All-In PodcastE117: Did Stripe miss its window? Plus: VC market update, AI comes for SaaS, Trump's savvy move
EVERY SPOKEN WORD
150 min read · 30,091 words- 0:00 – 1:04
Bestie intro: Jason's Japan trip!
- CPChamath Palihapitiya
Check out, what, uh, what time is it over there?
- JCJason Calacanis
Well, we started at 8:00 AM, so now it's 8:28. It's 8:28, I'm gonna be out on the slopes at 11:00.
- CPChamath Palihapitiya
Yep.
- JCJason Calacanis
So I'll be out there skiing. I'm in Niseko, uh, in Japan. You have to take a quick flight to Sapporo, uh, Sapporo, and then you drive two hours into the mountains. Yesterday, I cat-skied. There's an abandoned ski mountain-
- CPChamath Palihapitiya
By the way, in honor of you, I grabbed a Sapporo from the fridge today.
- DFDavid Friedberg
Oh, wow.
- CPChamath Palihapitiya
While we were there. Yeah.
- JCJason Calacanis
Oh, very nice. This whole week's episode brought to you by... So they drive the cat ski up, and then you ski down, and it's all fresh tracks. So it's at literally an abandoned ski resort, you know, during the financial crisis here.
- CPChamath Palihapitiya
I- I just asked you what time it was. That's all I asked you. (laughs)
- DFDavid Friedberg
(laughs)
- JCJason Calacanis
It's called small talk. It's called banter.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
I thought you might be interested in your bestie's life, but apparently not.
- CPChamath Palihapitiya
What's going on?
- DFDavid Friedberg
So let your winners ride.
- CPChamath Palihapitiya
What's going on?
- JCJason Calacanis
Rain Man, David Sa-
- CPChamath Palihapitiya
What's going on?
- DFDavid Friedberg
And they said we open sourced it to the fans and they've just gone crazy with it.
- CPChamath Palihapitiya
Love you, man.
- JCJason Calacanis
Ice skating.
- DFDavid Friedberg
Queen of Quinoa.
- 1:04 – 23:07
Stripe's precarious situation: Did it miss the window? Breaking down its $4B tax bill, slowing growth curve, enterprise vs SMB customers, scalability issues, and more
- CPChamath Palihapitiya
What's going on?
- JCJason Calacanis
Let's get to the show. Everybody wants to hear the show. A lot of news going on and... I, you know, in our industry, there's been a big discussion about RSUs and stock options, both the cost of these things and then there's another issue of people staying private for too long. If you remember, uh, for folks listening, Airbnb, Uber famously took over 10 years to go public. People like, uh, Bill Gurley wrote about this, "Hey, you should get public when the window is open." Obviously, the window is closed right now or largely closed, Stripe, now, people are speculating they missed their window. They have a $4 billion tax bill due to cover expiring employee RSUs, those are restricted stock units, and at the same time, Foursquare, uh, a company from the Web 2.0 era, this is, you know, 10, 15 years ago, uh, when they were a very popular check-in software, mobile location app, they are going to let their previous employees' stock option grants expire, according to the information. They issued these options in 2016, seven-year window before expiration. More than 100 former employees will be impacted and some of them are the very early, uh, team members. And this employee, uh, stock option problem is becoming a-acute because, hey, you, people waited to go public.
- CPChamath Palihapitiya
Basically, what happens is you grant an RSU, which is effectively W-2 income when it's realized, with an expiration date, but that expiration date forces you to be public so that that RSU can be exchanged for value, and that's like a 10-year window. So then these guys have to go in and modify that date and push it out by another four or five, six years or whatever. That is a deemed event by the IRS that then creates withholding tax issues.
- DFDavid Friedberg
Right.
- CPChamath Palihapitiya
So you then have to, you then have to withhold tax on behalf of the employees. And so that collective number is the $4 billion that Stripe is trying to raise.
- JCJason Calacanis
According to a leaked pitch deck, uh, Stripe implied they needed $2.3 billion in capital by the end of Q1 2023. They're working with Goldman Sachs to raise a few billion at a $55 billion valuation, that's down 42% from the peak of $95 billion in 2021. One wonders, if they had gone public, what their valuation would be right now.
- CPChamath Palihapitiya
Can we just say real quick why this matters, Jacob? Like-
- JCJason Calacanis
Yes. So anyway, why does it matter ?
- CPChamath Palihapitiya
Yeah. Why does this, why does this all matter?
- JCJason Calacanis
Yes.
- CPChamath Palihapitiya
Like, why do we care?
- JCJason Calacanis
Thank you. That's where we're getting to.
- CPChamath Palihapitiya
I posted a link. This is a 2013 interview that Zuck did with Michael Arrington of TechCrunch. And if you go all the way back, the apprehension to go public was one thing that we really anchored to a lot at Facebook in the early days. And at the time, I don't know if you guys remember, but there was these arcane laws around the number of shareholders that you could have. And I think the issue specifically was that after 500 shareholders, you have to publicly release your financials. And so we did all kinds of things to make sure we never hit the 500 cap, and we tried to push the IPO date as far out as possible, because we thought that it would keep people more focused. And then in 2010 or '11, and I've told this story a couple times, one of the things that I was advocating for pretty aggressively was trying to launch a mobile operating system to compete with iOS and Android. And we had put together all this work and brought in Intel and AT&T and all these people, and it came down to the fact that we needed a couple billion dollars to float this thing, and we didn't have that money. So the only solution to that would have been to go public, but it wasn't the right moment in time and Zuck wasn't comfortable with it. A year after going public, one of the things that he said publicly in this TechCrunch thing was, "Wow, I should have just gone public sooner. It did- it wasn't nearly the bad thing that I thought it was going to be." And when you look subsequently at how much money they've spent in AR and VR, spending half of quarters of that cash could have given them the chance to disrupt Android and iOS in 2010 and '11, which, in hindsight, is obviously a no-brainer bet, right? So even though I think we at Facebook were the ones to really put this in the water table, about not going public, I think a lot of startups should have gone back to first principles to really question whether waiting as long as possible actually makes sense. So I was curious about the Stripe situation, so I asked my team to do a little bit of work on, how would you value this thing if it were going public? And the interesting thing about Stripe is that it operates in a really transparent middleman business. So what's interesting about Stripe is that so many of the people in the ecosystem are public. And so what that means is you can build a pretty accurate mosaic of how well or not well that business is doing by interpolating all the other data from all of these other companies that are public and are forced to report. And so there- there's, like, a couple of really interesting things that jump off this page. And so the first thing that we did was we looked at, what does the future profitability look like-... acts of growth. And what's interesting is that you look at companies like Visa and Mastercard that are doing quite well and have done really well for a long time, but you look at this outlier in Adyen. And Adyen is probably the most obvious competitor to Stripe. And the thing that is demonstrated here is how incredibly profitable this business is, and how much operating leverage they have, which means their op ex is relatively constrained, because it turns out-
- JCJason Calacanis
Will you explain the X and Y axis here, just so people who are listening can understand the chart?
- CPChamath Palihapitiya
Sure. So if, if you take the market cap on the X-axis and divide it by their sales estimate, you get a multiple of the enterprise value to their sales.
- JCJason Calacanis
Got it.
- CPChamath Palihapitiya
And if you look at the 2024 estimated EBITDA margin that they're forecasting, acts of their long-term sales CAGR, what you start to get a sense of is the operating leverage that this business has. And so all of this basically nets out to three interesting takeaways. When Stripe got underwritten at $96 billion, it's this data point right here where, you know, you see a Stripe previous round, right?
- JCJason Calacanis
5X enterprise value to, divided by 2024 sales estimate.
- CPChamath Palihapitiya
Divided over their, their long term, their long term EBITDA, exactly, by their sales estimate. And then if you look at the $55 billion valuation, it's down. So what it looks like is happening is, appropriately so, people are doing the right thing, which is they're re-rating the stock, right, by approximately But what's interesting is not where they are in terms of where they used to be, but the interesting thing is where they are relative to their most obvious competitor, Adyen. So Nick, pl- please bring up the next one. So this is where things get really interesting, because we looked at what was Adyen and what was Stripe's GMV per employee a couple of years ago before all hell broke loose in the private funding markets. And what you see is they were pretty equivalent businesses, and they had roughly the same amount of employees. But this crazy thing happened, which is that if you look at the gray bar, this is the number of employees that Stripe has, it went crazy, from a little over 2,000 to almost 8,000. So a, a four-
- JCJason Calacanis
Wow.
- CPChamath Palihapitiya
... axing of employees in two years.
- JCJason Calacanis
Four ax in 24 months. They added s- 6,000 people. Just pause for a second on that. 6,000 people in 24 months and 700 days or so.
- CPChamath Palihapitiya
Right.
- JCJason Calacanis
Th- three people a day?
- CPChamath Palihapitiya
And if you do the same calculation for Adyen, it shows that they a little bit less than grew by about 75%. And then if you look at the growth of GMV and you impute how productive is each employee, basically this is the, the story of what's happened to Stripe and Adyen, which is that Adyen has found operating leverage, right? So they've found and maintained incredible profitability, and Stripe has added an enormous number of employees. Now, the question is why, right? So it turns out that these guys at the top line are growing roughly the same, except Adyen actually takes meaningfully less on a per transaction basis than Stripe does. And the reason is that Adyen services these large head customers. Think big, bulky folks that have huge amounts of transactions and so as a result have pricing power. And Stripe has some of those customers as well. In fact, they just announced that they're gonna process a large portion of Amazon's payment volume. But what's happened at the same time is that those kinds of deals aren't necessarily that profitable. And so you have to hire a lot more people to build a lot more features so that you can generate revenue from the long tail of customers, all of these SMBs. And this is the tale of these two companies, which is that Stripe has some head customers, but many, many, many tail customers. Adyen has mostly head customers, fewer tail customers. And so the leverage in the business is that Adyen has most of these employees in Europe where the cost of these folks is much, much cheaper and they have less than half the number. And so as both of these companies continue to grow, you have one that has maintained and frankly raised their long term profit projections because they see it in the business even at lower transaction costs, and Stripe which is having a little bit more trouble. So s- I thought it was a really interesting expose. The, the takeaway for me is that if you were sitting inside the company, and obviously hindsight is 20/20, the most profitable thing they could have done from an enterprise value perspective would probably have been to go public in 2018, 2019, because they could have raised max value at max valuation, cleaned out all these options issues, and have a huge balance sheet of cash with which to do stuff, whether it's acquisitions or other things. Because the thing that I struggle with is, is there going to be long term profitability in all of these tail products? Because if you look in the SaaS ecosystem, and Sax will hand the ball to you, there's companies building all this other stuff and these point products are probably pretty good too.
- JCJason Calacanis
Sax, what do you think about Adyen going after the fat part of the long tail and then Stripe going after the long tail, having many more customers?
- DSDavid Sacks
Well, I think they're both viable strategies. And I mean, I've actually written about this. I wrote a blog some time ago called Enterprises Versus SMBs: Who's The Better Customer For B2B SaaS Companies? And I think the sort of old school traditional view is that enterprises were always the best customers because they have the biggest budgets, that translates into the biggest annual contract values or ACVs. This provides the highest ROI on sales efforts. So now you can make a sales driven distribution strategy pencil in the first place. The prospects are easy to identify. You know, after all, if you're going after the Fortune 500, you can just make a list of the 500 companies. So, I think the traditional gold standard was-... sort of the head, like you're saying, Jason, the enterprises. However, I think in recent years, it's become more popular to pursue the Stripe strategy of the sort of more SMB.
- JCJason Calacanis
Why is that more popular?
- DSDavid Sacks
Well, because first of all, startups are, uh, the SMBs are more early adopters. So when you're a startup-
- JCJason Calacanis
Ah.
- 23:07 – 29:40
Lessons for founders: How ZIRP can skew CAC and LTV calculations, burn multiple
- CPChamath Palihapitiya
So Sacks, what, what does this moment tell you for founders, a lot of the listeners here, and capital allocators in terms of assessing businesses for the last, and this will pivot into our next story, the last couple years, you know, if you were a first time fund manager, you were investing in 19, 2019 to 2021, high valuations, those, those funds, are they ever going to be able to throw a profit? And then people were investing in those based on momentum, logo chasing. This is now back to, you know, sharpening your pencils, Bill Gurley style of investing, yeah?
- DSDavid Sacks
Yeah, I mean, we've talked about it before. There's nothing new here. When you're in a boom, the only three things that matter are growth, growth, and growth. And when you're in a downturn, the three things that matter are growth, burn, and margins. It's not that growth stops mattering, it's just that people also care about burn and margins. And, you know, the companies that fare the worst are the ones that have inefficient growth, that, that basically have burned a lot of money to grow. They have, you know, low or negative gross margins. They are burning way too much money. The burn multiple doesn't make sense. Basically, the ratio of money burnt to net new ARR that they're adding, those companies get called out when all of a sudden you have regime change like we're seeing now.
- CPChamath Palihapitiya
CAC is one of the early signs of this. Uh, Chamath, you and I saw that. Remember AOL was sending-
- DSDavid Sacks
CAC came back, yeah.
- CPChamath Palihapitiya
... DVDs everywhere and CAC became...
- JCJason Calacanis
... two or $300 for every AOL subscriber, and then they were playing this funny accounting game. I don't know if you remember this, Chamath, where they were saying, "Hey, the LTV is like five years for an AOL." They were looking back at that number, not forward with broadband coming. And so like, "We can totally spend $300 on TV ads to get a dial-up customer at 24 a month." And boy did that whipsaw them. So I, I, listening to everybody talk here, I'm just like, wow, keep your eye on the CAC, folks. The customer acquisition cost, how much you get, you spend to get a new AOL, Netflix, or SaaS product or a Stripe customer is critically important.
- DSDavid Sacks
We look really closely at CAC payback, you know, how many months does it take to, to pay back the cost of acquiring a customer? We don't look at that exclusively though, because you know what? Expenses go into... CAC is highly dependent on your accounting.
- JCJason Calacanis
Unpack that for a second, 'cause there's the money you spend on a Facebook ad or a LinkedIn ad or any other great platform for driving, you know, customers to sign up for it. But explain-
- DSDavid Sacks
Yeah, if you spend it-
- JCJason Calacanis
... yeah, the nuance of accounting.
- DSDavid Sacks
Yeah, you spend money on an ad or you spend money on a salesperson, obviously that goes into CAC. But then what about sales operation headcount? Does that go in? Is that ops headcount or is that sales headcount? Is that customer acquisition?
- JCJason Calacanis
Mm.
- DSDavid Sacks
Or is it something else? So there's a lot of, like, subtle accounting decisions that can have a big impact on-
- JCJason Calacanis
Fun with numbers.
- DFDavid Friedberg
Yeah.
- DSDavid Sacks
... that number. Well, this is why, this is why I've always recommended just looking at burn multiple. What I really want to know is, is how much money is this startup burning in relation to how much revenue it's adding? Just like the ratio of those two things.
- JCJason Calacanis
So this month-
- DSDavid Sacks
'Cause it's nowhere to hide.
- JCJason Calacanis
... we burned a hundred... Yeah, so-
- DSDavid Sacks
Yeah, this is nowhere to hide.
- JCJason Calacanis
... this month we spent $300,000 and we burned $100,000 and then we added $100,000 in new customers ARR. Uh, so that's 1X. So that you have on your chart here, burn multiple of 1 to 1.5 or under 1 is amazing or great. But if you burn 200,000-
- DSDavid Sacks
And I, I warned-
- JCJason Calacanis
... and added 100,000... Yeah.
- DSDavid Sacks
I warned founders going into this year, do not have a burn multiple greater than two, because there's just so many headwinds right now that what happens is if you end up missing your revenue forecast, your burn multiple is going to look terrible. It could shoot up to three, four, five and up. So it's better to have some cushion by going into the year being super efficient.
- JCJason Calacanis
On the converse side, Friedberg, if your lifetime value of a customer is incorrect, which we're seeing now with people canceling SaaS products or reducing the number of seats or in cloud computing, people are now saying, "Hey, maybe I should take myself out of the cloud and host my own servers or some of my own servers and reducing their cloud bill." Cloud, uh, growth is slowing at Azure across the board. Amazon Web Services, et cetera. It's the, the... It's still growing, but it's slowing, the growth. So that LTV, if you get that wrong, that can whipsaw you as well. Yeah?
- DFDavid Friedberg
Yeah, I mean, LTV, which is like, what do you make over time from a customer or however you want to assess it, um, a market deployment, it should be on kind of net cash. Meaning like how much profit do I pull back into my bank accounts at the end of the day after paying third parties and internal people? And where a lot of people, I think in models I've seen on, you know, what's the, uh, lifetime value of a customer? They kind of take either revenue or just the simplified gross profit number. But the reality is, if you're scaling the number of engineers you need because you have many more customers and you got customer service calls and, you know, you've got to do custom deployments with your customers, all of that kind of adds up to additional cost. And some of these businesses, you see that, the, the SaaS companies, for example, that all have gotten their multiples hammered. It's because the kind of microscope has come out at this point to, to some degree set aside general macroeconomic factors that are driving some of the multiple compression. But as the microscope has come out, it turns out that the efficiency of the business is not what everyone hoped and dreamed a SaaS business might be. That the efficiency of the business maybe looks a little bit more like either a services business or there's a big kind of scaling hardware component that the margin that you actually make for every dollar of revenue generate fundamentally is smaller than, you know, what you think it is. You have to add people to support and ops and new servers and all the stuff you're highlighting. And a lot of that's excluded. And then it doesn't take... Uh, you don't realize all that when you're small or when you're medium and growing, you realize that when you're bigger. When you're bigger, you're like, "Oh wow, how do we get these costs down?" Well, if we cut these costs, customer quality would decline, customers would churn, all this bad stuff would happen. So yeah, that LTV number is generally not right, and that's why I say it's much more about kind of a true ROIC calculation, which is how much capital am I deploying? And it's not just being deployed in marketing dollars, it's being deployed in other ways. And then how much capital am I making back net profit over time? And I think that's the right way to always analyze a business generally. But like particularly in businesses where it's easy to obfuscate either of those numbers and make it seem like it's an extraordinary business, you can get hurt when you get bigger or when you're scaling. And in a market like this where you're trying to go public, it's like, "Whoa, that really hurt." You know? So I think that's a lot of what
- 29:40 – 39:05
VC market update: ZIRP mistakes, VC as a "must-have" asset class for LPs, how the 2021 vintage can be saved
- DFDavid Friedberg
we're seeing.
- JCJason Calacanis
Let's talk about the other side of the table, Chamath. We've been living through a zeroest, zero interest rate hallucination. Basically, people were growth, growth, growth, logo, logo, logo, whatever. When they're making these bets, capital allocators now, we're back to brass tacks. Okay, what's the margin? What's the lifetime value? And is this actually real? Is there a real business here or is this just a grand hallucination? That hallucination e-exists not on, only on the founder's side, but on the capital allocator side. This week we had a, uh, interesting semi-viral thread on, uh, Twitter. Somebody named Tyler Tringas, he's an early stage investor, don't know who that is, but he did a thread predicting a 16Z, just to pick out one firm, was a zero interest rate phenomenon, uh, and an incredible machine to accumulate AUM, assets under management. And so what were your thoughts just...... writ large on the capital allocator side of this grand hallucination of zero interest rates.
- CPChamath Palihapitiya
I mean, I think it's a little unfair. I think this was written more just to try to generate views and clicks because-
- JCJason Calacanis
Okay.
- CPChamath Palihapitiya
... you have to see the underlying return data to really have a sense of knowing. Is it... I think it's fair to say a couple of things, that there was probably two and a half or three years of capital raised in the industry. That's gonna get really put under pressure. And the reason is that there is not a lot of time diversity in that money, meaning people got it and they put it into the ground right away. And one of the principles of having a more predictable return, set of returns over time is that you leverage time, right? So if you had $100 and you wanted to have a diversified stream of returns, you're much better off spending a dollar a month for 100 months versus $10 a month for 10 months. So just, that thing will cause a lot of impact and headwinds for a lot of the capital in 2021 and 2022. Then the other thing you have to keep in mind is that over many cycles where we've had high rates and low rates and medium rates, our industry typically returns a dollar 60 for every dollar it raises. And that's over many cycles, and so if you believe that we're gonna revert to the mean, out of the trillion dollars we've raised, maybe we'll return 1.6 trillion. Now, that sounds good, except the problem is that 1.6 trillion is marked at five and a half trillion. (laughs) So you're gonna have to give back-
- JCJason Calacanis
So there's a lot of pain.
- CPChamath Palihapitiya
You're gonna have to give back a lot of paper profits in order to get back to that 1.6 and be okay with it, and the question is, what has happened in decision-making in the meantime? Meaning how many people did you hire? How many deals did you do that you regret? And then how does it change your psychology in how you treat the next investment that comes over the desk? Can you separate yourself from these bad losses and not be on tilt and make a good decision?
- JCJason Calacanis
Mm. So you had a terrible two-day session like Phil Hellmuth did last week, losing $350,000. Can you play the next week and not be on tilt and start to build back your stack and make 30,000 a night for 10 nights or 10 of the next 20 sess- 15 sessions or whatever it is? Sax, you had a rebuttal or something you wanted to add to this?
- DSDavid Sacks
No, not really a rebuttal. I mean, look, I think if you're gonna be intellectually honest about it, I think that 2021's gonna be, is gonna likely be not a great vintage for VC. Why?
- JCJason Calacanis
Oh, that's an understatement. Yeah.
- DSDavid Sacks
Because the valuations were just... yeah, the valuations were just really high. They've come down by, what, at least 50% on average, maybe more?
- JCJason Calacanis
More.
- DSDavid Sacks
Maybe more.
- JCJason Calacanis
I mean, 50% now, but you still have more medicine to take, I think, when you look at some of these businesses, right?
- DSDavid Sacks
Maybe, but, you know, a lot of these companies are growing into their valuation. Look, I think for any given set of companies, for any portfolio, the most important thing is what's in the portfolio. So if in 2021 you had the founding of the next Google or whatever, that effect is gonna swamp the effective price levels in that year because of the power law. Again, the number one most important thing is just what's in that portfolio, what's in that basket. The second most important thing is the entry prices, and obviously if the entry prices are twice as high in a given year than they are in every other year and twice as high as what the exit multiples are gonna be in 10 years when that portfolio becomes liquid, that's gonna hurt the returns. But we won't know which of these effects predominates until five years from now when we see, you know-
- CPChamath Palihapitiya
More, yeah. I mean, when I saw that tweet thread, I thought maybe this is an issue for some venture firms, but we're not gonna see even the inklings of it for another five or seven years.
- JCJason Calacanis
Takes a while, yeah.
- CPChamath Palihapitiya
That's a problem that may manifest itself in year 10 and between now and then, any firm that has a good track record of returning capital or frankly has a good brand and good marks will still raise an inordinate amount of money because this is an asset class that I still think on the margins is a, more of a must-have asset allocation than a, on the margins, I'd just rather ignore it. Because it, you know, it is the future of, of how GDP will get created and so everybody kinda has to pay attention.
- DSDavid Sacks
Imagine if in 2021 the, you know, the next great mega outcomes in AI were created, right? Because those founders were just slightly ahead of the curve, you know, they were like a couple years ahead of the curve. If those create, you know, the next whatever trillion dollar companies-
- JCJason Calacanis
Google, Apple, Uber, whatever.
- DSDavid Sacks
Then the fact that price levels were 2X what they should have been won't matter.
- CPChamath Palihapitiya
Yeah.
- DSDavid Sacks
What'll really matter is the distribution. There'll be a, a bunch of bad portfolios and there'll be some really incredible ones, and that's the way it always is with venture.
- CPChamath Palihapitiya
The thing to keep in mind is in '21 and '22 rates were still effectively too low, and I think we did this analysis, Nick, you can throw up that thing, but it's not correlated with big outcomes, those vintage years. 2023 is the, is the first vintage year where we're actually starting to see high enough rates that have historically generated that kind of return, and so I do agree with you, David, I just think it's shifted out by a couple years, '23, '24, '25. Those can be some real power law years, I think, because we're gonna have, just based on what the Fed is saying, five and a half percent interest rates for the foreseeable future, which is, it's a huge, it's a huge number. The risk, that's a huge risk-free rate.
- JCJason Calacanis
I'll tell you what that is. You know what it is though, Chamath? I think to build on your point, and Friedberg, I'll bring you in on, after this, it creates an environment in which discipline on all sides of the table, boards, management teams, investors, rank and file, everybody has to be focused. Everybody has to have sharpened swords, and that little bit of headwind is... and the, the ability to raise capital being harder-... is building more reserve and more resilience and grit in this set of founders. It's kinda like parenting in a way, like if you are too permissive, you give too many options, kids aren't disciplined. And now this group of entrepreneurs I'm seeing who haven't given up, my lord, are they becoming animals in terms of ... Like pure samurai in terms of how they're running these businesses. Anything that's not efficient, projects that were the third or fourth most important project, cut, cut, cut. Now it's taking them 18 months, Freyberg, to maybe get discipline, but maybe you could speak to the next three years and the opportunity for investing in this cohort. Because, man, that last cohort is gonna be really, really challenged, and they'll probably do 6% returns just like your money market account can do right now, (laughs) five or six, or what bonds can do. But this next group, man, we're seeing dogged entrepreneurs who are focused on reality, and there is no hallucination now that this is gonna be easy. There is no grand delusion here. Uh, what are you seeing in the market with founders?
- DFDavid Friedberg
To your point about ... If, if the market average return in venture in, in early stage investing is gonna be 6%, remember it's, it's not evenly distributed. So, you know, 80% of funds could end up having net negative real returns and 20% make money, and then those, there'll be a very few that will make real money. And, you know, that's the, the nature of having, you know, a very kind of low average return on the industry is there may be a lot of wipeouts on, on the investor class, folks that have only had one or two funds and then just got blown up in the cycle. Um, I think that there's two groups of companies out there. One is companies that obviously have been funded and are doing stuff and are active businesses and they've raised money in the past, and that's where there's gonna be really ugly times. I've mentioned this in the past, but I do think that there's a significant number of these companies that if they were to be truly valued on first principles in private markets today, they'll get valued as, at a value that's less than their preferred equity, which means that there's a difficult restructuring needed in the company and not everyone's gonna be willing to embrace that. So, that's what's gonna trigger a lot of the wipeouts in the market. It's not like the businesses are valueless, it's that the capital structure makes it difficult to refund them, uh, to fund them and continue their, their operations. Now, for all the new businesses, as you highlight, man, there's so much extraordinary leverage out there, you know, left and right (laughs)
- 39:05 – 55:16
AI's outsized impact on SaaS and real-world businesses
- DFDavid Friedberg
I think we talked about this maybe a year ago, that there was a big bubble coming in AI. But I mean, left and right, in nearly every market, every segment, you won't see a pitch deck that doesn't have those two letters in it.
- DSDavid Sacks
Right.
- DFDavid Friedberg
Uh, I mean, I'm sure you, you guys find the odds check-
- DSDavid Sacks
No, I tell you, it does feel ... It is hard not to feel like you're a little bit of a lemming if you buy into the AI stuff.
- DFDavid Friedberg
(laughs)
- DSDavid Sacks
But I will say that the use cases we're seeing are really-
- DFDavid Friedberg
Unbelievable.
- DSDavid Sacks
... pretty incredible.
- DFDavid Friedberg
Totally.
- DSDavid Sacks
I didn't feel this way with the last couple of waves. Like, the whole Web3 thing never totally made sense and crypto always felt a little bit speculative, like, kind of unsure. But the AI thing seems like it's gonna deliver real value. And I'm seeing, like, already three major enterprise use cases. Number one is just auto summaries, like being able to summarize very quickly a thousand articles or a meeting. You know, spitting out a, like, a summary of what just happened in a meeting. And it can break it down between a recap and action items. It just does all the work for you. The second thing is, like, in-app customer service, kind of like a Copilot, but there's no reason to contact customer support anymore because you can just ask the AI inside the app and, like, why would you ever-
- JCJason Calacanis
And the AI will get it right.
- DSDavid Sacks
... contact customer support?
- JCJason Calacanis
And they'll be faster, right? That, that's something where it's-
- DSDavid Sacks
The AI is like a power user-
- JCJason Calacanis
... so narrow sacks. Yeah, they'll get it right.
- DSDavid Sacks
It's like a power user who's sitting next to you, it's your copilot, and is making you much more effective in the app. And then the third thing we're already seeing is autocomplete for everything. I mean, it is, like, bonkers how ... You know how you get little type ahead suggestions in email?
- JCJason Calacanis
Yeah.
- DSDavid Sacks
And it's, like, two or three words? The AI's gonna be able to do type ahead for any content type, paragraphs at a time-
- JCJason Calacanis
To-do lists.
- DSDavid Sacks
... to-do lists, tables. It's, so-
- JCJason Calacanis
It's bonkers. You see it in Google Sheets now, like if you type, you know, "equals sum" it's like, "Oh, here's what the seven most likely things to happen next are." In which case it's kinda like ... You use the chess.com app, I don't know if you've used it with the heads up display where it's showing you the different moves and this is a book move versus this is not a book move. Go ahead.
- DFDavid Friedberg
Let me make a prediction. All of the things that you guys said I think are incredible consumer surplus business opportunities, which means that the ultimate winner is us. And we're gonna become-
- JCJason Calacanis
The consumer-
- DFDavid Friedberg
As you said-
- JCJason Calacanis
... or the VC?
- DFDavid Friedberg
The consumer. No, the consumer.
- JCJason Calacanis
Got it.
- DFDavid Friedberg
Incredibly, incredibly productive and more leveraged in how we spend our time, which will allow us to do all kinds of other interesting things with all the time that we save. That I think is almost now a certainty. The problem with consumer surplus businesses is oftentimes there is no money made in the funding of them.
- JCJason Calacanis
Mm.
- DFDavid Friedberg
And really where the money is made isn't enabling it. So for example, so far what I would say is there's very little money that has been made in AI. There's been an enormous amount of money that's been made by NVIDIA. And the reason is because they are the pick and shovel provider in th- into the industry. And so that's an example. AMD I think can also benefit. So, the silicon players seem pretty obvious here. Maybe some of the cloud players. Um, the problem is that cloud players are trapped inside of other big companies with many other business models. But I just wanna put out there that I think, David, you're right that the consumer 100% wins, but economically it's not clear to me that there is a winner that is venture fundable-
- 55:16 – 1:00:29
Advice from Steve Jobs on customer-first product development, Section 230 update
- JCJason Calacanis
I... Here's a really important clip for founders. Uh, play the Steve Jobs clip. This is super important when looking at Web3 versus AI, to Sax's point.
- NANarrator
You've gotta start with the customer experience and work backwards to the technology. You can't start with the technology and try to figure out where you're gonna try to sell it. And I've made this mistake probably more than anybody else in this room, and I've got the scar tissue to prove it, and I know that it's the case. And as we have tried to come up with a strategy and a vision for Apple, um, it started with, what incredible benefits can we give to the customer? Where can we take the customer? Not, not starting with let's sit down with the engineers and, and figure out what awesome technology we have and then how are we gonna market that. Um, and I think that's the right path to take.
- CPChamath Palihapitiya
Can I ask you guys a question? I sometimes, I go down these rabbit holes. I'll watch hours and hours of Steve Jobs clips. What do you think makes him so calm? Doesn't he just strike you as incredibly just, like, calm and, like, comfortable with himself and just aware?
- JCJason Calacanis
I know what it is.
- CPChamath Palihapitiya
What is it?
- JCJason Calacanis
He was so much better and aesthetically building product than anybody else. He, when you think of that PC era of no taste, beige boxes, and everybody having no style and just no swagger, he was studying, you know, German design, Buddhism, tripping on acid, and, like, just understanding the universe at a level that Gates and the other contemporaries weren't. They just weren't as transcendent in understanding product design as he was. So it was like when you were saying you were playing poker with a bunch of four-year-olds or something, that's the analogy. He's just on such a different level that he's watching people make, you know, AS/400 and, uh, you know, IBM PS whatever, like, just garbage computers, garbage operating systems, and it's just like...
- CPChamath Palihapitiya
The thing is, like, if you look at any era, just the way that he communicates, there's just a level of calm. I don't know how to describe it. It's-
- JCJason Calacanis
Sax.
- CPChamath Palihapitiya
You understand what I'm trying to say? Like, he, he just seems like he just sees through all the noise. Like, he's seen through the matrix. Like, he's unplugged himself.
- JCJason Calacanis
Sax is unimpressed.
- CPChamath Palihapitiya
Okay, there you have it then.
- DSDavid Sacks
No, I'm very impressed with Steve Jobs. I think he understood product development better than anybody else.
- JCJason Calacanis
Yeah, clearly that's it.
- DSDavid Sacks
I mean, uh, my favorite Steve Jobs passage is the one where he describes the John Sculley disease. Do you guys remember this?
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
No. Oh, here it is. "You know, one of the things that really hurt Apple was after I left, John Sculley got a very serious disease. It's the disease of thinking that a really great idea is 90% of the work, and if you just tell all these other people, 'Here's this great idea,' then of course you can go off and make it happen. And the problem with that is that there's just a tremendous amount of craftsmanship in between a great idea and a great product."
- CPChamath Palihapitiya
Yeah, so true.
- DFDavid Friedberg
Yeah, I mean, I-
- DSDavid Sacks
Yeah.
- DFDavid Friedberg
... tell people it's like a rugby scrum. You go, you know, you gotta get a whole team to get the ball down the field. It's not like one person put the ball down the field. And, you know, they kind of maybe suggested a play, but once you're on the field, everything changes and everyone's involved in getting it down the field.
- DSDavid Sacks
That, uh, quote's where the name for Craft Ventures comes from.
- JCJason Calacanis
Oh, really?
- CPChamath Palihapitiya
Oh, little known fact.
- DSDavid Sacks
Yeah.
- CPChamath Palihapitiya
I didn't know that.
- DSDavid Sacks
Yeah.
- JCJason Calacanis
Section 230, we talked about last week, the Gonzalez versus Google case. The justices heard oral arguments and plaintiffs seemed to fare poorly. Quote from SCOTUSblog, "Justice Elena Kagan suggested that even if Section 230 is not well-suated to address the current needs of today's internet, such as, such a task was best left," as we predicted last week, I think, Sax, you did, "best left to Congress rather than the Supreme Court." Quote, "These are not, like, the nine greatest experts on the internet," Kagan observed. Sax, your thoughts?
- DSDavid Sacks
Yeah, I mean, this is just, uh, I think really a quick update to what we talked about last week. The justices heard oral arguments. They seemed to be very skeptical of the plaintiff's arguments. Even Justice Thomas, who has written the most skeptically in recent years about the broad immunity that tech companies enjoy under Section 230, seemed surprisingly sympathetic to the theory that the Ninth Circuit Court ruled on, which is that Section 230 protects recommendations as long as the provider's algorithm treats content on its website similarly. So, even the justice who I think was most likely to reign in 230 seemed to be more comfortable with what the defendant, which was Google, was saying. So it looks to me like Google and big tech are gonna win this one.
- JCJason Calacanis
Any thoughts, Jeremiah?
- CPChamath Palihapitiya
No, not really. I think...
- 1:00:29 – 1:14:24
Trump's savvy visit to East Palestine and 2024 strategy, Biden's visit to Ukraine, China's position
- CPChamath Palihapitiya
I wanna know what you guys think about Trump showing up with Big Macs and water in East Palestine.
- JCJason Calacanis
(laughs)
- DFDavid Friedberg
(laughs)
- CPChamath Palihapitiya
I mean, he is a, he's a-
- JCJason Calacanis
Wow.
- CPChamath Palihapitiya
... media genius. He beat Buttigieg to East Palestine.
- DFDavid Friedberg
Yeah.
- JCJason Calacanis
That was unbelievable.
- CPChamath Palihapitiya
I literally... Pull up my tweet.
- JCJason Calacanis
I think this is the power... We, uh, we... Because Trump has been out of the public discourse-
- CPChamath Palihapitiya
He's a media savant.
- JCJason Calacanis
... for two years.
- CPChamath Palihapitiya
He's a media savant.
- JCJason Calacanis
He is a media savant-... literally, Biden is in Ukraine, saber rattling over air sirens that may or may not be true.
- DSDavid Sacks
They were fake.
- JCJason Calacanis
Who cares?
- DSDavid Sacks
They were fake.
- JCJason Calacanis
Who cares anyway?
- DSDavid Sacks
Well, no, no, I think, I think-
- JCJason Calacanis
It doesn't matter. It doesn't matter.
- DSDavid Sacks
No, we don't know. No. Oh, no, we do. We do. We do, actually.
- JCJason Calacanis
How do you know you were there?
- DSDavid Sacks
We address that. Okay, because-
- JCJason Calacanis
Well, someone go to the background. Tell the background.
- DSDavid Sacks
I don't need, I don't need to be... Hold on a second. I don't need to be there because Jake Sullivan participated in a press conference and he was asked by a CBS News reporter if the US gave the Russians any kind of heads up that the President was going to be in Kyiv. And what Sullivan said-
- JCJason Calacanis
Yeah.
- DSDavid Sacks
... and I quote is, "We did notify the Russians that-"
- JCJason Calacanis
Yes.
- DSDavid Sacks
"... President Biden will be traveling to Kyiv. We did so some hours before his departure for deconfliction purposes." You know what deconfliction is?
- JCJason Calacanis
Right.
Episode duration: 1:31:31
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