I suspect most people would not want to go and Swi- and save Switzerland. It would lead to the bi- one of the biggest financial crises of all times. Um-

Fabrice Grinda 43:14 Would, would, would that not be why supernational organizations like the EU, like the IMF step in with the-

Harry Stebbings 43:19 Yeah. But it... The amount of money required to save it w- is so much. Uh, look, and I think there are a lot of people who would be dancing on, on like, you know, Switzerland burning, but look, the- all I can think of is like imagine what's going on right now. We have, like, what all the bank earnings that have not been announced, but like the decoupling of, of, from Russia, there's gonna be massive write-offs of assets there, of like Russian debt. Russia... (stutters) So I think that there's a massive wave of corporate profit decreases that will be impacted by the, by the exit from Russia and from Russian assets. I think there's, uh, bank defaults that are possible, if not likely. I think you have a sovereign debt crisis that's looming. Um, and that's even before we consider Putin going nuclear, using a tactical nuclear we- nuke. If that happens, I think all bets are off. And I don't mean global thermonuclear war. I mean, that would be obviously awful, but I, I actually just mean even a tactical nuke use or, or chemical weapon use could be, could be completely terrific or horrible. Not to mention, you know, whatever, Xi Jinping deciding to use this distraction of Ukraine to go after Taiwan. And, and all of these are possible. And, and frankly, you know, 8% interest or 10% interest rates with no one as underwriting is also s- s- highly possible and, and would lead, I think, to asset price falling (laughs) you know, another 50% from where we are at the very least. M- and plus, I think a massive global recession where unemployment spikes and, you know, w- i- it is... And it... And that probabilistics, that scenario, I think, uh, as a percentage probability is increasing by the day. You know, if you'd asked me in Jan- in c- in December, I would have said 5%. Now I'm at 20%.

Fabrice Grinda 45:01 I think, I think one thing I, I find interesting here, I would love your thoughts on this, you know, Howard Marks said about the alignment between labor productivity and GDP in terms of when one increases, the other increases-

Harry Stebbings 45:11 Yeah.

Fabrice Grinda 45:11 ... historically. Technology does not mean that is the case. Technology, in many cases, replaces or displaces labor productivity or labor in certain roles.

Harry Stebbings 45:19 That's not true. That's object- objectively not true. Uh, the technologies always increase labor productivity. Uh, the... And, and, and humans plus machines working together has always led... I mean, the, the... When you just told me the Luddite, uh, argument, um, of like all the jobs being replaced by machines, there would be no jobs in the future and, and, and human... And, and humans become bl- or productivity doesn't increase. If you look at like every period of history, that has been proven wrong. Like, let me take you back to 1998. So I'll take you back 24 years and back in the past. And let me tell... Uh, and let's say that in 1998, and, and I'll use not 2019, so pre-COVID numbers by, by comparison. In 1998... Actually, I'll do 20 years, so 1999 to 2019. In 1999, I go to you and I'm like, "In 20 years, the top four job categories will have been destroyed by technology. You will have no more bank tellers. Uh, you will have, uh, you will have, uh, 500 billion of retail that'll have been destroyed by online commerce. You'll have all of car manufacturing that'll have been automated, and you... all the travel agents will have been displaced by, by automation." Please, you... And these were the top four job categories in the world in that time. "Please now describe the economic conditions of nineteen- of 2019." Most people would have been, "Oh my God, the end of the world, 20% unemployment, Great Depression," et cetera. In- instead, we had higher unemployment than we... uh, uh, lower unemployment than we ever had. We had best economic conditions we had in like 50 or 60 years. I- I think it's too easy for people to imagine the jobs that are gonna be des- destroyed by automation and too hard to imagine the jobs that are being created. And the fact that these... A lot of the jobs being destroyed, by the way, are like not meant for humans. You know, humans should not be flipping burgers. Humans should not be like, you know, turning, uh, putting a cog in a machine, uh, or doing something repetitive. These are meant to be automated. Humans are meant to be more creative and work in conjunction with machines to do something extraordinary, and, and we have the ability to do that. Even... A- and think of the jobs of today, like the influencers, the Twitch streamers, the, the, the, the, the social media managers. I mean, no one could have even imagined they could exist back in, in, in 1999. So, it... Technology will then lead to productivity growth, which will lead to labor productivity growth.

Fabrice Grinda 47:41 While we were talking, the Bank of England just confirmed, I got a ping literally, a push notification on my, uh, iMac. Um, Bank of England confirmed that interest rates will rise to 1%, the highest in 13 years.

Harry Stebbings 47:54 Yeah. But that's also... So yes, and by the way, I think the Fed is expecting a 50 bps raise in the coming, I don't know, days or weeks, and it will still be way below lower historical average, right? Like the last time, I think we were at like 5% was like, you know, 2007. You know, it's, it's been a l- people have not seen quote unquote "normal" interest rate levels in a long, long time.

Fabrice Grinda 48:17 Okay. I have to ask, on the negative side, how probable are we here? Is this 20%? Is this 15, 10%?

Harry Stebbings 48:23 Yeah, 20%. Double digits sadly, uh, because we do have a massive debt overhang from, uh, from COVID and from running deficits for the... forever, uh, that we need to deal with at some point. And, and before we have a, a crisis that forces us to deal with it. We have, um, we, we may have.

Fabrice Grinda 48:44 (laughs)

Harry Stebbings 48:44 ... more inflation, partly because of geopolitical uncertainty, and we still have this massive geopolitical uncertainty overhang over us. So, no, sadly, it's, it's high. So I, I actually think there's a real risk of recession, and a real risk that we need to raise rates more, to the point that we'll cause a recession.

Fabrice Grinda 48:59 I have

Fabrice Grinda 49:00 two questions, bringing it back to our market before our quick fire. Number one, is given all the above, how do you approach your own velocity of deployment? I'm so fascinated on that. Is now the time to be aggressive, completely pull back, neutral? How do you approach this?

Harry Stebbings 49:14 The... So because the, uh, so I'll, I'll, I'll, uh, velocity should be, uh, for me, is in capital deployment, in the amount of capital. So, (laughs) so because w- the number of startups we invested in, because the number of startups that was created what tripled from 5,000 to 15,000, we tripled the number of in- uh, deals we did from 100 to 300 essentially. And so I've had to di- divide my check sizes by three to not run out of money.

Fabrice Grinda 49:40 Yeah.

Harry Stebbings 49:40 So you do not want to be going to your LPs right now asking for more money.

Fabrice Grinda 49:43 Yeah.

Harry Stebbings 49:43 You do not wanna go to market. Um, so you, you wanna be careful with your capital deployment. So be... Make sure you have enough, uh, if you're one who's leads and has a large, lar- large, large quantity of capital in, in ma- in, uh, the startups, which is not our case, you should probably have capital for, for, for follow- for saving the company's portfolio that we're gonna need the cash in the future. So make sure you have capital reserves. Um, be on the lookout for deals, and there are many. I have my shopping list of companies that are extraordinary in the later stages, that should there be big discounts, I would go and buy in the secondary markets. Uh, so I have my shopping list, so I'm keeping cash on hand for that. Uh, but other than that, uh, the seed, pre-seed, and A, anything I see that I like, I'm still deploying. So I'm, I'm way more careful, but I'm more price sensitive and I make sure that they raise enough cash. Uh, and I, I, I'm very care- I mean, we've always been careful in unit economics, but I wanna make sure they don't raise too much, uh, too, at too high a price. I, I, I recommend they raise a bit more than they need, and that they're careful with unit economics, um, such that they're in a position to raise in the future. So we're still deploying, but very careful in the late stages. I mean, last year we didn't do a single deal C and beyond just because prices were too high. Um, I think that will change, but we haven't seen discounts yet.

Fabrice Grinda 50:59 Totally get you. How do you think we'll see LP markets react? LPs do react quite fast actually. I've been surprised by the speed of reaction from LP markets.

Harry Stebbings 51:08 Yeah, I mean we s- look, we saw it in April 2020. In April 2020, I think all of our LPs said, "Don't do. No, I, whatever, even though we've committed, you don't do a capital call. Please don't do a capital call we can't fulfill." So because what happened is it, it's happening now, by the way. What's happening is they have these models where they can only have X percent of the capital to, let's say, venture.

Fabrice Grinda 51:29 Yeah.

Harry Stebbings 51:29 Uh, the thing is, the, the public markets re-price very quickly. So if your public market portfolio is down 50%, but your, your, your pub- your VC portfolio has not re-priced yet, which it hasn't, uh, then your allocation of venture just doubled, you know? (laughs) And so that's a problem, uh, if we went from 5% to 10%. And so they don't wanna allocate more capital, and they'll tell you, "Don't go raise any fund, don't make capital calls." So you need to be thoughtful, be careful of what the LPs want.

Fabrice Grinda 51:56 And on top of that, you had Sequoia, you had Paradigm, you had GC, you had Katie Horn's new fund, you had Electric, you had all these billion dollar funds.

Harry Stebbings 52:04 Yep.

Fabrice Grinda 52:04 Just suck up all access capital and budgets were spent for '22 and '21.

Harry Stebbings 52:10 Yeah, absolutely. Yeah, mo- most, most LPs that were raising our fund right now, most LPs, new LP relationships that we're trying to have are like, "Look, we've already fully allocated for this year, and I, uh, so, you know, we're happy to chat, but maybe it'll be for the next fund."

Fabrice Grinda 52:25 Fin- fin- final, final one, and I promise it will be quick fire. What are you most excited for? Like pre-seed, where actually, you know what, the pricing is very much as it was, and the earliest of early, or actually you're B and beyond, where we're gonna see a complete retreat from the traditionals and real price compression? Where are you-

Harry Stebbings 52:42 So, so I remain, eh, I remain ex- extremely excited about, uh, ab- about C, because, like, everything remains to b- to be, to be built. Now, we, we do pre-fund, but it's not our bread and butter, because what happens is you end up having, you know, 20 companies going after the same category and, and, and, and do we really wanna place a bet right now and maybe on the wrong horse? And so seed is really, seed A is really more of our bread and butter, and, and r- everything remains to be built. We're still at the very beginning of the technology revolution. If you think of all of the major categories, like education, healthcare, public services, uh, B2B, we're still at, like, sub 5% penetration in many of these. So I, I still think that the tech revolution remains to be built, and we, and, and so we're still investing aggressively in seed. We are keeping... But where I'm most excited about opportunities to deploy a lot of capital at good prices in the coming 12 month, yes, it is the B and beyond, or a C and beyond, because I think we're gonna see major repricing. Some of these m- amazing, we're gonna see LPs who are gonna want, uh, to decrease their exposure to some assets, and then hopefully we're gonna see big discounts in, in secondaries of these extraordinary leaders. And if I can get, you know, if I can invest in whatever, Stripe or SpaceX, uh, at a 50% discount as an ass ran, I will. Now, I'm not saying it'll happen, but I think should it happen, I'm using two examples that are so obvious, uh, but obviously the companies we look at are more the one to 20 billion valuation (laughs) in, in that, in that range of the obviously, you know, obvious winners.

Fabrice Grinda 54:13 I totally get you. Um, yeah, by the way, and anyone wanting to sell Stripe, uh, you know where to go. (laughs)

Harry Stebbings 54:19 (laughs)

Fabrice Grinda 54:20 Um, uh, t- I wanna move into my favorite bit, which

Fabrice Grinda 54:22 is the quick fire. So I say a short statement, you give me your immediate thoughts. Does that sound okay?

Harry Stebbings 54:26 Go for it.

Fabrice Grinda 54:27 Okay. So what's the favorite book and why?

Harry Stebbings 54:30 Favorite book is Sapiens. Um, I don't read many books that are business-y, but I, I, I love...I love the way it covers the history of humanity and the l- and the, the concepts that we've created, and it explains the way the world... Uh, it's the book that, to me, explained the way the world was better than most. Uh, like how agriculture domesticated us, or wheat domesticated us, that led to the agricultural revolution, that led to property rights, that led to the way society is structured today, that led, ultimately, to the, to, to the revolution we're currently living. And so it was so well-argued and construitive. It, it made a... Yeah. Be- but definitely the most interesting book I've read in the last decade. Now, most fun book and re- most interesting re- book on venture capital I'm reading right now is called Power Law, uh, by Malabou. It's the history of venture capital. Amazing book. Um, yeah. But, uh, but, look, I don't have a favorite. Uh, Sapiens probably, you know, ranks up there. But I have, like, lots of favorites.

Fabrice Grinda 55:29 What have you recently changed your mind on?

Harry Stebbings 55:34 Needing (laughs) ... Kind of something we talked about earlier, like ne- ne- n- ne... I hate bureaucracy. You cannot imagine to the extent I, I abhor it, which is why I auto docu signed, you know, (laughs) documents for 15 years without ever reading them. Uh, which is okay when you're deploying your own capital, but if you wanna be a manager of other party, uh, people's capital, you actually need, um, you- you- you need, uh, to, to dot the I's and- and- and cross the T's. So, uh, uh, FJ Labs today is 31 people. We have a massive back office team. We have, like, processes that are well-ironed. And now that we do a lot of crypto, um, the- the rules and regulations around it, uh, y- y- you know, they're tight, and you have t- t- to- to my great chagrin, right? Like, my, my, m- m- in- in life, my, my intuition is like, "Ask for forgiveness, not permission," but there are some cases, and I think financial regulations is one of them, where you actually (laughs) want to do the right thing. And so actually having the structure to be able to execute the way we wanna execute, um, I, I see the value in that.

Fabrice Grinda 56:40 What's your biggest miss, and how did it impact your mindset?

Harry Stebbings 56:46 I'll give you four misses because they impacted, oh, my mindset differently. Uh, and by the way, if you've been in venture as long as I have as an investor and entrepreneur, the number of misses is countless, all right? Like, I have more misses than I have wins, right? Like, uh, e- every year, it, we're seeing 200 deals a week, right? Like, we're seeing, we're seeing a thousand deals a month. So, (laughs) the w- the, uh, w- the, uh, wh- we're seeing... Yeah. We're, we're seeing, like, 10,000 plus deals a year. Um, so misses. Uh, I think I told, um, Mark Pincus no to invest in Zynga at, like, 50K (laughs) at, uh, at a one million pre. Uh-

Fabrice Grinda 57:27 Ooh.

Harry Stebbings 57:27 ... uh, because, you know, nah. I, even though I'm a gamer. I, I'm a gamer. I love gaming. I saw that it was gonna, that Facebook was gonna be a big platform for gaming. It was gonna be big and made a lot of sense, but I'm like, "You know, I like marketplaces. I think at the end of the day, it's head driven. Uh, other people are gonna copy you. Profitability is gonna decline. Uh, the... P- people are gonna churn." And, and all this is true, but in the meantime, you could build a $10 billion company. Which is kind of the same reason I, I think I passed on Twitch at two million pre. Uh (laughs) , again, I'm a gamer, but it's a media company. I don't wanna do... I, I don't do media. Even though kind of it's a kind of marketplace, but I didn't see it that way. And, and, and it, you know, like, like, being too close-minded of, like, "Oh, I only do marketplaces." Like, these were amazing founders that I knew and loved, that I could have worked and wanted to work with, in categories that I'd pl- that I personally pursued. And so that, like, that being so narrow-focused... And even when my thesis was correct, like, yes, the... Ultimately, gaming is a hit driven and the capital requirements increase, and the CACs increase, et cetera, you can still build extraordinary businesses along the way, especially when you come in at one pre. Um, definitely, so-

Fabrice Grinda 58:38 Is your- is your- is your- is your- is your takeaway from that what someone told me the other day? When you have the feeling that no matter what this entrepreneur would do, I would back them-

Harry Stebbings 58:46 Yeah.

Fabrice Grinda 58:46 ... like you said with Pincus or with any others, you never lose money on it. If- if someone gives you 50 million, just keep the money.

Harry Stebbings 58:51 Yeah. Yeah. Okay. So- so here, here... So in... Similar example. Uber, I saw it at two bil- I saw it before. Like, at two billion pre, I'm li- I- I- I'm like... I wrote in my debrief of the call, "I'm gonna regret this rec- this decision the rest of my life, but having looked at the numbers where they're doing a hundred million in GMV, 18 million net loss per month, 18 million burn per month, and they're e- and on 18 million net revenue per month, it makes the numbers... Like, how can I ju- I can't justify two billion valuation I'm passing." When you start the statement with, "This is a foundational generational company, and the founder is extraordinary, and I'm gonna regret this decision the rest of your life," you are. Do not... If you- that... If you write that (laughs) , make the investment (laughs) . You know? So yes, I was a total idiot because I actually wrote my own conclusion that I was gonna regret it in m- (laughs) in my, in my debrief.

Fabrice Grinda 59:45 Oh my god, that's hilarious. Uh, tell me, what was the other one? You said there were four.

Harry Stebbings 59:48 Uh, different lesson. I sold Tencent at the IPO because I'm like, "You know, it's fully baked in, fully priced. It's worth... It's, like, worth 400 million at the time, I think." It was like... I- at that time, it was only QQ. It was ICQ of, uh, of- of China or AIM of China. And I'm like, "AIM didn't really get big." Uh, you know, I... And basically, the... my logic was, "I'm a private market investor. I don't follow public markets. Once it's public, I sell no matter what. No matter the price, whatever. Look-up ends, I sell." Um, and I should have looked at it somewhat differently, which is like, you know, internet penetration in China is 6%. There's (laughs) , there's a way, ways to go. And public, going public is not the end of the journey. It's just another step al- uh, stepping side along the way. And by the way, having been an investor in the company for years, knowing the management team has an extraordinary privileged access to the company, I should know better than most whether or not this is a good investment or not. So it used to be the second the look-ups expired, we would sell 100%, and now it's more discretionary. Now, of course, in last year, I, I kind of regret that discretion of- of keeping the companies that I'd, that I loved. I mean, we- we- we kept all our shares in Coupang and-... and whatever, Palantir and Opendoor and many others that now I wish I'd sold. But, uh, the... W- we're way more thoughtful and diligent. And like, Sequoia kinda made that decision, right, when they decided to, to be a, become an RIA and-

Fabrice Grinda 1:01:09 Sure.

Harry Stebbings 1:01:09 ... and have big public market positions and not just sell. Um, and so I kind of, like, dec- now when things go public, we sometimes sell, but... I mean, after the lockup. But we, we, we evaluate it as like, "Okay, is there a 10X sale from here? Is there still a venture out th- a venture outcome possible in the public markets?" And if the answer is yes, we keep going.

Fabrice Grinda 1:01:28 How did you analyze that move from Sequoia? Brilliant and strategic or?

Harry Stebbings 1:01:33 I think it was a reflection on what they were doing already, right? Like, they were already starting to hold more and more (laughs) of their companies forever. Uh, but, but look, I see myself as a capital allocator. So as a capital allocator, um, where is capital going to compound faster? And as long, you know, m- so my... I, I've had 300 exits or so, I don't know the exact number, in the last 24 years, and I've, I've realized I are 45% a year. And then in the, in the unrealized we have like 650 companies or so, it's like also 45% implied IRR. So I'm compounding at 45% a year. And so, when a company goes public, do I think that capital can continue to compound at 45% or more per year? And if the answer is yes, I should hold.

Fabrice Grinda 1:02:15 For sure.

Harry Stebbings 1:02:15 Uh, and, you know, do I think there's a 10X from here, uh, or, or not? And if the answer is no, then I reallocate. And by the way, I do the same thing in the private market. So when I get a series, my company is at series E or G or F or whatever, and there's a secondary opportunity, I, I, I look at it. And last year especially, especially after I wrote the Everything Welcome to Be Everything bubble, I, we did a lot of secondaries. And it's not that I didn't love the companies, I loved the companies, I loved the founders. It's just like, the prices were too insane that I wanted to increase the cash buffer for, for, for the rainy days that I thought were coming. And, and so we did. (laughs)

Fabrice Grinda 1:02:50 How do you, how do you determine the waiting to sell? Is it 50%? Is it 70%? Is it 20?

Harry Stebbings 1:02:54 Yeah. 50%. You know, bl- if it's 50%, you have schmuck insurance in case it goes to the moon, uh, and you sold enough then you do okay. Now, there are a few cases where we'll sell 25 or 75%, uh, and, and there needs to be a really good argument for it. Like, it's way too much. I mean, some of our positions, you know, v- venture follows the power law, um, some of our positions became just too, worth way too much, and evaluations were way too high. And so there we sold 75%, and the remaining position continued to be ginormous. Um, so those we'd sell 75%. But most often, rule of thumb, easiest, you split it into two, 50% sell. (laughs)

Fabrice Grinda 1:03:33 Totally.

Harry Stebbings 1:03:33 And then you ride the rest, you ride the rest.

Fabrice Grinda 1:03:35 Totally with you. I think you need enough to ride in the rest.

Harry Stebbings 1:03:38 Yeah.

Fabrice Grinda 1:03:38 Tell me, what's your biggest insecurity as an investor today, Fabrice?

Harry Stebbings 1:03:42 I'm writing tiny checks. I, I should be a billion dollar five fund and I'm like... and instead I'm like writing out a $300 million check. That, I mean, part of the problem is what I said earlier, is like the number of deals we did tripled, and so I'm, uh, d- divide by three my, my check size. So, I hate it that I'm writing a, a seed check size of... Uh, uh, my series A check size is 325K, my series B onwards is 725K, because otherwise I'd run out of money (laughs) in, in a year. I should be writing million dollar As and two million Bs and four million Cs and... Even my seed and pre-seed check sizes are too small. So, my check sizes are too small.

Fabrice Grinda 1:04:19 But you must, but y- you must be able to get into anything that you want with those check sizes.

Harry Stebbings 1:04:24 Um, some founders, you know, don't want you to write such little checks. They, they think it's not enough capital committed to them, that you're not paying enough attention to it. So, I mean, there, there's a plus side and downside. The plus side is like you're not competing for allocation. But the, my entire fund is predicated with not competing for allocation with other VCs. And so, I could be, but I, and so, I should be able to write the biggest check possible without competing for allocation or requiring a board seat or leading, et cetera. And they're much bigger than what I'm writing and, and I, I'm under-capitalized and it, it annoys me but it also makes me insecure because, you know, it sounds ridiculous right? (laughs) These founders, th- they're raising a $300 million round at a two billion pre, and I'm like, "Yes, I'm in for 725K." And I want to write a $20 million check, you know? (laughs) It like really annoys me.

Fabrice Grinda 1:05:12 I totally get you. Um, listen, we're gonna have a round two where we're gonna dive into portfolio construction in detail and hopefully also round up a billion and a half for that. Um, but, uh, I do wanna finish on, what was the most recent publicly announced investment, or one that is most recent? You do a lot. But what's one that comes to mind? And why did you get so excited?

Harry Stebbings 1:05:31 Um, so Topsort just re- announced their, their series A, they just raised like 110 million valuation. Topsort is a, um, it's a m- it's a m- it's a product for marketplaces to sell advertising basically, and like monetize their placements. And obviously our portfolio has like 600 marketplaces, so all of them are a customer of this. But basically if you look at Amazon's, um, PNL, when they starts, started selling advertising, it's 95% gross margin product. And so for many marketplaces, beyond the rate they can take, beyond the listing fees, et cetera, putting like selling placement and bump up, et cetera, which is a pure margin product, can increase your effective take rate and improve your unit economics dramatically. So that company, uh, I think is genius because they're, they're basically a tool for helping marketplaces monetize better. And, and it's like such a no-brainer. So the team is... And the team is so smart and articulate about like how do you get perfect pricing strategy? How do you do the right BD deals? And so yeah, amazing company, amazing team, amazing product, and they just raised it. We invested earlier than that, and we just reinvested in the last round as well.

Fabrice Grinda 1:06:42 Fabrice, listen, I've loved this my friend. It's so lovely to do. I can't believe it's been seven years.

Harry Stebbings 1:06:46 (laughs)

Fabrice Grinda 1:06:46 But really, thank you so much. We're gonna, as I said, we're gonna do a round two, but I so appreciate the time today.