All-In PodcastE120: Banking crisis and the great VC reset
EVERY SPOKEN WORD
160 min read · 31,882 words- 0:00 – 1:35
Bestie intro!
- JCJason Calacanis
All right, everybody. Welcome to the All-In Podcast. And with me again this week, the Sultan of Science, the Prince of Panic Attacks, the Queen of Quinoa, David Friedberg, the Dictator, Chamath Palihapitiya, wearing a beautiful Mr. B sweater, and David Sacks, the Reign Man himself.
- CPChamath Palihapitiya
Thanks for coming to my Loro Piana dinner on Tuesday, J Cal. Love you for that.
- JCJason Calacanis
That was wonderful, thanks. Uh, at least one bestie showed up for you. Wonderful, wonderful dinner. I sat as far away from the Loro Piana people as possible in the arranged seating. Thank you for that. I guess, maybe (laughs) you were like, "I'm gonna contain the damage." (laughs)
- CPChamath Palihapitiya
Bernard Arnault said, "Put, put the all caps guy at the end," and I said, "Okay." (laughs)
- JCJason Calacanis
Yeah. He still heard me.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
I was like, "Chamath!"
- CPChamath Palihapitiya
It was so loud. (laughs)
- JCJason Calacanis
"What's the amuse-bouche?"
- CPChamath Palihapitiya
David Friedberg: J Cal's joke at, at dinner, every time he said something, he yelled like he was in all caps. (laughs) It was so funny.
- JCJason Calacanis
(laughs) Chamath!
- CPChamath Palihapitiya
He's like, "I want another butterscotch pudding!" (laughs)
- JCJason Calacanis
The butterscotch pudding is delightful, Sean!
- CPChamath Palihapitiya
Oh, my god.
- JCJason Calacanis
Sean's like, "I'm, I'm four feet away from you, but J Cal, y- you can take the caps lock."
- CPChamath Palihapitiya
Sean was so embarrassed. Chef Sean Crushed it. Chef Sean Crushed it. It was great.
- JCJason Calacanis
Sean Crushed it once again.
- DSDavid Sacks
Were you sounding alarms when the restaurant, like, almost ran out of something? Alert, alert, alert!
- CPChamath Palihapitiya
(laughs)
- DSDavid Sacks
Restaurant is running low on coffee.
- JCJason Calacanis
We're dangerously low on caviar on this white asparagus.
- DFDavid Friedberg
What's going on here? Let your winners ride.
- JCJason Calacanis
Rain Man David Sacks.
- DFDavid Friedberg
What's, what's going on here? And I said- We open source it to the fans and they've just gone crazy with it.
- JCJason Calacanis
Love you, bestie.
- DFDavid Friedberg
What's going- Queen of Quinoa. What's going on here?
- 1:35 – 5:39
Recapping the events of the past week
- DFDavid Friedberg
- JCJason Calacanis
All right, everybody. Welcome to the pod, where we, uh, you know, try to inform you. We try to make some jokes here. I just wanna make what is, uh, a little bit of an opening statement here. It's not an apology and it's not a victory lap in any way, but there has been a lot of attention, I think, on the last episode of the pod and perhaps some tweeting from two of the four besties this past weekend. I saw, and I, you know, I'll let you speak for yourself here, Sacks, and we're gonna get into the timeline of what's occurred and then what are potential outcomes here and solutions to the banking issues that we've witnessed in what is a week since the bank run on Silicon Valley Bank and the shutdown on Friday. But what I saw and again, speaking only for myself here, was absolutely terrifying up close and personally, watching people pulling money out of banks and watching people have to set up loans to hit their payroll. And this was like one of those surreal moments in a, in a movie, where like a meteor is coming towards earth and you see it in the telescope and nobody else sees it, or only a small number of people in the observatory see it. And I think part of the reason people listen to this podcast is because we are insiders and, speaking again just for myself, I'm always trying to be exceptionally candid and transparent with the audience. Additionally, I make jokes. (laughs) So sometimes you might laugh during this podcast, or you might laugh when you're reading my tweets. And, uh, that's part of what I do. Now, I also realize that we have an audience now that is larger than I think any of us expected for this podcast. Uh, certainly magnitude larger than I expected. And frankly, I didn't know if this podcast was gonna make it past 50 or 100 episodes. And my Twitter following count doubled since we started this podcast, and I think it's 80% due to this.
- CPChamath Palihapitiya
Well, that's because you tried, that's because you tried to ruin the pod.
- JCJason Calacanis
(laughs)
- DSDavid Sacks
(laughs)
- JCJason Calacanis
I think it was because of the caps locks. But anyway, putting all that aside, what I would like to say as well is like we are living in a situation that is unprecedented. I think the alarm bell I sounded, you know, was because I saw a fire. We'll get into the timeline here. But I sounded that alarm bell after Silicon Valley Bank was put into receivership and when I saw additional bank runs occurring. I wouldn't change it. I think these were the right, the right thing to do was to inform folks. Now, I did use all caps perhaps a little too much. That was a little bit of a bit. If people didn't understand that, maybe I need to adjust my communication style now that this thing is so popular. But I stand by my mode of operating in the world, which is, I always want to be candid with people. I always want to tell the truth. And yeah, sometimes I, I make jokes about life and, you know, dealing with these stressful situations. That's it. It's not an apology. Uh, it's more of an explainer. And yeah, maybe I need to adjust the caps lock or, or how I deliver stuff. But I stand by the message of what I said. And I think it's important for us to maybe look at the series of events and misinformation that has spread, because there are people literally blaming venture capitalists for the bank run that is now systematic and the, the balance sheets of multiple banks around the world. And I think, Sacks, it'd be great for you to maybe just comment on the week that was and the timeline of events.
- DSDavid Sacks
Yeah.
- CPChamath Palihapitiya
So as usual, you're not apologizing.
- JCJason Calacanis
No, absolutely not apologizing. But will recognize that this platform is bigger and that maybe on the margins I could adjust my communication strategy. But, Chris, there's a lot of people who don't know that I make jokes and maybe people don't understand when I'm joking and when I'm serious. Right? And so-
- DSDavid Sacks
Right.
- CPChamath Palihapitiya
Jason, what would you change?
- DSDavid Sacks
(laughs)
- CPChamath Palihapitiya
Was there anything you'd change?
- JCJason Calacanis
Chamath, I think I might not have used a Mad Max image and gif about the end of the world, 'cause people are too stupid to understand that's a joke in a fictional movie.
- CPChamath Palihapitiya
(laughs)
- DSDavid Sacks
(laughs)
- CPChamath Palihapitiya
I see. So you find yelling effective?
- JCJason Calacanis
It depends.
- DSDavid Sacks
Well, J Cal, I agree that I don't think you have anything to apologize for in terms of the substance of what you're trying to get across. I personally could have done without the all caps.
- JCJason Calacanis
It was a bit. (laughs)
- DSDavid Sacks
Well, yeah. What you're basically saying is nobody should listen to you because you're not that important and I wholeheartedly agree with that.
- JCJason Calacanis
(laughs) No, I'm saying understand I might make a joke. Consider me more in the-
- DSDavid Sacks
Yeah. Of course, of course.
- JCJason Calacanis
... Bill Maher category.
- 5:39 – 32:55
Understanding the banking crisis
- JCJason Calacanis
Yeah.
- DSDavid Sacks
All right. Let's, let's go back, let's go back and look at the timeline, 'cause there are now serious accusations, and I would call it really scapegoating of- and it wasn't just you, it was me and Bill Ackman. In fact, the Wall Street Journal editorial board, which I respect a lot, mischaracterized what me and Ackman were trying to do in terms of drawing attention to a regional banking crisis in progress, a run on the banks. They called it spreading panic. I don't know how you tweet or publicly discuss-... a run on the bank that's currently happening that needs to be addressed with an immediate federal intervention. I don't know how you can discuss it without then having someone else mischaracterize it as trying to spread a panic. But J-CAL, the, the Wall Street Journal editorial board didn't mention you, so you're off the hook.
- JCJason Calacanis
Okay, good. Fair enough.
- DSDavid Sacks
I don't... They, they didn't know who you were, but-
- JCJason Calacanis
Thank you. Thank you (laughs) . Thankfully.
- DSDavid Sacks
But, uh, but no, but seriously, so I went back and looked at the timeline of all of this. And so first of all, we have to understand that this banking crisis now has, uh, swept in five banks, five bank failures. First, there was Silvergate, but everyone dismissed that because it was some weird crypto bank. Then it was SVB, but everyone sort of dismissed it 'cause they said it was based on panicky VCs rather than a systemic problem in the banking system. Then it was Signature Bank, which got seized on Sunday, which I think utterly refuted the idea that this was just a Silicon Valley problem. Then you had the Feds step in and backstop, um, First Republic, which would have been the next domino to fall if it wasn't backstopped. And then five, you had Credit Suisse basically a- again avoid an outright failure because they got backstopped by the Swiss government. So, we now have five banks in roughly a week, and these are not small banks. They're... Credit Suisse is a, is a GSIB, a Globally Systemically Important Bank, and the other ones are top 20, top 30 type banks. We're talking about hundreds of billions of dollars in deposits. So clearly, there's a larger phenomenon going on here. And frankly, it's being caused not by like anything VCs did because VCs are just depositors. We're just one class of depositors. And depositors are not to blame for what's going on here. What's going on is that these banks have huge unrealized losses on their balance sheet and the losses have come from the sudden spike in interest rates. That's what's going on. The sudden spike in interest rates is because we've had the most rapid Fed tightening cycle in our lifetimes. In the last year, the Fed funds rate's gone from roughly 0 to almost 5%. That has broken a lot of things. And the banks which have broken first are the ones that had preexisting problems and they had horrible risk management, but that's who gets broken first in a stress test, right, is the most poorly run banks, the ones with preexisting issues. But just because they went first doesn't mean that others don't have similar kinds of issues. Now, I'm not saying this in any way to be panicky, maybe those banks will be fine, but there are larger issues in the banking system that are worth talking about. And to the point about-
- JCJason Calacanis
And if you work backwards-
- DSDavid Sacks
... whether VCs could have spread this, J-CAL-
- JCJason Calacanis
Yeah.
- DSDavid Sacks
... you're absolutely right about the timeline. I mean, I went back and checked. I personally never tweeted anything about SVB until Friday afternoon-
- JCJason Calacanis
Yeah.
- DSDavid Sacks
... when SVB was already in receivership and the run on the bank had already started with Signature and First Republic and we could see it with our own eyes. And then this pod didn't drop, the one where we talked about this problem, didn't drop until Saturday morning when the banks were already closed. And by Sunday night, the Fed had acted and basically implemented our recommendations, which was to basically intervene. So, I don't know how you can blame... Uh, this search for scapegoats, I think, is getting out of control, and it's just not factually accurate.
- JCJason Calacanis
And, you know, the, it's convenient to make tech, which is hated right now, Chamath and Friedberg, y- you know, the scapegoat, venture capitalists, obviously the, the part of tech that people might hate the most or the easiest target. But let's talk about the Fed raised those rates because of inflation and inflation happened because of out of control spending due to COVID and then th- the second administration. So you had a Republican administration that spent a lot of money and then a Democratic administration, Chamath, that spent a lot of money. So maybe we could even go backwards from Fed fund rate going, you know, (laughs) what looks like parabolic when you look at the chart. Maybe you could speak to what got us to the Fed making those decisions, Chamath or Friedberg?
- DFDavid Friedberg
Maybe I can just do a little cleanup on what Sacks said. I think-
- JCJason Calacanis
Sure.
- DFDavid Friedberg
... the issues at Credit Suisse are different than the issues at First Republic. And the issues at First Republic are different than those other three banks. The other three banks, David, that you mentioned, Signature, Silicon Valley Bank, and Silvergate, all had very traditional liquidity crises, right? We talked about this last week, which is duration mismatching where you have depositors who want their money today, but you have assets that mature in 10 years. And as a result, you have huge unrealized losses if you all of a sudden cash them out today versus waiting 10 years. I think what's happening at First Republic is really just about making sure that that loan book and the depositors can get parked into a combination set of banks that can take care of the balance sheet so that there are no more liquidity issues. At Credit Suisse, they have an enormous amount of liquidity. What that was, was I think a lot of speculation around whether they would default on their bonds or whether they would theoretically need more liquidity. But the balance sheet itself was not only liquid, but also very solvent. So I think that was just more of a panicky reaction to comments from a 9.9% shareholder who just said that they can't put in any more equity. But even then, I went back, this is the chairman of the Saudi National Bank. He was asked on Bloomberg, "Would you give Credit Suisse more money?" And he had a very reasonable answer, but it was snapshotted in a very awkward way. The first sentence was, "Under no circumstances." Would he do that? Okay. Now if you stop there, you could be panicked, but the rest of it made a lot of sense, which is he said, "Look, in Saudi Arabia, if we go above 10%, we have to go through regulatory approvals domestically and there are regulatory approvals abroad. That's a big hill to climb and all of a sudden it no longer becomes a financial investment, it becomes a somewhat political investment. And so we're very happy at 9.9%." That was the totality of his statement, but if you just cherry pick the first 45 seconds and ran with it, which people on the internet did, this is sort of what caused that second level wave panic at a GSIB. And then the Swiss National Bank stepped in and I think that that panic has largely gone. Okay, so-What is the real issue? The issue, again, is I think we have had a bit of supervisory failure here, right? Because w- we all know this in any industry, if you let capitalism go totally unchecked, shareholders will demand immediate profits today. It happens in every industry, except in ones where you can basically gamble on future profits, and that's what tech does. But every other shareholder in every other asset class demands money today, and that's the same for banks. The problem is, the banks are a highly regulated business. They are supposed to be supervised by the regulators, and this is a very clear example where, why is there not a real-time spreadsheet? I mean, this is not complicated stuff where assets and liabilities and duration mismatching can be known on a real-time basis, where the San Francisco Fed, Mary Daly, should have a report that's escalated to her when SVB got over their ski tips, which they did in Q4 of 2022. So I think the real question that has to be examined is, where were these folks for the last four months when they could have done something, not just about this, but rules in general for all banks that are not the G-SIBs? And I think that's a very-
- JCJason Calacanis
Okay.
- DFDavid Friedberg
... important question that politicians need to get to the root of.
- JCJason Calacanis
Friedberg, we, uh, discussed this article from Seeking Alpha, which came out on, let me get the exact date here, December 19th. Title of this Seeking Alpha story is, "SVB Financial: Blow-Up Risk." And the summary, in three bullet points, says, bullet point one, "Potential losses in loan portfolios could severely impair book equity." Number two, "Unreal- unrealized losses in hold-to-maturity portfolio already equal to book equity." Number three, "Funding environment for startups with pressured deposit base adding even more pressure to the balance sheet," in other words, startups spending money to cover their burn rate. Friedberg, and obviously we had the Dodd-Frank rules lessened or loosened, uh, under the previous administration, and that specifically was driven by Silicon Valley Bank. They had a big part in that. So looking back on this, and, and people do want to place blame, let's talk about the effects that occurred, 'cause this was hiding in plain sight, literally in December, in an article that looks like it was written by somebody who went into a time machine and said, "How do I warn people in December about this?" Maybe you could talk about the Fed's interest rates, the spending, and what led up to this-
- DSDavid Sacks
Look-
- JCJason Calacanis
... issue with the banks.
- DSDavid Sacks
You guys remember when we started this podcast three years ago? We were like, "They're gonna shut down the economy. There's gonna be crazy second and third-order effects of doing that. No one knows what they're gonna be." Here they are, and I think that's, like, the root of what is a rippling effect. You can't shut down the global economy and stop trade and stop people and have the government step in to write a giant check, and not expect that you're gonna have to cash that check at some point. That's effectively what I think we've been kicking down the- the road here. The way we initially tried to resolve the problem was to drop rates to zero, and then spend our way, you know, back to a growing, supported economy, and then overshot, ended up with, you know, too much stimulation, too much stimulus, too-low a rates for too long, responded too quickly, whiplashed back. At the end of the day, there was a giant gaping hole blown into the global economy when we shut down the world from COVID. There's no blame. It's just what happened. And when that happened, there was a massive cost that had to be borne at some point. And it's gonna get borne at some point. And the rippling in a pond, you don't know where the ripple is gonna hit, what part of the pond, what leaves it's gonna hit. That's what's going on still. And it's such a dynamical system, it's so hard to say with linear certainty, "This is what should be done and what could have been done and what they should have done at the time." No one had that predictive capacity back then. They did what they needed to do. People thought that they should have stim- dropped rates. They said we should have written all these big stimulus checks. Some people said you shouldn't. Some people said you did. Certainly, some people are being proven right, and some people are being proven wrong. But at the end of the day, the economic loss that was realized at that period of time, we're still trying to get out of it, and we're still recovering from. And I think that's a big part of what's being eaten up right now. And you're gonna see it in the wipeout of certain equity. You're gonna see it in the wipeout of these banks, of the assets that they hold and, and these portfolios. And the effects of that are obviously, you know, still being felt.
- JCJason Calacanis
Sax, do you agree that mistakes, that th- this, uh, there isn't somebody to blame? Because it is clear that the Fed said, "Inflation is transitory," that was wrong, and then they went faster than in history to raise the rates. Those seem like two glaring mistakes. And then the Todd- the Dodd-Frank loosening under Trump and with Silicon Valley Bank pushing them, that seemed like a really big mistake.
- DSDavid Sacks
By the way, I wasn't saying the Fed's not to blame for not raising rates fast enough.
- JCJason Calacanis
Okay.
- DSDavid Sacks
That- that was, 'cause you guys remember, I was the first person to talk about-
- JCJason Calacanis
Sure.
- DSDavid Sacks
... what Stan Druckenmiller had said, that they're not raising rates fast enough, that we've got massive inflation. We should have been raising rates. I was the first person on the show to be, you know, barking that. So don't- don't forget, like, I was there-
- JCJason Calacanis
Okay.
- DSDavid Sacks
... like pretty early. What I was pointing out was like, we shut down the economy during COVID, the global economy.
- 32:55 – 54:20
Solving the global debt problem, righting the ship
- JCJason Calacanis
But just going forward, how do we keep the ship from taking on water if we do have a cannonball hit it again?
- DSDavid Sacks
Oh, we got a hard, that's a hard equation to solve. We got a lot of demands-
- JCJason Calacanis
Clearly, that's why I'm asking you. That's why I'm asking you what your suggestions are. (laughs)
- DSDavid Sacks
We got a lot of demands. We got a lot of, a lot of demands for money. You guys see, I, I think there's a lot of things that are, seem unrelated that are all pretty related right now. There's a massive protest underway by labor in France. There's a massive protest underway in the Netherlands. There's strikes on the Underground in London. When we talk about global debt and US debt, we often, I don't think, account for all the debt, which also includes promissory obligations made to a workforce, a global workforce that's been working for decades. Individuals that have spent their whole lives committed to some company or to some government working, with the expectation that they're gonna retire and have some benefits paid to them. And there's this massive underfunding of those benefits and those pools of capital. We very quickly talk about unfunded pension liabilities, but when you actually kind of account for the number of people and the amount of capital that those people are expecting, that the workforce, the global workforce is expecting to be paid to them in retirement, both public and private, it's a massive amount of money that's not funded today. And you start to see the cracks in the system when that population says, "My pension payments are not keeping up with interest, with inflation," or when there's a threat that pension payments or retirement benefits are gonna kick in at a later age, or you're not gonna get them fast enough, or you're not gonna get as many as you thought you were gonna get. We have that problem in the United States in the form of Social Security and these underfunded pension liabilities. That is the critical macro tension in this equation that I think drives the real problem that's gonna come to a head at some point. We blew a hole in the, in the, in the boat, but we're also forgetting that there's, like, a massive amount of weight that's gonna drop on the boat. And I think that it's a really hard equation, uh, to solve. We can talk about keeping banks solvent and all this sort of stuff. At the end of the day, the central bank, it appears, in the United States and probably globally, it's gonna be one big bank, right? They're basically (laughs) gonna take on the whole balance sheet themselves and, and at the same time, you've got a lot of folks saying, "I want to get paid more. I have obligations due to me." And guess what? You know, Jason, to your important statements historically about the importance of democracies, ultimately, you know, the members of that democracy are gonna say th- this, this is a benefit that, that the majority are owed, and that's gonna pull things out. I think the only stopgap, l- I'll just say one thing, the only stopgap in the next decade is gonna be significantly higher tax rates in the United States. I, I don't see how you're gonna fulfill the tension gap that's underway right now with respect to where productivity is going and where capital markets are going and where the demands are on the system from people requiring additional capital to come out to them without taxing assets away from the asset holders. So this would be corporations and high net worth people, and I think that's why you see this Biden proposal. We may not like it, but at the end of the day, it's gonna be the only way to create a stopgap that's, that's, that's gonna avoid-
- JCJason Calacanis
Well-
- DSDavid Sacks
... massive inflation in the near term.
- JCJason Calacanis
Reducing spending-
- DFDavid Friedberg
I, I see the Biden proposal.
- JCJason Calacanis
Hold on. Hold on one second.
- DSDavid Sacks
Let me just say, the only other way, the only... I'll just say one more thing, Jake, I'm gonna go. The only other way besides, you know, a massive long-term tax regime to fill the hole would be some extraordinary productivity gain. And this is where we can all have a hope and a dream and an investment and e-effort around technology.... AI automation, people think that they're threats-
- JCJason Calacanis
Energy.
- DSDavid Sacks
... ... job. Energy. But if you can get energy down below, uh, three cents a kilowatt hour and you can scale its production by tenfold, if you can automate a lot of, uh, labor, if you can get AI to do a lot of stuff that we do today, productivity will go through the roof. The economy will grow fast enough to get out of the debt bubble and meet all of these liability obligations.
- JCJason Calacanis
So there are-
- DSDavid Sacks
So that's why-
- JCJason Calacanis
... three ways-
- DSDavid Sacks
Yeah, so-
- JCJason Calacanis
... just to summarize.
- DSDavid Sacks
... that's why I think, I think, uh, to me, to me, that's the long term. The medium term is going to be this tax stopgap, this very high tax stopgap. And then the short term is going to be all the shenanigans that we're talking about.
- JCJason Calacanis
Okay, I'll go to you in a second, Sacks. So just to recap, there is actually a third way too. There are three ways productivity, as you very astutely point out, and we, we just highlighted some of the ways productivity could help, whether it's energy, AI, et cetera. The second is, of course, increasing taxation on the people who are at the top of the pile, uh, would be the likely solution. The third is also austerity, cutting spending in some way. But let me also propose one thing here. As we look forward to what do people want out of a bank and how should startups or just individuals deal with bank runs and their trust in banks, to Chamath's point, I've been- I was thinking about this over the weekend and in this discussion that we would have based on a lot of things you said, Sacks, which was people just deposited their money and they don't have the ability to assess if a bank is solvent because the FDIC can't do it and it's their full-time job. It's their mandate to make sure these banks are solvent. So how is a consumer going to be able to do that or even a startup founder or even a sophisticated investor like Ackman or any of us-
- DSDavid Sacks
Yes. Yes.
- JCJason Calacanis
... if we're, in fact, sophisticated. So let me pause for a second here and posit something. We don't want a bank. We want a bank vault. Consumers do not want their deposits to be used for shenanigans, just like many people would rather pay for a social network than have their privacy data sold. So I think we should bifurcate banks into bank vaults and banks. Banks can do what they want with your deposits, you get free checking. But what I want in a bank, what I want my startups to use, what I want my venture firm to use is I want to pay the bank for services. Whether it's 10 basis points, 25 basis points, $500 a month, I would rather see my startups pay $1,000 a month in banking fees, $2,000 a month on banking fees for $2 million, whatever it is, and pay for each check, pay for wires, pay for white glove service, whatever they choose, but not allow the banks to take that money and loan it out or do things with it. I just want a vault. And I think a vault service is what the majority of consumers want. And given what we're seeing with two insane bank run bailouts in our lifetimes as adults, for those of us who are in Gen X, 2008 and now, we would rather pay for services, and I, I leave it to you, Sacks. Is this a potential solution? 'Cause I don't hear anybody saying, "Give me a bank vault." And why does that service not exist in the world?
- DSDavid Sacks
Yeah, look, what people really want are, they want a service provider who gives them the ability to make payments, which if you're a small business is payroll and payables, things like that. They want a money market fund to basically earn interest and, um, and they want all that to be safe. I mean, it's, it's very simple. The idea that when you go open a checking account at a bank that you are making an unsecured loan to that bank, that is not something that any consumer or small business understands. That whole model I think is completely obsolete and outdated. And what I heard so many people say, and I think this is not sincere, I think it's just because they hate tech, is that depositors should take it on the chin because somehow they made a stupid decision when they opened a checking account. It's like, are you kidding me? Listen, what, what do you want the process to be? You want consumers and small businesses when they open a bank account to have to review the financial statements of that bank, try to figure out all of their disclosures, where their assets are, whether they have toxic assets on the books, and if they don't do a good enough job doing that, if they're not smart enough to do that, then you want them to be disciplined. This is the word that I kept heard being used, is we need to discipline-
- JCJason Calacanis
The punitive, yeah.
- DSDavid Sacks
... the depositors.
- JCJason Calacanis
Yeah.
- DSDavid Sacks
The depositors are not in a position to evaluate the balance sheet of these banks. That's what the feds are supposed to do. That's what the regulators are supposed to do. That's what Moody's-
- JCJason Calacanis
Yes.
- DSDavid Sacks
... is supposed to do. And you're telling me that a bank that had an A rating from Moody's the week before and had an FDIC seal of approval, that somehow they got it wrong and the feds got it wrong, but the customer-
- JCJason Calacanis
In related news.
- DSDavid Sacks
... is supposed to get it right? I mean, come on, that's ridiculous.
- 54:20 – 1:08:36
VC market update: Founders Fund splits its eighth fund in two, Sequoia's reported returns, YC cuts its growth-stage team
- JCJason Calacanis
uh, split up. Should we move on to some of the other pressing issues? There was, uh, a really interesting Founders Fund story about them breaking their, uh, latest fund in half, and then there is Stripe closing their funding. Which one would you gentlemen like to go to, or a different story on the docket?
- DSDavid Sacks
I think there are, there are four things that are very interrelated-
- JCJason Calacanis
Okay.
- DSDavid Sacks
... in startup land. So Founders Fund took their... Just to make the math simple, 'cause I'm gonna get the numbers not exactly right, but like, a $2 billion fund that they're gonna break into two $1 billion funds. So I think that's one story.
- JCJason Calacanis
It's a $1.8 billion fund. They're gonna break it into two $900 million funds. It's their eighth fund. It's being cut in half, and it'll become eight and nine.
- DSDavid Sacks
I think what that speaks to is valuations and the marks that we think we have for existing companies and the future value that smart investors like to see.
- DFDavid Friedberg
All roads lead to, it's as, we're in for a slog and so trying to put a $2 billion fund to work doesn't seem to make a lot of economic sense to some of the smartest people in the room. So that's, that's that. The second thing is-
- JCJason Calacanis
And just one note there, it says according to Axios, Peter Thiel led this charge and he is, uh, the, the contrarian's contrarian. He was the one, according to Axios, that led that cut of the fund size with some at, uh, Founders Fund, according to the reports, opposing him.
- DFDavid Friedberg
I'll say the, I'll say the more important thing, which-
- JCJason Calacanis
Uh.
- DFDavid Friedberg
... and Peter and I are on the same... We're the largest LPs in our funds. And so, you know, as the largest LPs in our funds, I think this is a no-brainer decision. Number two, Stripe basically takes a 50% haircut, which is the single best run, most highly valued company in Silicon Valley. Again, that's going to eviscerate-
- JCJason Calacanis
Private company, yeah.
- DFDavid Friedberg
... a lot of TVPI in a lot of people's portfolios, a lot of theoretical money that LPs were gonna get. I think the third thing is, there's a person that went and filed a FOIA request at UC Berkeley to get Sequoia's returns and it turns out that the best investor in the game, quote unquote, since 2018 has not really done that well. And I think in the University of California invested over $800 million in Sequoia since 2018, and I think has returned, what? Some 40 million bucks on that number. And then the fourth, which just came out today, is that Tiger wrote down the value of their private book by 33% for 2022. And so, you know, I think Tiger's AUM basically has gone from 100 billion to 50 billion in a year.
- JCJason Calacanis
There's one more note to add to that. YC basically let go of their growth team this week, Y Combinator. Uh, for people who didn't know had, what was called the Continuity Fund, they were doing late stage investing and that got cut.
- DFDavid Friedberg
Oh my gosh.
- JCJason Calacanis
Which is a signal, uh, and, and the 17 employees are gone now. And Gary Tan, I think is making the right decision. You know, they have to focus on what they're great at, which is the earliest stage of the company, and they had conflicts with this one.
- DFDavid Friedberg
Well, this is... Look.
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
This is the most interesting thing for me in the following way. I think the Y Combinator unicorn hit rate is 6%, right? So every 100 companies that come out of YC, which costs only about $10 million to seed, right? Six of them become worth a billion dollars or more, and obviously some become worth much, much more. And so if you see how difficult it is, even for a growth fund that's attached to that funnel, to be successful and make money, because obviously if this thing was turning cash, you would not have cut it. That, I don't, I don't think anybody would do that. So I think it was a very challenging strategy at a challenging moment in time. And so I applaud these guys for having the discipline to do it. But if you take them all in totality, it is a complicated place in venture capital and startup land. Holy mackerel, like-
- JCJason Calacanis
It's a reset.
- DFDavid Friedberg
A, it's tough to make money. B, a lot of folks may not know exactly what they're doing. C, a bunch of valuations are totally wrong. And D, we're gonna have to start doing the cleanup work now of resetting all of it, which just takes years, as you guys remember in 2000.
- JCJason Calacanis
Hard reset.
- DFDavid Friedberg
It took us, it took us five years to fix this.
- JCJason Calacanis
Yeah, it's a hard reset. Sax, what, what do you, when you look at these in totality-
- DSDavid Sacks
Yeah.
- JCJason Calacanis
... what would you say?
- DSDavid Sacks
Well, I agree with what Chamath just said. I mean, it is gonna be a hard period with a lot of resets, a lot of restructuring, a lot of cap tables. There's a lot of mess to clean up. All of that being said, I think I'd rather be an investor today than an investor two years ago or one year ago, because at least the valuations have corrected to some degree. And then also we have this really interesting AI wave happening now, and there's a lot of opportunities to invest in that new, you know, cycle. So at least there's like an interesting product cycle that's getting me excited to go to work and see these new demos from all these different companies. Whereas, you know, you go back a year or two and just the product innovation doesn't seem as world changing as it does now. So I think that as bad as things are, my guess is that the new vintages of VC are gonna be better than, you know, call it 2021 for sure.
- DFDavid Friedberg
That's not gonna be a high bar. (laughs)
- DSDavid Sacks
(laughs) It's not a high bar, but still.
- JCJason Calacanis
Well, I-
- 1:08:36 – 1:24:56
Science corner: Superconductors
- JCJason Calacanis
everybody's been begging for a science corner. Enough about the chaos in the world. Everybody wants the sultan of science to tell us and educate us about something. And, uh, Sax needs to use the loo anyway, so let's do a science corner here. Room temperature superconductors. You sent me a link. I read the abstract of this paper, and, uh, I ch- I don't know which language I need to put this into Google Translate (laughs) , but I couldn't understand any of it. So please (laughs) ... I literally read the abstract, and I was like... I, I couldn't get through the first two sentences without having to start doing searches.
- DSDavid Sacks
Okay. I'll start with just, like, the simple explainer on superconductors.
- JCJason Calacanis
Please.
- DSDavid Sacks
Um, you know, materials that conduct electricity are called conductors. So conductors, electrons move through them, like a copper wire. That's how electricity flows. And all conductors have some amount of resistance, meaning not all the electrons kind of flow through at a perfect rate. They bump into the atoms in the material, in the wire, and they generate heat. You know, if you've ever felt a wire while electricity is flowing through it, it gets hot, right? So that's because the conductor has some resistance, which means the electrons bump into the walls of the atoms in the material. They generate heat, and you lose electricity. You lose energy. You lose power. And so in 1911, it was discovered when mercury was reduced to a very, very cold temperature that there was a point at which the material conducted electricity with absolutely no resistance. So the electrons flowed through the material, completely unbounding, un... You know, not bouncing into the material, not generating any heat. And having no resistance mean you're losing no power in transmission of that electricity, but a number, number of other super interesting effects occur. Number one is that magnetic fields now reflect off of that metal perfectly. So if you put a magnet... Have you ever seen that image of a... And, Nick, we could probably pull one up in the YouTube video. We put a magnet on top of a superconductor. It actually floats because the magnetic field, like, the north and the north push against each other, and it floats up. So superconducting materials kind of became this fascination in the early 20th century that, oh my god, if we can actually make materials that superconduct, there are all these amazing benefits. One of the benefits is you could have no loss in electricity being transmitted. Today, 15% of power is lost in the transmission from the power station to your home. You could also do interesting things like create maglev or frictionless trains that float, you know, like magnets floating off the ground on top of a superconducting track. And by having no friction, you could push the tra- the train once, and you wouldn't need to use any energy to move it along. So you could have basically powerless transportation. You could have really powerful new microprocessors. So if... A superconductor microprocessor instead of a traditional semiconductor microprocessor would use just 1% of the energy of a semiconductor microprocessor. Think about that. All the AI stuff we're talking about, all the chips that we're talking about, dropping the energy needs by 99% if those chips were made from a superconducting material. And one of the more interesting applications of superconducting materials could be infinite battery storage. So you could take a superconductor, turn it into a coil, and the electricity would just flow through it infinitely because it would never turn into heat. And then when you're ready for that power, you just plug in, and you get the power out. The actual loss of energy in a superconductor battery, less than 5%. And that's compared with, you know, significantly more energy loss used in chemical systems. And you wouldn't need to kind of get all the materials that we're struggling to get now to generate batteries. So the idea of generating, like, superconductors in industrial scale has always been super interesting. Today, the way that we generate superconducting materials is we have to make a material super, super cold. In 1987, a physicist named Qu developed one of the first ceramic superconductors where they discovered a new way of generating superconductivity. It wasn't just taking a metal and cooling it down very, very cold 'cause when you get it very, very cold, the atoms stop moving and the electrons inside pair up, and it's called Cooper pairing, and they flow through. And he said, "We could actually do this with a hotter temperature," and he demonstrated this in a ceramic, yttrium barium copper oxide, super confusing name. But basically, he took a bunch of materials and baked them in an oven, and they turned into this really interesting material that became superconducting. And then the race was on 'cause what he did is he made a superconductor that could superconduct at the temperature of liquid nitrogen. And liquid nitrogen is really cheap, so we can just use... And that's actually how all MRI machines run today is you have superconductors that reflect the magnetic fields in the super- in the MRI machine, and they're using liquid nitrogen to stay cool. And so there's a lot of industrial applications today that use superconducting materials using liquid nitrogen. But in order for us to do all the stuff I mentioned, like maglev trains and infinite battery storage and superconducting microprocessors, we have to get superconductors... We have to discover a material that can superconduct at room temperature so that we can sit with it in a computer on our desktop, or we can have it run on a railroad track, or, you know, we can put it in our backyard to store energy.And there's been this race and there's all these different classes of materials that physicists and material scientists have spent decades trying to figure out what can super conduct at room temperature. We started with metals, you know, copper, and we tried carbon nanotubes and fullerene tubes. We had all those, these different ceramics, like, like, it was... like I talked about. And there have been literally tens of thousands of ceramics that people bake in ovens and try and see how superconducting they are. Basically, you take the material and you cool the temperature and you measure the resistance, and as soon as it hits superconductivity, boom, there's this magic moment where it drops to zero and it becomes superconducting and there's this big changeover effect. So everyone's trying to find that temperature which it can happen at room temperature. And people have found superconductivity on the surface of DNA and organic molecules, but you can't scale that. People have found, you know, uh, superconductivity on all these weird kind of material on the surface of things, but no one's ever been able to industrialize it. In 2015, there was a new kind of material called a hydride, which is basically taking a, a thin metal and putting it in hydrogen gas and kind of baking it for, for a couple of days, and the hydrogen sticks to the metal, and then you would use this hydride as a new kind of, um, uh, conductor. And hydrides, it turned out, had really good superconducting potential. They would superconduct at room temperature, but they needed super high pressure, so you'd actually have to leave them in, like, something that's like hundreds of times the pressure of the atmosphere. And so that, that's not really technically and industrially feasible either. So this guy named Ranga Dias published a pa-paper a couple weeks ago that got a ton of press and a ton of controversy, and basically he said, "Look, I've got this new hydride and, uh, it's... I've got this really, you know, weird metal that no one ever talks about and I've baked it with this, um, with hydrogen gas, and this hydride can actually superconduct at, you know, room temperature and at only one gigapascal." Which is still greater pressure than room temperature, but it basically starts to show on the chart of are we getting there, can we actually get there, that maybe we are. And so this paper was published in Nature a couple of weeks ago, and it got a ton of, uh, a ton of coverage because everyone's like, "Oh my gosh." The problem is this particular individual, you know, the, the, the lead, uh, researcher Ranga Dias on the, on the paper, he's pretty controversial because he made a room temperature superconducting claim back in 2020 in a paper he published in Nature. And after he made that, that claim, a lot of scientists tried to replicate what he did and they were not able to, and then the, the journal retracted his paper. And he had a method that he took data noise out of the measurement system he was using, and the way that he took the data noise out, people said, actually skewed the results and made it look like it was superconducting when maybe it wasn't. And he actually had a, a talk that he did, uh, that was published on YouTube a year later where he said he raised $20 million from Sam Altman and Daniel Ek and a bunch of other investors, and it turns out that also wasn't true. And then he came back and said, "Well, I didn't actually raise the money. I was talking with them about raising the money." So this guy's kind of a sketchy character in the space. But the temperature at which he was able to generate or claims to have generated, and he did get peer review and did get published, a, a superconductor is, is at room temperature, it's at slightly high pressure, but if it's real and it does get repeated, it's one of the next steps that we're almost gonna be getting to this point of true room temperature superconducting materials. And then this whole industry will blow up. Transmission lines, battery storage, maglev trains, superconducting microprocessors, you know, many new industries can and will emerge from this material discovery if it's proven to be real. So, you know, it's a super interesting storyline. A lot of people in the material science world and scientists, chemists, physicists are kind of going crazy about this. And there was a, um, a survey done by Quanta Magazine and half the scientists were like, "This is bullshit." And the other half was like, "This is gonna change the world." So we don't really know yet where this is all gonna settle out, but I thought it was worth kind of talking about and bringing it up, because if room temperature superconductivity is really realized in the next decade, it's another one of these kind of black swan technology discoveries that we, none of us are thinking about right now, but it totally transforms all these markets and very quickly kind of increases, like we were talking about earlier, productivity, makes renewable energy super, super cheap, makes computing power 99% less power-intensive, AI chips will explode using this technology. So a lot of super interesting applications if room temperature superconductivity comes to light. Super interesting story. I thought we should share it and talk about it.
Episode duration: 1:30:04
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