E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning

1. 0:00 – 1:15

   Bestie intro!

   1. JCJason Calacanis0:00

      All right, everybody. Welcome to the All In podcast. We're back. Thanks to Friedberg and Sacks for moderating the show into the lowest ratings-

   2. DSDavid Sacks0:10

      (laughs)

   3. JCJason Calacanis0:11

      ... in its history. (laughs)

   4. DSDavid Sacks0:13

      (laughs)

   5. CPChamath Palihapitiya0:13

      Hold on, hold on. Please give the keyboard warriors that are their bot armies some respite here. They tried their best. It just didn't work.

   6. JCJason Calacanis0:20

      They did try their best. They just ... It's, it's okay.

   7. DSDavid Sacks0:22

      I think the ratings of the last episode must be a result of Google, uh-

   8. JCJason Calacanis0:25

      Yeah.

   9. DSDavid Sacks0:25

      ... down-ranking us as a result of our honesty about not wanting to get more boosters-

   10. CPChamath Palihapitiya0:30

       So Sacks, you're on the Brigadoon train.

   11. DSDavid Sacks0:31

       ... because somebody at Google, some lower level functionary, to push a button-

   12. JCJason Calacanis0:36

       Push a button.

   13. DSDavid Sacks0:36

       ... to, uh, shadow ban, I mean, visibility filter us.

   14. CPChamath Palihapitiya0:39

       It's everything except the moderation skills-

   15. JCJason Calacanis0:42

       Yeah.

   16. CPChamath Palihapitiya0:42

       ... of the two Davids.

   17. JCJason Calacanis0:42

       No way is the moderator (laughs) turning it into Fox Sunday.

   18. CPChamath Palihapitiya0:44

       Can't be that.

   19. NANarrator0:45

       I'm going all in.

   20. Let your winners ride.

   21. Rain Man David Sachs. I'm going all in.

   22. DSDavid Sacks0:54

       And I said we open source it to the fans and they've just gone crazy with it.

   23. CPChamath Palihapitiya0:57

       Love you, man. Nice.

   24. NANarrator0:58

       West Coast queen of quinoa. I'm going all in.

   25. JCJason Calacanis1:02

       The reaction I got from our COVID vaccine discussion was, hey, pretty fair and balanced. Like, not in a, in a joking way, but like, actually like, yeah.

   26. CPChamath Palihapitiya1:09

       Yeah, the warning on YouTube was pretty benign actually.

   27. JCJason Calacanis1:12

       Yeah. It's like, "If you want COVID information, click here. Thank you." (laughs)

   28. CPChamath Palihapitiya1:14

       Yeah.

   29. JCJason Calacanis1:14

       Okay.

2. 1:15 – 17:52

   Macro picture update: 0.25% raise, jobs rip up, wage growth continues to slow

   1. JCJason Calacanis1:15

      Let's talk about the market data. The Fed raised 25 basis points. The market obviously has ripped since then. The jobs data this morning was crazy. We added 517,000 jobs, more than 2X December, and well above the estimates of 188,000 jobs. The Fed, I think, is starting to realize they can f- inf- obviously impact inflation and slow down speculative assets, but they're having a very hard time with the labor market, uh, obviously. Labor participation actually is growing. We've talked about that many times here. It's bumped up to 62.4%. We all know it peaked at like maybe 69% during the 2000 time period. Wage growth though continuing to slow, so that is some good news there. And obviously risk-on assets are ripping the last couple of days. Chamath, what's your take on where we are with the market and the Fed's action, which people are starting to believe will be another 25 basis point hike and then maybe staying high for the rest of the year? Did you, uh, hear their comments? You think dovish? What's your take on the market?

   2. CPChamath Palihapitiya2:23

      I watched Powell's speech and it was really amazing because in December he was extremely hawkish and he was basically like, "Listen, we're gonna keep rates higher than you like and longer than you want." And that was pretty clear, and the markets reacted. And then not but 35, 40 days later, he essentially said, "We have two 25 basis point hikes left to go," and he's going to try to stick the landing essentially. And even though the rest of the language in his entire speech and the press conference, if you read it in the absence of his body language, so if you just read the transcript, would seem very hawkish as well, but the reality was he basically capitulated. And then the market essentially said, "Okay, we're at the end of this thing." And we've talked about this before, but markets tend to bottom six to nine months before it's clear that you could have done this. And so we're a little bit off to the races in the short term. It's compounded by a couple of other factors. One is that at the end of last year, so many people were tax loss harvesting, which means if you had some gains somewhere else, you sold some things that were losing money so that you could net the two together. You saw a lot of stocks, Tesla was probably the poster child for this, trade all the way down to like $108 a share and it's effectively doubled in the last 30 days, right? So, everybody tax loss harvested. Everybody de-grossed. Nobody was really owning anything. And then when Powell basically said, "We're mostly done," there's been so much systematic buying right now that nobody's really well positioned. To me, this is very similar and eerily reminiscent of the end of 2018 and beginning of 2019. And if you guys remember, at the end of 2018, October, November, December, the markets just fell, and part of it was Powell's gonna raise rates, inflation's getting out of control, et cetera, et cetera. And then we got all this data that said China may be entering a real period of malaise and Powell capitulated. Again, trying to stick the landing. And long story short, he didn't. That was a head fake and the markets just ripped higher. Then we went into the COVID pandemic and all of that stuff happened. So, I think we're about to replay a little bit of that, at least in the next 30 to 90 days. The pain trade is to go up, so that's probably where we're going.

   3. JCJason Calacanis4:48

      Here's the Fed fund rates chart from 2000 and into the 2008 recession, and you see just, you know, to Chamath's point in 2019, that little step up to 2%, uh, and then this dramatic step up, uh, that we've been on up, uh, to four and a half or so. Sacks is this where the Fed pauses, you think they cut, and, and what overall effect is this gonna have on venture capital in the startup market, which is super important to us?

   4. DSDavid Sacks5:17

      I think we're in the whipsaw economy here. Just a month ago, sentiment was incredibly negative. On this show we were predicting for the year that we were looking at the Fed funds rate going from 4.5% to say 5.5%, two 50 point increases. The belief was that we were gonna have a recession later this year. I think that was pretty much consensus. And now three weeks later, you had a situation in which we got a couple of really good inflation reports, so all of a sudden the consensus changed to, "We're not gonna need to raise rates, you know, to 5.5%, maybe we only get one or two more quarter point rates." And the market just ripped on the belief that inflation was in the rear-view mirror, the problem had been licked, and now we can just kind of move forward. And the Fed seemed to confirm that-... just yesterday with the quarter point rate increase. And now today, we have this wild jobs report with over half a million new jobs. The expectation was only 100,000. And so now all of a sudden people are wondering, "Well, wait a second. Does this mean that labor costs are gonna, you know, go back up, that the economy is overheating, and now the Fed's gonna have to raise more?" So I would say literally from week to week, we're being whipsawed between expectations of, uh, whether inflation has been conquered or not, whether the economy is gonna have a re- recession or not. And I think probably where we're sitting at this moment is you'd have to say that the risks of inflation returning are slightly higher, but the risks of a recession are slightly lower, because with this kind of jobs report, better chance of having a soft landing here.

   5. JCJason Calacanis6:58

      It's very hard, in other words, Sax, to have a recession if people are employed, if people are employed.

   6. DSDavid Sacks7:04

      Especially when you're down to-

   7. JCJason Calacanis7:06

      And we have 50 year, yeah, 50 year low.

   8. DSDavid Sacks7:06

      ... 3.4%. Yeah, exactly. So-

   9. JCJason Calacanis7:08

      50 year low.

   10. DSDavid Sacks7:10

       Right. So I just think that we're in a highly volatile economy and it's very hard to predict the future. I'd say that relative to where we were a month ago, you'd have to say that the odds of us having a soft landing this year are quite a bit better than they were just a few weeks ago.

   11. JCJason Calacanis7:27

       All right, Freidberg, when we look at this employment picture, it does seem people are going back to work. It seems maybe indicative of people blew through their savings. We talked about this, you've been harping on and on previous episodes about people doing personal debt, buy now pay later. Is, uh, a possible thesis here that people YOLOed for so long, post-pandemic, Coachella, vacations, et cetera, that maybe they whipped through their savings? It seems like we, we've burned off a trillion in savings or something like that, and the debt's going up, so now people maybe need to go back to work and they're finally capitulating and taking jobs. Do you think that's what's actually happening here?

   12. DFDavid Friedberg8:04

       I don't know if I would-

   13. JCJason Calacanis8:05

       Just one of those theories.

   14. DFDavid Friedberg8:05

       ... classify that. I mean, the, there's obvious, a lot of this stuff is on the margin. The, the one challenge, you know, Larry Summers has been harping on since last spring all the way through the summer and the fall, and, you know, in multiple kind of interviews and publications he's done, he's ex-US Treasury Secretary, obviously brilliant economist, um, that the US needs to have a 5 to 6% jobless rate for five years in order for us to really get to the inflation rate target of 2 to 3% or below 2%. And so, you know, the economists and the macro guys that are tracking the jobs report today are the, I think the indication is we're not there yet, and that the implication of a tight job market is wages go up and wages go up, inflation goes up, and 'cause companies need to charge more 'cause they have to pay more to get talent. And this, uh, obviously continues to support the escalatory spiral, uh, that drives inflation. So that's the, the, you know, kind of downside to the jobs report today that I think a lot of folks are watching.

   15. JCJason Calacanis9:11

       The Fed mentioned over and over again deflation. So a- any impact there, Chamath? Do you think we're gonna see prices start to crater? And what impact would that have on the market?

   16. CPChamath Palihapitiya9:21

       I think Sax is right. I think the, the marginal risk here is, is for this whipsawing. So we have a period now which is disinflationary, but the problem is if the stock market keeps going up and all of a sudden we have less restrictive monetary conditions, then we're gonna be back at the same place we were before, which is money sloshing around into all kinds of risky assets for more money. You know, there's still an enormous amount of money sitting on the sidelines that has to come into the market now if this thing keeps going higher. So we're in a delicate moment, and if we reignite inflation because all of a sudden more companies have more liquidity that they can tap, right, more money they can raise, more money as a result that they can spend, because we don't have this first inflationary cycle under control, there could be a risk that, that we reignite inflation. And so then, then they have to capitulate, the Fed has to capitulate again and start another hiking cycle. So I think it's a complicated moment. I think all of the smart money in Wall Street that I talked to up until this point, they forecasted like this period would be choppy and the second half of the year would be really robust and, like, you needed to be super long and things were gonna be incredible. And when I talked to them this week they're like, "Oh, God, we weren't positioned for this. We had no risk going into this. We're gonna be forced buyers." There's a bunch of companies that are whispering that they wanna go public now.

   17. JCJason Calacanis10:50

       Oh, really? Hmm.

   18. CPChamath Palihapitiya10:51

       And so the big banks have been calling around trying to book build quietly for some IPOs. And so if they try to kind of crack this capital markets open, I think there's, again, the marginal risk will be that we do whipsaw it, Sax says, and we go-

   19. JCJason Calacanis11:08

       When you say book build, you mean trying to see if you'll get some early takers to buy equity in an IPO, perhaps even in a company like Stripe that's been sitting on the sideline?

   20. CPChamath Palihapitiya11:17

       So not Stripe. They're in a complicated moment. But when they called the book build, they basically say, "Hey, listen. XYZ Company quiet filed. Look at the S-1. What do you think? Where's the price? Blah, blah, blah." And they're trying to get an indication of whether you'd wanna be in the IPO book. So I think that there's a lot of those testing the waters that are now starting again.

   21. JCJason Calacanis11:37

       Would there be an appetite in your mind for an IPO, uh, in the second quarter of, like, a Stripe type company putting... You know, I don't know what the other candidates are, the lead candidates, but Stripe is the one people talk about most.

   22. CPChamath Palihapitiya11:48

       The thing that we have to think about is, like, most of the market are not people, right? Most of the market are computers and algorithms and ETFs. It's an extremely formulaic buying model that you have components of an index, those represent certain percentages, you have to own those percentages to be relevant as that index. And so it's this reinforced buying loop as well as a reinforced selling loop, right? So when things start moving-... those folks have to just systematically move money in. All the humans know that, so the humans tend to front run all the computers and they basically are the ones that sell into these guys. And then that's what inflates these prices. And similarly, on the way down, humans try to front run it by being short into that stuff. So, we could see the capital markets open. Even if we don't, it's actually the worst scenario because now you have all this money going into a fewer number of names. That sort of explains Facebook has doubled in, in 30, 60 days.

   23. JCJason Calacanis12:46

       Yeah, it was about to get to that, yeah.

   24. CPChamath Palihapitiya12:48

       Te-Tesla, Tesla has doubled in 30, you know, 30, 60 days. A lot of the tech stocks, like high beta stocks that we are all, you know, helping to build, those companies have just absolutely ripped 60 to 100%. These are not healthy and normal moves, and so the question is, what happens if inflation somehow all of a sudden pokes itself back up? Right now it doesn't look like it is and Powell was clear and it's true, we're in a deflationary cycle.

   25. JCJason Calacanis13:13

       Well, he said deflation 11 times during his, uh-

   26. CPChamath Palihapitiya13:16

       Yeah, we're in a def- we're in a deflationary cycle.

   27. JCJason Calacanis13:17

       ... and he, he's very clear about his use of language.

   28. DSDavid Sacks13:19

       That's why the market ripped. I mean, basically, that was all part of a narrative where inflation's on its way out, we've licked that problem, and that's what the market was pricing in. And I think now the question is, in light of today's jobs report, is that actually true or not?

   29. JCJason Calacanis13:36

       And I'm sorry-

   30. DSDavid Sacks13:37

       I think-
3. 17:52 – 33:58

   Interest rates impact on mega-cap company creation

   1. JCJason Calacanis17:52

      could be, I think you wrote a blog post about this, Chamath, sort of the regime change. If you look at the Googles, the Facebooks, the Apples, Amazons is, is a little bit of an exception here, those companies printed money. They had profits. They built up large cash reserves. If we look at the next cohort of companies, Airbnbs, Coinbases, Ubers, et cetera, they focus on the top-line growth.... uh, much like the Amazon, which was very obscure approach, correct, Chamath, uh, in, in the history of this?

   2. CPChamath Palihapitiya18:22

      Nick, do you just wanna throw up this chart? We did a little analysis over here and it was just basically looking back 60 years of company formation. We looked at all of the 100 most valuable public company startups, and we indexed that to the tenure interest rate.

   3. JCJason Calacanis18:37

      So what are we looking at here, Chamath, with this chart?

   4. CPChamath Palihapitiya18:39

      So basically, we went back from 1960 onwards, so basically, you know, 63 years. And what this shows you is the 100 most valuable public technology companies, then the size of the circle here is their market cap, and then it's overlaid on top of the tenure interest rate as well as gray bars for recessions. So, what is this graphic meant to illustrate? Well, it just was for us to study, is there a correlation between the value of companies and what the interest rates were or what the economy was doing at the time? And to your point, Jason, the trend is pretty starkly made on this chart, which is that if you were a company that was founded in a period of austerity, you had the ability, in general, to build a much larger company than that which was founded in a period of wealth and excess. Right? So when you look at when rates were sort of approaching zero or were zero, there was a lot of really successful companies, they're listed here in the, in the light gray on the right. But none of those things really represent the success that these other companies had. That's the first interesting takeaway. The second interesting takeaway, though, from this has nothing to do with rates per se, but it is that when rates intersect with the emergence of huge technology trends, so in the case of the 1970s it was the PC revolution, in the case of the late 1990s it was the internet revolution, those two things which required enormous progress in both physical infrastructure, so atoms, as well as software infrastructure, bits. When you put those two things together, those also created big companies. And so if you add that all up, the point is that whenever you see huge tectonic shifts in technology combined with periods of austerity, that's when the gargantuan dollars are made. So, in the 1970s, companies like Microsoft and Apple from the get-go had to be profitable. Right? And in the absence of one very important round of financing that Amazon was able to close, the next big lot of companies were founded again in rising rates where they just had to get profitable or find a way to be positive free cashflow or have positive working capital faster than anybody else. So, these are, like, really interesting trends that I think just say that as rates creep back up, and if we can intersect that with some improvements in technology over the next five to 10 years that we've all talked about, it could be a real boon for startups and startup investing.

   5. JCJason Calacanis21:22

      It would mean people are a little more resilient, a little more hardcore, to use a term. Freberg, what are your thoughts on this, uh, analysis by Social Capital?

   6. DFDavid Friedberg21:29

      It's interesting. I mean, I think there's probably two ways you could interpret this. One is in an era of excess capital. All the capital gets competed away, and so you pay more salaries, you have, uh, it's harder to get high-quality talent, you make a lower margin, et cetera, et cetera. It's much more kind of, uh, competitive on the ground. And then another one is just obviously kind of, like, evolutionary fitness. When there's less capital, investors are more selective. I think what might make this era a little bit different than the past is just the amount of termed dry powder sitting on the sidelines right now, so the, the, the total VC capital raised last year I think was a record high. That means there's a lot more cash that needs to kind of be deployed in the next 12 to 36 months than has ever, um, been deployed in, in the history of venture. If that holds true. So, that may be kind of a, a counterbalancing effect here where it may take three years before that effect plays out, where there's more of a dearth of capital. It's certainly the case that, uh, institutional investors' endowments, pension funds, traditional family office LPs and venture funds are making far fewer commitments this year to new funds, a- as I think we all know, and that tightening will play out in the venture funds that'll get raised for this vintage, the next vintage, and so on. And so maybe that, that kind of evolutionary fitness concept starts to play out later. And also-

   7. JCJason Calacanis23:00

      And sizing. And sizing.

   8. DFDavid Friedberg23:00

      And sizing. I, I think there's also this, like, you know, we talked about this on our text stream, but the venture business of the last 15 years, everyone since 2008, everyone's been trained and all the younger people that have come up and are now partners and running the firms on an environment of momentum investing rather than fundamental investing. And so there is also a question of how, uh, fit the investors are for a market space where valuations are flat or descending or the decision whether or not to invest is no longer driven by who else is investing and how much is the company growing and how much is their valuation going up. Uh, but it's much more about kind of the fundamental performance of the, the, the business.

   9. JCJason Calacanis23:49

      Does this match what you're seeing on the ground, Sax? Are, are people being more dogmatic pragmatic? Are, are the capital allocators really sharpening the knives and looking at these businesses a different way as it actually hit the streets?

   10. DSDavid Sacks24:04

       Yes, there's a record amount of money, venture capitalists raised over the last, you know, couple of years. But it's gonna be deployed much more slowly and carefully over the next, say, three or four years than it was over the previous few years. So divide that amount of money by three or four because the pace...... of deployment's gonna go way down. And so yeah, I think people are gonna be more careful, they're gonna take longer to make decisions. I think it's gonna be much, much harder for new funds to get started. All of the, you know, hype around, you know, solo capitalists and, you know, all these, you know, seed funds and micro VCs and all this kind of stuff, I think a lot of that's gonna get washed away. I think, in hindsight, a lot of that was a product of the bubble. And yeah, I think you're gonna be in for a period of some retrenchment in VC, and I think that's good. I mean, I think to the point of Chamath's study, that, you know, that the counterintuitive finding in his study was that great companies are created during times when we're not in a bubble and, and capital is sloshing around everywhere, but when you're in a environment of moderate capital availability. And I think the point is that we all have to be under some stress, right? That's what evolution requires is, you know, if an ecosystem or an organism is not under stress, they have no pressure to evolve and become fitter and compete. And I think that's what makes our industry and our ecosystem very adaptive over time, is that it's constantly, you know, it, it does face survival pressures. But over the last several years, all the survival pressures were taken away, because anybody could raise money and-

   11. JCJason Calacanis25:49

       There was always another bridge available.

   12. DSDavid Sacks25:50

       Right, exactly.

   13. JCJason Calacanis25:50

       There was always some extension and there was no reckoning.

   14. CPChamath Palihapitiya25:53

       Some convertible note to be done.

   15. DSDavid Sacks25:55

       Right.

   16. JCJason Calacanis25:55

       There was no reckoning, you know, a lot of these companies-

   17. DSDavid Sacks25:57

       Correct.

   18. JCJason Calacanis25:57

       ... just seemed to, you know, get another 12 months of runway, another 12 months of runway.

   19. DSDavid Sacks26:01

       And then found- founders learned so many bad habits during that period of time-

   20. JCJason Calacanis26:04

       Yeah.

   21. DSDavid Sacks26:04

       ... and so much entitlement and excess built up in the system during that time. And I think now, we're, we're seeing that a lot of that is working its way out. I mean, just look at the Facebook results the other day.

   22. JCJason Calacanis26:18

       So Facebook just-

   23. DSDavid Sacks26:19

       Let's talk about Facebook as an example.

   24. JCJason Calacanis26:21

       Yeah.

   25. DSDavid Sacks26:21

       Because here you have a company where the stock, over the past year, had been pounded. It was like down over 50%. And the market did-

   26. JCJason Calacanis26:29

       90 bucks a share, yeah.

   27. DSDavid Sacks26:30

       Yeah, did, the market did not like its answers around the capital investments it was making, and then Brad Gerstenauer, our friend, wrote that letter encouraging them to get much more efficient and then they did that. And they basically started doing some riffs and basically just getting much more efficient in what they're doing, and specifically taking out layers and layers of middle management. I mean, that was really the big thing. So they kinda took a page out of Elon's book, in terms of what Elon had done at Twitter. I mean, not nearly to that extent, because I don't think they needed to, but they targeted this idea of, "We have too many layers in the company. Too many mid-level managers." And the stock ripped just, what was it, like, up 20, 25%, uh, yesterday? In a day?

   28. JCJason Calacanis27:11

       Yeah, in a day. And they're up to... I actually bought it, based, the day they had the layoffs, I put in a buy order and it was closed at $94 and now it's at $193. And FedEx, of all places, uh, is laying off 10% of its offers, officers and directors.

   29. DSDavid Sacks27:29

       Yeah.

   30. JCJason Calacanis27:29

       So, the idea now is, hey, in the senior ranks, what is the inefficiency there? How do we get-
4. 33:58 – 1:02:33

   Mass extinction event coming to startups, reckoning for VCs, venture debt issues

   1. JCJason Calacanis33:58

      There was an interesting mass extinction event tweet that went on that's related to all of this. Tom Loverio, a GP, a general partner, at IVP, which is a venture firm, tweeted the following thread. "There is a mass extinction event coming for early and mid-stage companies late '23 and '24. It'll make the 2008 financial crisis look quaint for startups below. I explain when, how, and why, and," uh, well started off with some detailed advice. Basically, four in five, four in five early stage startups, he claims, have less than 12 months of runway, uh, according to a Q4 survey of 450 founders by January Ventures. He sees late '23, '24, when this will all come home to roost. Mark Suster, from Upfront Ventures, friend of the pod, replied with the following, "Precisely our internal analysis, 5,000 seed, 2.5 million raised or above, A and B companies," so three different categories, "funded in the last four years, we estimate 50% will go out of business. Loss ratios in the last seven years have been artificially low d- due to excess capital," as we just discussed previously with the never-ending bridge.

   2. CPChamath Palihapitiya35:05

      We've talked about this before. If you look back over 40 years of venture capital, the average top quartile fund distributes 1.6 or 1.7x the capital they raise. Even though now we've gone through a period where people have shown these unbelievable markups, right?

   3. JCJason Calacanis35:21

      Mm-hmm.

   4. CPChamath Palihapitiya35:21

      TVPIs, the total value-

   5. JCJason Calacanis35:23

      Right.

   6. CPChamath Palihapitiya35:24

      ... of paid-in capital, distributions have not really budged that much. Distributions are still modest. They're below 2x. And so we have to go through what's called mean reversion, right? We have to-

   7. JCJason Calacanis35:34

      Sure.

   8. CPChamath Palihapitiya35:34

      ... go back to the historic statistical average, which means that a 50 to 60% mortality rate seems pretty reasonable. By the way, in the dot-com bubble, that's what we went through. You know, in 2001 to 2005, we had a 50% mortality rate.

   9. JCJason Calacanis35:49

      At the seed stage, I mean, you kind of expect 70% to go out. Series A, maybe a little bit less. Friedberg, what are you seeing on the streets? You're investing in startups.

   10. DFDavid Friedberg35:57

       Yeah, look, I, I think that there's-

   11. JCJason Calacanis35:58

       Is there an opportunity, by the way, also in here? So what are you seeing, but is there an opportunity in this group of, this cohort of companies which seem to be, um, upside down and/or in-

   12. DFDavid Friedberg36:08

       I'll ta- Yeah.

   13. JCJason Calacanis36:09

       ... a tsunami right now?

   14. DFDavid Friedberg36:09

       This cohort of companies, I think, generally is overburdened with feature orientation and short-termism more than you would see in an era of, uh, reduced capital rather than excess capital. And what I mean by that is a lot of companies...... built a business or built a product that allowed them to show traction in the market faster and typically those products that are easier kind of paths to market end up being features, they don't end up being platforms. So it's very hard to become a big business, or to become a scaling business, or to differentiate in a competitive market. That's a generalized... that's a very general statement, but I think, you know, when you miss out on the platform play, you start betting as an investor on a lot of the derivative plays that look like the real big company, look like the platform. I mean, think about how many companies try to look like some iteration of Stripe, or try to look like some iteration of Uber, or try to look like some iteration of, you know, name your big kind of behemoth. And as a result, you get all these sort of feature-ish platform plays that have maybe a niche or some kind of, you know, narrow kind of market opportunity, they got funded. Those, those businesses obviously aren't gonna have the same valuation multiples of the winners in the market. And now, uh, and they burnt a lot of money to demonstrate growth because so much of investing over the last 15 years has been momentum investing, and so they, they try to grow then they try to get a higher valuation, investors plow more money in. Now the problem is that so many of these series B, C, D, and E companies have a true market value, they're not a valueless company, but the true market value of them is probably less than the total preference stock of the capital that's gone in. So they're worth less-

   15. JCJason Calacanis37:52

       Okay so wait, let me-

   16. DFDavid Friedberg37:53

       Yeah, yeah.

   17. JCJason Calacanis37:53

       Let me, let me just make sure people understand that-

   18. DFDavid Friedberg37:55

       I'll just, I'll just describe it, yeah. So when investors invest, they have preferred stock, so they have a right to get their money back. So they, let's say a 1X liquidation preference, they invest $100 million, the company is worth 300. So they own 25% of the company after they invest, but they have a right to that $100 million first before common shareholders get paid. The problem now is that a lot of those companies may be worth less than the 100. They're not worth 400 anymore, they're worth 100. And you can see this play out in the public markets with that, uh, that dataset I shared with you guys a few weeks ago. Over two thirds of companies now that have gone public since 2020 are worth less than the capital that they have raised, as in the venture market. So if they were still private, they would be worth less than their preference stock. And that's where these companies start to unravel, because now the investors have to totally recap the company, the founders don't wanna have all of their common wiped out, now they own nothing, and there ends up being a very ugly scenario that happens with the board at that point on how do we wind this thing down? How do we recap it? What's gonna happen? And that's usually where everyone starts to run for the hills, the founders, one or more of the founders leave and so on.

   19. CPChamath Palihapitiya39:00

       Freeberg, I have a, I have a question for you. So you mentioned this earlier which I think was a really important point but we didn't really touch it. Do you think there's gonna be a reckoning inside of venture firms about recalibrating general partners?

   20. DFDavid Friedberg39:14

       100%. I mean, look-

   21. CPChamath Palihapitiya39:15

       And why? Sorry, just explain why, why.

   22. DFDavid Friedberg39:17

       Yeah, so I think what's happened is over the last 15 years to become a successful venture investor you've gotten into the hot deals. The deals were... and, and hot deals, the valuations are typically climbing up. And, you know, when the valuations climb up, that's an indicator that the company is doing well and you should invest. That's been the model for operating in the last 15 years. But the truth is that maybe just because the valuations have gone up and more money has gone in doesn't necessarily mean that that's a great business, or as Chamath points out, that you ultimately get a positive net return on that investment down the road. And that window is now closed. So the, the, the investors that have been trained ge- this is such a generalization and I hate saying it because we have so many good smart friends that work in venture, but generally speaking there are a lot of folks who have come up who have been trained on this momentum investing model. And it's, it's like, it's like day trading, the stocks are going up, let's all put money into the stock going up instead of having a more fundamental approach to, is there real cash generation potential and scalability and platform ability of this company? And as a result, you're gonna have to see I think the junior partners that have come up and done well in this market ... There's gonna be a point-

   23. JCJason Calacanis40:24

       Can I build on your point? Well they're, they've, they've done well on paper, but they haven't done well on distribution, so maybe that, Chamath, becomes the-

   24. DFDavid Friedberg40:31

       Well, so-

   25. JCJason Calacanis40:31

       ... way you decide who's a good venture capitalist. Which of these companies actually returned capital at a peak market?

   26. CPChamath Palihapitiya40:36

       Well, I think Freeberg, uh, is really onto something, and he mentioned this before so I got curious about this and I went into PitchBook, and my team and I looked at all of the people, the humans in our business, that have generated more than a billion dollars in distributions on a given deal. And there's 20 that have done that, in our industry. Like, there's people that have made hundreds of millions of dollars once or twice, but there's 20 people that have made more than a billion dollars more than once, okay? And if you look, not a single one came up through the ranks as a pure engineer or product manager.

   27. DFDavid Friedberg41:09

       Right.

   28. CPChamath Palihapitiya41:09

       Everybody to a one is extremely commercial in their background and their-

   29. JCJason Calacanis41:16

       Hmm.

   30. CPChamath Palihapitiya41:16

       ... operating experience. Very few percentages of them were actually founders. A huge percentage of them were trained in banks and other places, so non-traditional, quote unquote, "roles" for what this current crop of GPs look like because we went through a phase where if you were a VP of product or a VP of design or a VP of engineering at a well-known startup, that was the most obvious onboarding into a venture firm. But if you just look back at the data, that cohort of people has actually never made money, again according to PitchBook.
5. 1:02:33 – 1:12:32

   Adani's potential fraud, role of short sellers

   1. DSDavid Sacks1:02:33

   2. JCJason Calacanis1:02:33

      Freeburg, you were talking in the chat about Adani Enterprises and uh, Hindenburg doing this short research and publishing it. Stock has just absolutely gotten clobbered. They were trading at, uh, gosh, 4100 was the 52-week high. And this thing has just cratered in the last five days.

   3. DFDavid Friedberg1:02:55

      I mean, I think-

   4. JCJason Calacanis1:02:55

      You wanna explain what's going on here?

   5. DFDavid Friedberg1:02:57

      Well, I mean, the story that, the conversation I thought it would be interesting for us to have is the role that these short seller research analysts play in driving efficient markets by identifying perhaps things that the market broadly is missing. Particularly given that a few weeks ago, we were all kind of talking about the FTX debacle and how no one was doing their diligence and no one was digging in and no one was kind of revealing publicly what was going on inside of that business that ultimately caused significant losses. You know, the claims made by Hindenburg is that this company Adani, which is founded and run by a guy named Gautam Adani, he started the company like I think 30, 35 years ago, and he's built this thing into this, you know, sprawling empire as people would say where he owns ports, he owns mining companies, he owns energy transmission businesses. He's got a whole green energy business. And he's taken a bunch of these companies and he's floated them publicly so they're all kind of publicly traded. There's some degree of interrelatedness between all these businesses. It reminds me a lot of, I don't know if, if any of you guys remember Eike Batista out of Brazil. You guys remember this guy? Where, you know, he kind of built this sprawling empire, very kind of broadly diversified industrial conglomerate with, you know, lots of different kind of segments and used a lot of leverage, a lot of debt to grow the business and a lot of interrelated intraparty transactions, and ultimately the whole thing kind of came crashing down. And at this Adani business, it's super technical and super complicated, all the kind of accounting shenanigans that Hindenburg is claiming has been going on and capital markets shenanigans that they're claiming have been going on with this business. But their kind of report, which I think is like 400 pages long, has caused-

   6. CPChamath Palihapitiya1:04:48

      The response was 400 pages, crazy.

   7. DFDavid Friedberg1:04:49

      The response was long too, yeah. And then the markets shrugged off the response that he put out, didn't really care and they kept, kept selling the stocks off. So there's like seven or eight publicly traded companies, all of which are just getting decimated. Look, I don't have any strong opinion on this business. I, you know, I kind of skimmed through the thing, but you know, it really made me question like how such a big, call it accounting or capital markets fraud, if it really is that, can go on, and how much of a role these sorts of players play in the market. And whether you guys think that this is a good thing in the market to have these short seller reporters out there, you know, doing this analysis, publishing it. Jason, by the way, you called out Nick- Nikola, Nikola, the, the electric car company. As you know, Hindenburg put out that Nikola report-

   8. JCJason Calacanis1:05:33

      Yeah.

   9. DFDavid Friedberg1:05:33

      ... stock tanked, right? They claimed it was all fraud, et cetera, and then the thing got destroyed.

   10. JCJason Calacanis1:05:37

       And it was, Trevor Milton got convicted, yeah.

   11. DFDavid Friedberg1:05:39

       Right. And so I mean, I guess do you guys think that these guys have a, have a positive role net net in the market in kind of identifying and calling out this stuff? 'Cause we all have friends that are on the wrong side of short sellers and they complain about it and it can be really difficult to grow and build a business when people-

   12. CPChamath Palihapitiya1:05:54

       Elon had these guys literally claiming he was running a fraud for years and years, and it was an intense amount of scrutiny because when the tra- when the stock was less trafficked in, when we were in it in 2015 and '16 and '17, that was the constant refrain, and Elon was constantly batting back folks like this who would make claims. And the way that these guys are allowed to operate is because they use the First Amendment and say, "We have the right to say this stuff." I think that shorting falls into two buckets. One is you use it as a hedging instrument, so when we talk about spread trades like long Google, short Facebook, or long Facebook, short Google, you should be allowed to short. I think that, that's a very reasonable thing to do. I think the, the question is if you were on the inside of a company and you say, "XYZ is happening," for example, Trevor Milton, and it causes the stock to go up and it turns out to be fraudulent, he's held accountable. The question is, should there be the same responsibility for people on the outside who if they have enough distribution can say the exact opposite of XYZ is happening? In this case, XYZ is not happening, which then causes the stock to go down because what the business model of these short sellers is, write a document-... it looks very polished and very credible. Put on some positions, then put the document out. If the stock goes down, you close it out. In my opinion, I think that short sellers are a really important part of a well-functioning market or the ability to short. But what I would like to do is take an extra step, which is y- you should hold these folks accountable the same way you'd hold an insider accountable, which is almost to the effect of like, when you put out this screed, if you make money from it, it should sit in escrow and the SEC should actually adjudicate whether it's true or not. So in the case of Hindenburg and Nikola, they shorted the stock, they put out a report, it turned out they were right. All that money is completely well earned. Now, what if this Adani thing turns out to be not true or true? Nobody knows right now, except 50% of the market cap has already been wiped out. So that's where things, I think, are, are in a bit of a gray area. The last thing I'll say is that if you look at in the developing world, there's a very gray line between some of the leading entrepreneurs in these governments because these entrepreneurs are doing the work of some of these governments, whether it's Eike Batista in Brazil in one moment, right around natural resources, or Adani and Ambani in India, or a lot of the people that, that made a lot of money in China or the people that are making money in, in developing markets, Turkey, Russia, et cetera. The government uses very talented entrepreneurs to go and concentrate capital to develop infrastructure progress. We did that in America in the 1800s as well. So that's where I think, you know, you have to also balance it 'cause his response was basically like, "This is an attack on India." And in a way you can see where he's coming from, right? Because he's building ports and roads and bridges and he's like, "Without this stuff, how is India supposed to even exist in the 21st century?" That's a reasonable claim. So I agree with you, Friedberg, I don't know whether the report is right or not, but this extra step of actually having the SEC actually tell us what the answer is, I think would be a very important improvement to how this kind of stuff works.

   13. JCJason Calacanis1:09:06

       The other improvement that the SEC has been proposing in Rule 13f-2 is that... (laughs) people would need to disclose their short positions.

   14. CPChamath Palihapitiya1:09:20

       Right.

   15. JCJason Calacanis1:09:20

       This proposed rule would require institutional investment managers, I'm reading from the SEC website-

   16. CPChamath Palihapitiya1:09:24

       Right.

   17. JCJason Calacanis1:09:25

       ... managers exercising investment discretion over short positions meeting specific, specified thresholds to report on the proposed form SHO, information related to end of month short positions in certain | (crosstalk)

   18. CPChamath Palihapitiya1:09:35

       That is a no, that is a no-brainer.

   19. JCJason Calacanis1:09:37

       ... daily activity affecting the sh- short positions.

   20. CPChamath Palihapitiya1:09:37

       That should absolutely pass. That, I mean, that's a no-brainer. Yeah.

   21. JCJason Calacanis1:09:39

       And the commission would aggregate the resulting data by security, therebo- maintaining, thereby maintaining confidentiality of the reporting managers-

   22. CPChamath Palihapitiya1:09:46

       Yeah.

   23. JCJason Calacanis1:09:47

       ... and publicly disseminating the data to all investors. This new data would supplement the short sale data-

   24. CPChamath Palihapitiya1:09:51

       I think this relates to overlending of stock-

   25. JCJason Calacanis1:09:54

       ... that will be public about more from 10 run stock exchanges.

   26. CPChamath Palihapitiya1:09:54

       Right? I mean, this is less about like who's doing what and it's much more about are we kind of creating critical fail points in the system by seeing over-leverage and overlending in certain, uh, trading assets.

   27. JCJason Calacanis1:10:03

       Well, there should also be some rules about the spreading of fear, uncertainty, and doubt. That FUD that happened with $TSLAQ. I mean, paradoxically, you know, thousands of-

   28. CPChamath Palihapitiya1:10:14

       No, but people that, but that's an example-

   29. JCJason Calacanis1:10:16

       ... anonymous accounts, you know-

   30. CPChamath Palihapitiya1:10:17

       That's, that's an example of people essentially lying in public-

Episode duration: 1:12:32