All-In PodcastE101: Ye acquires Parler, Snap drops 30%, macro outlook, VC metrics, valuing stocks & more
EVERY SPOKEN WORD
150 min read · 30,108 words- 0:00 – 2:02
Bestie intros: Brad Gerstner joins in place of Sacks, and brigadoons!
- JCJason Calacanis
Welcome everybody to episode 101. David Sacks is on vacation. Sitting in, Brad Gerstner from Altimeter Group. Welcome back to the pod. Brad, how you doing?
- BGBrad Gerstner
It's good to be back.
- JCJason Calacanis
Good to be back.
- BGBrad Gerstner
I mean, first- first you guys, uh, you know, tilted Friedberg and now a little bit on, uh, Sacks is-
- JCJason Calacanis
Yeah.
- BGBrad Gerstner
... is getting attacked on Twitter and so you roll me back in when-
- JCJason Calacanis
Yeah, absolutely.
- BGBrad Gerstner
... when you've got a little problem.
- CPChamath Palihapitiya
Whenever the Brigadoons come out, Brad Gerstner comes on.
- BGBrad Gerstner
(laughs)
- CPChamath Palihapitiya
(laughs)
- DFDavid Friedberg
Brigadoons. I love that term.
- JCJason Calacanis
I think Sacks will be okay. But shout out to Sacks.
- CPChamath Palihapitiya
You know who probably hates the term Brigadoons? The nitwits that are in the Brigadoons.
- BGBrad Gerstner
(laughs) Brigadoons.
- CPChamath Palihapitiya
Oh, the Brigadoons.
- JCJason Calacanis
It's all going to end at some point because I think-
- CPChamath Palihapitiya
The Brigadoons.
- JCJason Calacanis
... new ownership at Twitter is going to change, like, the whole span thing.
- DFDavid Friedberg
That's a Rodgers and Hammerstein musical, right? Brigadoon?
- JCJason Calacanis
Brigadoon, yeah, yeah.
- DFDavid Friedberg
Brigadoon. (laughs)
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
Yeah, yeah. But I think- I think Brigadoons could stick. I don't know, I've never heard anybody use that for the verbatims.
- DFDavid Friedberg
Yeah, calling- calling the Twitter mob the Brigadoons is a good new thing. I like it.
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
It's pejorative, it's funny, it'll- it'll- It softens everything a little bit, tones it down. I like it.
- JCJason Calacanis
It feels goofy.
- CPChamath Palihapitiya
It completely-
- DFDavid Friedberg
Yeah.
- 2:02 – 14:17
Ye's current situation and acquisition of Parler
- NANarrator
- JCJason Calacanis
Well, anyway. Uh, Kanye West can't leave, uh, an amazing career alone and he is going to buy Parler, which apparently Candace Owens' husband, George Farmer, had created. So, he's going to buy his own social network. If you don't remember, Parler is like a sh- really shitty version of Twitter that never seems to have worked or been stable. It crashed the first 10 times I used it. Miraculously, this steaming pile of garbage had raised $56 million in funding, and Kanye's on a social media/media tour saying horrific antisemitic stuff. He seems to be having a mental breakdown again. Uh, there's a big discussion now, I guess, should people be platforming them to the point, um, that he's doing three, four, five hour interviews with people, and it does seem like it's acute mental illness/breakdown. I don't wanna, like, diagnose anybody, uh, from afar here, and I'm not qualified to do that now.
- DFDavid Friedberg
But you just did.
- JCJason Calacanis
Well, I mean, he has been public about his struggles with mental illness.
- CPChamath Palihapitiya
It's not a huge leap for any of us that have had family members-
- JCJason Calacanis
Yes.
- CPChamath Palihapitiya
... have manic episodes. I mean, this is-
- JCJason Calacanis
It's clearly a manic episode.
- CPChamath Palihapitiya
This is pretty much right out of a textbook.
- JCJason Calacanis
So, my question for you guys is (sighs) what... You have somebody with great wealth, great creativity, he's obviously a savant in so many different categories, with a huge social media following, plus money, plus fame, and then you add social media to the mix, which is an accelerant, and then all of these, you know, Tucker Carlson and every other publication, every podcast using this moment, I think in a way to kind of, I don't know, get ratings off of this train wreck. I- I find it abhorrent to interview somebody when they're in a manic episode like this. I'll be totally honest. I wouldn't do it. What is your take on this?
- CPChamath Palihapitiya
I have a family member, a blood relative, that is in severe mental health crisis. If the emails and the text messages that this person sent were public, you- you- you- I read these things and they've severely, severely impacted me to the point now where I have, like, a rule that when they're in a manic episode, I just kind of harvest them and archive them, just in case something bad happens. But I can't even take the effort to read it and- because it takes such a toll. And then I feel really guilty because I think maybe there's a- something in there where I could be missing something. So, this is what- when you're in the middle of a- of- of- of a severe episode, this is what the family and the loved ones of that person is also dealing with. So, I have- I have no idea what's happening with Kanye, but what I would tell you is, when you're in a manic episode, the more- the- the- the thing that you need is for the people around you to try to step in to help you, and it's really freaking hard. And I can tell you that in- in- I've seen this person in my family saying- say things and do things that are just so beyond the pale.
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
And it's part of when they're in that moment, and the whole goal is to try to get them out, get them back on their meds, get them rebalanced. It's a really, really complicated thing to deal with.
- DFDavid Friedberg
Well, look. I mean, the guy- the guy's buying a- a social media platform. I- I think it continues to support the point that I made a few times, which is, I don't think that anyone has a monopoly in social media networks. We've seen every couple of years, uh, competitors emerge, people proclaim monopoly. Those monopolies get, uh, destroyed by the next thing, you know, from Friendster to Myspace to Facebook to Instagram to Snapchat to TikTok. And I think that the- the reality is the users of those platforms ultimately coalesce around a set of standards they want to see happen on that platform, and those standards become kind of the editorialized or produced model for how that platform should operate.... because that's what the users say. They don't want antisemitism. They don't want what they would call a kind of challenging an institution, and they don't want fake news. Whatever the, the classification is, there is an editor or an editorial board that editorializes what is and isn't allowed to be said on that platform. And ultimately, there is a fringe voice, or a voice that feels unheard or feels like it cannot speak on that platform. And what we're seeing now with, I think, Elon acquiring Twitter and Kanye acquiring Parler, um, and generally a, a number of kind of emerging networks, uh, like, uh, what's it called, Rumbler, uh, as a alternative to YouTube, is a real clear indication-
- JCJason Calacanis
Rumble?
- DFDavid Friedberg
Uh, what's it called?
- JCJason Calacanis
Rumble, I think.
- DFDavid Friedberg
Rumble.
- JCJason Calacanis
Rumble.
- DFDavid Friedberg
Yeah, there's, it's, it's really clear-
- JCJason Calacanis
But not, no R at the end.
- DFDavid Friedberg
I think it's, it's a really clear supporting fact that there are gonna be alternatives, and that these, what we thought were monopolies and what kind of became digital town squares, and almost infrastructure, uh, are really just application layers. They're editorialized and there are gonna be competitors. And I think there are folks that wanna have a voice that feel like they've been editorialized out of the existing networks, like Kanye, like Trump, like Elon to some degree. And they're, um, you know, uh, those that have resources are changing that. And I think that speaks to a really healthy competitive market. So having folks like Kanye step in and try and create a new platform that has alternative voices, long term I believe in freedom of speech, I believe that we should have alternative voices, but I also believe that consumers and customers should be able to choose what platform they wanna be on based on the editorialization that happens on those platforms. And I do believe that the owners of those platforms should have their own rules, because it creates a different- differentiated product.
- CPChamath Palihapitiya
Jason, is that what you were hoping to get comment on? Or this idea of the media-
- JCJason Calacanis
No, yeah, I was-
- CPChamath Palihapitiya
... feeding frenzy, um, feeding on Kanye's mental breakdown?
- JCJason Calacanis
Yeah, I, I was talking about the media frenzy. That's the thing that I think is pretty abhorrent here. In fact, YouTube just pulled a bunch of the interviews he did recently because there's so much antisemitic stuff in it. And, you know, when somebody's in a mental breakdown like this, which I, I think it's pretty clear he's in, you know, they, they do this behavior, and of course it's hurting them. It's, to your point, you know, I'm sure it's hurting his, uh, kids or, or, or ex-wives, or ex-wife, and, you know-
- DFDavid Friedberg
Can I ask who's to decide take out?
- JCJason Calacanis
... that it's gonna blow back... What's that?
- DFDavid Friedberg
Can I ask, who do you think is to decide that? Because he's done interviews where he said, "I have episodes and those episodes actually provide me with creativity," and realized he's go-
- JCJason Calacanis
I, yeah, yeah, I think it's up to the post- the person who is the host of that show who ma- has to make an editorial decision. And so Tucker Carlson's going for ratings, or if somebody else does it and they want the ratings because Kanye's a big name, that's, you know, I get it. He's a, he's a great get, right? And if you are somebody who likes to interview people, that's like a lifetime get. That could be the get that, you know, makes people learn about your podcast. I just think it's unethical to do that when somebody is suffering like that, to then feature them and to platform them in order to get your own ratings. Uh, that's a personal decision. I would never do it.
- 14:17 – 32:53
Snap drops ~30%, corporate misgovernance, super-voting shares
- BGBrad Gerstner
- DFDavid Friedberg
Snap's down 30% today. Did you guys see this? I think it's, it's related in the sense that everyone historically talked about social networks as being these, uh, you know, the network effect where, you know, multiple people get on and they link up with y- with each other. It's harder and harder to break the network, and it gets bigger and more valuable and can generate more revenue. Clearly not happened over the years with Twitter, uh, to the degree that people thought it should have, and now clearly it's not happening with Snap. I think it also speaks to this idea of fragmentation. I don't know if you guys wanna talk about Snap, but pretty significant decline from, what is it, 160-
- JCJason Calacanis
Well, here's the, here's the-
- DFDavid Friedberg
They were 160 billion market cap and today they're trading at 12.
- JCJason Calacanis
They're down 91% from peak to trap, 91%.
- DFDavid Friedberg
Yeah.
- CPChamath Palihapitiya
Here's the important thing to note, which is that if you look at the MAU growth of Snap, it's actually been extremely steady, and they've had an in- incredible march forward, and I think that they're roughly around 350 million, um, Nick, I'll send you the-
- DFDavid Friedberg
DAUs, right?
- CPChamath Palihapitiya
I'll send you the link. Yeah, I think it's like the DAO is-
- DFDavid Friedberg
Their DAU count is, is incredible.
- CPChamath Palihapitiya
It's incredible.
- DFDavid Friedberg
It's amazing, like-
- BGBrad Gerstner
Zero, I think zero is, in my opinion, a deep sign of disrespect. I think you can, I think you can agree, you know, that, um, there is a separation between, you know, the voice of the common shareholder in these companies and, and the direction of the companies. But I think it obscures what's going on. Chamath, I totally agree with you. If you look at usage, the number of customers walking into the store, um, Snap's gone from 265 to 360 million DAUs. Twitter, 190 to 240. Meta from 1.8 to two over the course of the last three years. They're all growing. More people are walking into the store and using the service. The story here is all about pricing. How much is each of those users worth? I mean, Apple is the apex predator-... of this entire market. We wouldn't be having this conversation but for the fact that Apple's changes with IDFA literally pick-pocketed the industry $2 billion this year under the auspices of privacy. And so if you look at these companies' usage up, pricing or ARPU down. Okay? Recently, Apple's come under a bunch of pressure, so now they're out with SCAD4, which is their update to, uh, the, the, the ad policy post-IDFA that allows you to target advertisers or individuals with 10,000 attributes instead of 100 attributes. So we're gonna see some realignment. I expect that the real question is what happens to ARPU next year. But to me, the story here is that the usage and the health of these core platforms is remarkably sticky.
- CPChamath Palihapitiya
Yeah.
- BGBrad Gerstner
For all the things we say-
- CPChamath Palihapitiya
Yeah.
- BGBrad Gerstner
... about Instagram, I mean, TikTok has had explosive growth, 30% growth each of the last three years. But even the incumbent platforms, really sticky usage. This is about how they're monetizing those users, and the real story is Apple.
- JCJason Calacanis
Yeah. And if you, for people who don't know, IDFA is the identifier for advertisers. Some people refer to it as MADE, uh, Mobile ID, AdID, I'm sorry. Um, and so what that does is it lets you track a user anonymously across their-
- CPChamath Palihapitiya
Brad, have you ever, have you ever owned-
- JCJason Calacanis
... usage on a phone and then attribute-
- CPChamath Palihapitiya
Have you ever owned-
- JCJason Calacanis
... any clicks to a sale. Go ahead, Chamath.
- CPChamath Palihapitiya
Brad, have you ever owned Snapchat stock?
- BGBrad Gerstner
No.
- CPChamath Palihapitiya
Why not?
- BGBrad Gerstner
Um, certainly governance is a key component of it. Um, but the second thing is-
- CPChamath Palihapitiya
Like do you have, do you have any belief that you could even get a meeting with the CEO and management where they would listen to you appropriately?
- BGBrad Gerstner
We've certainly got meetings with management before. So yes, I believe we could. Whether or not that impacts, you know, how they build product, how they, how they run the business, you know, the influence, et cetera. But again, I, I, I think that's not really the problem here. But the point, I would, uh, totally agree with you on, Chamath. We've had 10 years of where the cost of capital was zero, 10 years of hyper growth for these social networks, right? In each of the last five years, Facebook has hired more people, in each of the last five years, than they had 10 years after the company was founded. Okay? So as we've seen this growth begin to turn over, I have seen the companies really slow to react, to right size their behavior that they had over the course of the last decade, to put themselves in a position to compete for the next decade. So it's one thing just to throw your hands in the air and say, "Well, this is all Apple. We couldn't do anything about it." But we, we really haven't seen leadership in terms of cost control. We really haven't... We all know these companies could run which-
- JCJason Calacanis
Snap did do, yeah, of the, of the major companies, Brad, Snap did do a 20% riff. They had 6,000 employees or so and they cut 20%. Facebook is the one that's perplexing because they seem to be massively over staff- staffed, as you talked about, and they have been massively, um, they've had a massive decline in their, uh, stock price. And they are the one who is affected most by what Apple did in terms of app tracking, transparency is their new word for-
- CPChamath Palihapitiya
I think that there's a perception though. I, I mean, I'm still stuck on this issue. I really think that stock prices tend to ebb and flow based on sort of, like, friction or momentum. And when there's momentum, more and more people can easily underwrite it. And when there's friction, fewer and fewer people can underwrite it. And so I think that if you are a CEO of a public company, you have to think about, "How many headwinds do I have and how many tailwinds do I have?" All the time. And some of them are in your control and some of them are not. At least in the case of Meta, as with Apple and Google, they... Meta is forced to copy the best decisions of these bigger companies. Why? Because they were one of those biggest. Now, they have, may have been the smallest of the biggest, but it's going to be very hard for Meta eventually to not converge on those same set of decisions. And the most important one is what Brad just alluded to, which is that there was a point in 2016 and 2017 where you literally could not give away Apple stock. And the big turn of the dial, and, you know, some say it was Carl Icahn, who knows, was this, theoretically this famous dinner that Carl Icahn had with Tim Cook where he laid out a plan. And it's like, "Listen, you need to start managing costs better, managing OpEx better, return a ton of cash, buy back the stock, and you'll be a darling." And Tim Cook was rewarded, and he's, he's been rewarded with an incredibly performant company. And so, you know, Google is slowly inching towards that plan. Microsoft is in that plan. And so the only big four horsemen that hasn't really gotten the script yet is Meta, but they will. It's just, we're just debating when. And so there's a perception that, you know, Meta will copy what the rest of these big guys do, but these other long tail companies, the headwinds are just greater. And so when you, you know, don't have a company that can be broadly owned by intelligent, thoughtful investors, that's a headwind, right? When you give nobody votes, that's a headwind. And so that's why you see a company that's continuing to grow impact not being able to translate that into economics. And if I were the board of that company, that should be a wake-up call, because eventually that'll flow into the morale of the employees and the ability to retain, and then the ability to invest in the future. And I think the simple answer is enough with all these, you know, gymnastics around control. You know, if you looked at Elon, the most incredible thing from day one was there's common stock.... you know? And his whole thing was like, "I'm just gonna do the best and you know what? If I'm not the best, I'm gonna be out." He has never-
- 32:53 – 1:05:38
Macro outlook, Stability AI's $101M fundraise, VC fund metrics
- CPChamath Palihapitiya
and underperform forever.
- JCJason Calacanis
Do we think, Brad, when we get to the sort of macro look at this, let's assume we're in a s- this four or five or three, four, 5% interest rate for some extended period of time. Let's call it a decade. Wh- what does the tech industry look like? Because it does seem if Elon does, with Twitter, what seems to have been leaked here correctly, uh, according to all reports, and there's a 20% RIF at, uh, Facebook, and we start to see people take the medicine, is that the ultimate setup for now, hey, these companies are being run to throw off cash, a- and we have some way out of this, uh, what people think is gonna be a very hard landing?
- BGBrad Gerstner
Well, I mean, i- you know, first just let's talk about, you know, where rates are through, you know, today, you know, we're at 4.3 on the- on the 10-year. I mean, technology has performed incredibly well for a long period of time with rates in this i- i- in this range. So, the adjustment period is very difficult, right? And so when- when you look at the convexity in going from 0% interest rates to 4.5, like that has been a shock to the system. It has been destabilizing to multiples. Multiples were basically infinite last year, and now multiples have come back to reality. And so I don't question, in fact, I actually think free capital was a weapon of economic destruction, right? Free capital hurt good companies from being great companies. They hired too many people, their margins were too- too low. You know, SoftBank funding all of these rideshare companies around the world to compete with Uber meant that Uber, even though they're a market leader, did not have market leadership economics. And so the wringing out of the system, of that excess, that grift, that stupidity, that's gonna be good for the fundamentals of these business. But the transition from, you know, that low rate environment to the high rate environment, it's dislocating for investors, it's dislocating for management at these companies, and it's gonna be dislo- this is not, you know, a- a six-month phenomenon. We're gonna have two years of wringing out, right? Because there's no bailout here by the Fed, there's no V-shaped recovery for these companies. This is now going to be, I heard somebody say this week, "If the last 10 years was about beta, the next 10 years is about alpha." Not all companies are going to do well, not all companies are going to bounce back. This is going to be about what companies have the courage to build great products and to drive a great business model that allows them to compete and continue to invest at high rates in the next wave of innovation, whether it's AI, et cetera. And so, um, you know, to me, the markets, J-CAL, have largely put in a box at this point inflation and rates, right? Rates have come up 65% in the, you know, from 2.7 to 4.3 in the last 60 days, and the market's basically sideways. It's down 5 to 10%. Rates are up another 10% in the last two weeks, and Google and Apple are up. That tells me that the market's gotten, you know, gotten its- its arms around rates and inflation. What the market really is worried about now are two things. Number one is earnings, and number two is the long tail of risks. On earnings, there's kind of a conventional wisdom emerging from, uh, from- from many folks that 3,200 is the bottom, or maybe 2,700 the bottom, that we're gonna go from 225 in- in S&P earnings back to 200. That seems to me to be l- you know, again, a lot of people making that bet. I don't see any evidence in Q3 earnings...... UnitedHealthcare, United Airlines, Schlumberger, Tesla, et cetera. Their earnings are up on a year-over-year basis. They've guided now to Q4, their earnings are gonna be up on a year-over-year basis. And the consensus expectations in Q1 are that earnings are gonna be up on a year-over-year basis. To go from 225 down, down to 200, we, it- it- it can't just be a slowing of the rate of growth of earnings. You have to reverse course entirely. So we have to see something we're not seeing yet. So on an earnings gr- growth, that's where the mar- there's some tension in the market. Then finally, what I would say is there are a lot of big brains in the world who look at this level of dislocation, rates going on the two-year or on the front end of the curve from zero to four and a half, and Druckenmiller or Soros would say, "Negative reflexivity." Shit breaks when you have this much volatility in the world. The world is not equipped to deal with these exponential moves. And so there's a lot of concern in the world, whether it's about Ukraine, Taiwan, UK bonds, the Japanese yen, nobody knows what it will be, but they're just saying demand a higher margin of safety because the propensity, the likelihood that shit breaks when you have this much dislocation is higher. So I don't think-
- JCJason Calacanis
The proverbial black swan could come any minute and could-
- BGBrad Gerstner
When I look at s-
- JCJason Calacanis
... cause another downdraft.
- BGBrad Gerstner
But y- last year, we were all sitting here and said asymmetry to the downside. Multiples at all-time high, interest rates at all-time low. We saw that starting to roll over. We saw smart people, Elon, Bezos, et cetera start to sell into it. As I sit here today, yes, we're going to have harder times ahead economically, but it feels to me like a lot of it is priced in. I don't think we have huge asymmetry and skew to the downside. I think that's like fighting the last battle. It's not to say in this distribution of probabilities one of those events can't occur, but from my vantage when stocks, the average stock down 20%, stocks like Meta down 50 to 60%, a lot of stocks down 70, 80, 90, that doesn't seem like the time to call the big short. That seems like a time to be, like, neutral-
- JCJason Calacanis
Yeah.
- BGBrad Gerstner
... to positive.
- JCJason Calacanis
Sh- should we go to TVPI, DPI, uh, and talk about the privates, Chamath-
- DFDavid Friedberg
Well, I just wanna say one thing about your-
- JCJason Calacanis
... or Friedberg again?
- DFDavid Friedberg
... prior question, uh, which kinda ties into some of what Brad said. But you, you asked the question about does this mean that these companies are now gonna kinda cut costs and start spitting out cash? I think there is certainly a market incentive to do that to keep share prices up. And the companies that can do that are, are certainly taking action with the headcount reduction across some of the big guys. What I think is gonna be interesting and what a lot of people are watching is how many of the small and mid-cap guys can actually do that. Uh, and those that can't, will, it will become pretty evident pretty fast and they're gonna end up in the shitter. Um, and that is-
- JCJason Calacanis
You're talking to a Peloton or something like that?
- DFDavid Friedberg
Doesn't matter. Across SaaS, across consumer, across DTC, across hardware. Everyone is now saying, "Can you actually earn?" And at this point, you should have enough scale that you should be able to earn. And if you cannot, the market will punish you for it. And that's certainly what seems to be the incentive and the pressure in the, on the buy side to the, the executives across all these organizations today. So I think that's a big trend of what's happening right now, is everyone's going through their portfolio, spending time with management and asking, "Can you earn? Can you actually get this business to generate cash? What is the path? Show it to me, prove it to me in the quarterly results. And if you can't, then you're not fitting in a bucket that I can own you."
- BGBrad Gerstner
The only irony there, Friedberg, is that (laughs) that comes as a surprise. God forbid we should actually expect companies to prove unit economics and, and to make profits, uh-
- DFDavid Friedberg
Yeah. But when you, when, when your interest rate's zero, you divide by zero, you get infinity. So, you know, you were able to kind of explain everything away into the future. Now you actually have an interest rate at 5%, I gotta be, you know, making, uh... I'm, I'm not gonna pay a lot more than 20 times earnings and I wanna see that that's really my earnings. You know, I wanna see that you can actually earn.
- CPChamath Palihapitiya
There was a person at Brad's investor day who Brad interviewed and I won't say his name, but he's a star of stars. He's a bit of a GOAT. And he had, and I'll just say the generalized version of what he said.
- BGBrad Gerstner
Well, say, say his name and then bleep it out. (beep)
- CPChamath Palihapitiya
And (beep) said the following, which is so true. He's like, "We've gone through an entire decade of under-training an entire generation of people in Silicon Valley. You know, we have under-, under-trained and under-mentored the product managers, the engineers, the senior executive management, the CEOs. Many of these people, unfortunately, are not, um, they don't have the skillset to execute at a high level, um, at any point in the cycle, except when rates were zero, like many business models. And now that rates are not at zero, these people are turning out to be extremely underdeveloped and unable to run these businesses." And when he said that, it really struck a chord because he's right. And, you know, he was also saying it just got even more exacerbated in this era of remote work, because now there is even less opportunity to mentor and to coach and to talk one-on-one. And people think, you know, that this is a boon, and it's not. So, you know, we, we are going to deal with also the aftermath of an entire generation of highly under-skilled companies because the executive and senior leadership and CEO ranks of many of these companies are not in a position to win.
- JCJason Calacanis
I- if I may, there was, uh, an interesting moment this week when we talk about this discipline that has been lacking the last couple years. $101 million funding led by Co2, uh, Lightspeed Venture Partners at a $1 billion valuation, uh, for Stability AI. Uh, this is a for-profit company built off the backs of the open source project Stable Diffusion. They have no revenue. They have no product. They've been around for, you know, a millisecond. Any thoughts on this type of funding happening pre-product, pre-revenue on an open source project?I mean, there's still ... There's always going to be-
- CPChamath Palihapitiya
Free world.
- JCJason Calacanis
Yeah, I mean there's always-
- CPChamath Palihapitiya
It's a free world. Not my money.
- JCJason Calacanis
There's always going to be these, these asymmetric bets that people think if it works, it's worth 100x.
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
And they'll price it as they price it.
- CPChamath Palihapitiya
I think what we were talking about-
- JCJason Calacanis
But what I think, I think what we were just talking about is a little different, which is how do public markets rationalize evaluation? Uh, these businesses need to start earning for the public investors to be able to represent to their investors that they're doing their job in making sure that they're holding management accountable to demonstrating earnings potential. But these early stage bets, you can see valuations range depending on the asymmetric outcome potential of the, of the opportunity.
- CPChamath Palihapitiya
And you know what the upper ... And you know what the upper bound is. The upper bound is that when rates were zero and governments were printing money more than they could get their hands on, the top five tech companies represented a quarter of the S&P 500, but there was a pretty steep falloff, and everybody else represented the next, you know, about 10% of the market cap. So the point is that we had bounded outcomes when rates were zero. The average market cap, uh, of a successful company was around $3 or $4 billion. So I'm not gonna judge this company at all. And those investors are very smart investors, Lightspeed and Coatue. What I will say is, at the end of the day, there's a terminal buyer of these companies, and we had a period of time that we can look back on to understand that when the party is absolutely rip-roaring, the alcohol is free, you know?
- 1:05:38 – 1:21:38
The difficulty of active stock picking and valuing businesses
- CPChamath Palihapitiya
- JCJason Calacanis
All right, let's, uh, move on. Uh, do you wanna go to, uh, stock picking or Lyft versus Newsom on this Prop 30?
- CPChamath Palihapitiya
Uh, I wanna-
- JCJason Calacanis
For sure.
- CPChamath Palihapitiya
... hear the Freidberg diatribe on stock picking.
- JCJason Calacanis
You do? Okay.
- CPChamath Palihapitiya
Yeah, yeah, I wanna hear it. I wanna hear it.
- JCJason Calacanis
Well, anyway, there is a bunch of people talking about, uh, index funds versus, um, buying individual shares and being a stock picker. Elon and Cathie Wood, uh, got into this on Twitter, and we all know the arguments for passive versus active. Uh, and there's large active funds out there, uh, that are just programmatically buying. And Elon and many think that, uh, active would be better for society or a bit more active. Friedberg, what's your take?
- DFDavid Friedberg
A business is a, over time-
- JCJason Calacanis
(laughs)
- DFDavid Friedberg
... it's supposed to be a- a machine that takes money in and puts money out, and then there's money left in the machine. It's like a box. Money comes in, money goes out. And over time, the objective, the money coming in, which is sales or revenue, exceeds the money going out and the box grows, right, the assets grow. And the best way to look at that is in the financial statements of that business, you know, the income statement, the balance sheet, the cash flow statement. But we... A- a- and then there's this narrative that can be layered on top of those metrics, that measurement of how well that business is performing over time, and that narrative is what drives a lot of investment decisions.... uh, today. Right? I see whether it's an analyst writing an analyst report, or a portfolio manager, or an individual picking a stock. Everyone's got a reason why they're buying the stock and they say, "Here's my thesis." And what happens is everyone looks at that box, looks at that business, looks at that thesis from a different angle and there's always something you're missing. So, there, you know, there's some element that is driven by imperfect information. And in some cases, it's just heavy bias. You know, you look at a stock, you're like, "Hey, I really like Disney+. I really like the subscriber growth." But the question fundamentally is over time, what is the revenue generation and the profit generation potential of that one thing you're looking at, and what are the 100 other things that are gonna contribute to that business, that box, taking in more money or spending more money? Is that box gonna run into a regulatory problem? Is it gonna run into a customer problem? Is it gonna run into a content problem? Is it gonna run into competition? The number of issues and opportunities that any one of these businesses can and will face is infinite. And every participant in a market is looking at some different set of those opportunities or threats, and every participant in that market is making a different value judgment. And so very often people will buy a stock because they see their sliver, they convince themselves that based on the sliver of the perspective that they have, that this is something I wanna own. They don't do the work on what's the income statement, balance sheet, cash flow gonna tell me over time about the quality of that business, and they don't do the work on what the valuation of the business is relative to comparables, relative to future earning potential. And I just wanted to have this diatribe because I see so many individuals doing stock picking. And over time because of this myriad of things that could go wrong and will go wrong, or may go right or won't go right, or the regulatory thing, or the market thing, or whatever interest rate thing hits that stock and the stock price goes down, eventually everyone gets hit on the head and everyone reverts to mean or below mean, meaning the average of the index over time, or underperforms that index over time. And so, I, I mean, for me, I, I spent two years... I, I, I know we all went through some sort of investment banking training. I spent two years out of college without a... I had no finance, econ, or business background. I, I worked in investment banking, learnt how to read an income statement, balance sheet, cash flow, learnt to understand how business performance ultimately translates into financial outcomes, and spent a lot of time on valuation and figuring out... Just because you like the story of a stock, you like the story that the CEO is telling you, doesn't necessarily mean that you're paying a fair price. So if you... If everything they do goes right, the s- price could still drop. And I think that this is a really important set of lessons for people that are individuals that are doing stock picking, which is to, number one, make sure you know how to-
- JCJason Calacanis
So your, this message and this diatribe is specifically targeted towards day traders, retail, correct?
- DFDavid Friedberg
I don't know if it's just them. I think it's just generally, like, make sure you understand how to read an income statement, balance sheet, and cash flow statement. Number two, make sure you know how to assess valuation. Make sure you know that when you're buying a stock, you know what the total value of the company is based on the price you're paying. And how do you justify that that total value makes sense relative to your model of the future outcomes for that business? And then number three, recognize and be cognizant of the fact that whatever one thing you're seeing that you think you've got some edge or some advantage on because no one else is seeing it, there's 99 other things that you're not seeing. And this is where everyone learns this lesson over time and everyone gets bonked on the head at some point in making these decisions. And it's why every stock picker or nearly every... And we can talk about the greats at some point here, and where alpha can be generated and so on. But generally, most stock pickers over time underperform the index. Um, and it's just- I, I... Particularly with the retail movement over the last couple of years, I, I see a lot of thesis, "Here's my reason for buying the stock," that excludes understanding the financials-
- JCJason Calacanis
Got it.
- DFDavid Friedberg
... understanding the valuation metrics, and also excludes the whole litany of things and all the diligence that goes into thinking about all the other angles you might be missing. So that was my-
- JCJason Calacanis
Shemoth rebuttal? Uh, or feedback generally?
- CPChamath Palihapitiya
It turns, it t- It turns out that it's hard to be good at anything.
- JCJason Calacanis
Mm-hmm.
- CPChamath Palihapitiya
Insert the blank takes tens of thousands of years of practice. In investing, I think what I have learned is that it's very easy to get caught up in the mania. I have also learned in the last decade that, you know, we really benefited from zero interest rates. It was a tide that lifted all boats. And I have learned how to think about correlation and the difference between alpha and beta and how to construct portfolios that I think can be all-weather portfolios. To Friedberg's point, those are nuanced long-tail skills that you'll only take up if you're really passionate about the craft. It's not dissimilar to a person, I'm just gonna use golf as an example, who learns how to hit a fade versus a draw and who learns how to really manipulate, you know, their wedges in very specific ways. And these are all long-tail skills that come in when you decide you want to master something. And it's just important to note that that mastery is required to be really good, because otherwise there'll be times where you'll go out on the golf course and you'll crush it, but then, you know, there'll be other times, and most other times, where you can go and get run over 'cause it's hard. So that's my only comment is that this is like everything else. It's not nearly as easy as it looks like.
- JCJason Calacanis
Brad, you pick (laughs) stocks for a living. Should retail... How involved should retail investors be? Should they just buy an index or-
- DFDavid Friedberg
By, by, by the way, Jacob, I, I don't think it's fair to say retail. What... I think my point was really about-
- CPChamath Palihapitiya
No, his point is everybody.
- JCJason Calacanis
Okay, sure. Everybody.
- DFDavid Friedberg
My point is saying a thesis and excluding all these other factors that are critical in making a decision about what you're buying and whether you're paying the right price...... means that you have to make sure that you're expanding your point of view on whether or not a stock is worth buying at the market price today. And I think having that broader perspective is what I see missing in 99% of the chatter on Twitter, 99% of, you know, folks talking about what thing to buy-
- CPChamath Palihapitiya
Got it.
- DFDavid Friedberg
... and why they're buying it.
- CPChamath Palihapitiya
David, sh-
- DFDavid Friedberg
And I think it's very critically important.
- CPChamath Palihapitiya
You're saying that most investing that you see is very narrative-driven, and that narrative can sometimes be so powerful that it overpowers all the other elements that one should be doing to get a full picture of why you should be buying something. Is that...?
- DFDavid Friedberg
I think that's a fair summary, Chamath. Yeah, yeah. And I think it's, um, you know, it's, and it's, it's, it's just about how so much of what goes on on CNBC, on, uh, a l- a l- a lot of Reddit boards, not all of them. There's some very sophisticated folks there doing very sophisticated financial analysis and looking at all the angles of a stock, assessing the valuation. But so much of these conversations exclude what you're paying and what you're getting, and exclude the broader context of all the things that could and may not happen with a particular business. And as a result, at some point one of those things bonks you on the head, you lose 50%, and you're like, "Oh my gosh, my whole portfolio blew up."
Episode duration: 1:41:04
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