E135: Wagner rebels, SCOTUS ends AA, AI M&A, startups gone bad, spacetime warps & more

1. 0:00 – 2:45

   Bestie intros: Friedberg fills in as moderator!

   1. DFDavid Friedberg0:00

      This is going to be a feisty episode.

   2. JCJason Calacanis0:03

      Is it?

   3. DFDavid Friedberg0:04

      Two of us are on Greenwich Mean Time, two of us are on Pacific. J Cal's still asleep in his head.

   4. JCJason Calacanis0:10

      I'm good actually.

   5. DFDavid Friedberg0:11

      You good?

   6. JCJason Calacanis0:12

      I'm good.

   7. DFDavid Friedberg0:12

      All right. Well, great to be back. Welcome to the All Conspiracy podcast, where we repeat false statements and help spin them into tales of struggling against the establishment, the elite, and the mainstream media. We will deliver to you, the people, the revolution against the powers that be.

   8. CPChamath Palihapitiya0:28

      Unless it offends (censored) .

   9. JCJason Calacanis0:30

      (laughs)

   10. DFDavid Friedberg0:30

       (laughs)

   11. JCJason Calacanis0:30

       In this case, ...

   12. DFDavid Friedberg0:31

       Mums the word.

   13. CPChamath Palihapitiya0:32

       Beep. Beep. Beep.

   14. JCJason Calacanis0:34

       Still trying to get my invite for next week.

   15. DFDavid Friedberg0:36

       All right, we also enjoy-

   16. CPChamath Palihapitiya0:37

       Mums the word, Friedberg. Mums the word.

   17. JCJason Calacanis0:39

       Woo-hoo.

   18. DFDavid Friedberg0:39

       Mums the word. We'll also enjoy sharing with you fantastic stories of opulence-

   19. CPChamath Palihapitiya0:43

       Let's be neutral.

   20. DFDavid Friedberg0:45

       ... opulence, leisure, and benevolent greed. Here we go. Joining me today are my co-hosts, General David Sacks, commander of the-

   21. JCJason Calacanis0:51

       (coughs)

   22. DFDavid Friedberg0:51

       ... Fourth Battalion of the Internet Tweet Brigade. General, welcome. Joining us from a remote location.

   23. JCJason Calacanis0:58

       In Moscow.

   24. DSDavid Sacks0:58

       Has there been, like, an establishment takeover of the pod? I mean-

   25. JCJason Calacanis1:01

       Yes. (laughs)

   26. DSDavid Sacks1:02

       ... what, what's up with this intro?

   27. JCJason Calacanis1:03

       Yeah.

   28. DSDavid Sacks1:04

       Every argument they make against us, you're basically just conceding is true.

   29. JCJason Calacanis1:07

       Yeah, I know. Exactly.

   30. DFDavid Friedberg1:08

       From his 12th century Mediterranean castle, Il Duce, Chamath Palihapitiya. Welcome, Chamath. How is the Mediterranean diet treating you?
2. 2:45 – 23:15

   Wagner Group rebellion

   1. DFDavid Friedberg2:45

      Obviously, you guys recorded right before-

   2. JCJason Calacanis2:49

      Hmm.

   3. DFDavid Friedberg2:49

      ... the Wagner Group attempted coup or potential coup or theorized coup began last week, so Sacks, you kind of sent out a text saying, "The show's already stale," because you kind of missed that, uh, that news cycle by publishing right after it started, but you recorded right before. So let's do just a quick recap of what happened with Russia, Ukraine, and particularly this Wabner- Wagner Group rebellion. Last Friday, the Wagner Group, which is a Russian paramilitary organization led by Yevgeny Prigozhin, launched what seemed like an armed insurrection against Russia. Wagner had occupied portions of Rostov-on-Don, a city of over a million people, a regional capital and headquarters of Russia's southern military district, before setting off towards Moscow and then abruptly stopping, I think, about 200 kilometers before reaching Moscow City. At that point, there was supposedly a negotiation. The President of Belarus got involved and, uh, Prigozhin decided to step down. Putin said, "I'm not going to persecute or I'm not going to prosecute you for these crimes." He was given immunity and it was announced that all the members of the Wagner Group were given the option of returning home or joining the Russian military and the Wagner Group was going to be dis- uh, dissolved. Sacks, maybe you can kind of give us your summary of the events that took place, and then we'll talk a little bit about the interpretation of what we think this means for the conflict in Ukraine.

   4. DSDavid Sacks4:20

      Well, you're right that this, uh, rebellion took place just after we dropped our last episode. And so, everybody, both on Twitter and in the comments, was dunking on me for my take on last week's episode, that the much hyped Ukrainian counteroffensive was, was not succeeding, that it was, in fact, failing. I think there's abundant evidence for that, which hasn't changed. Even CNN had written an article basically supporting the idea that the counteroffensive was not living up to what had been promised. And so everyone was, in the comments, saying that my take had basically aged like milk and this, uh, armed rebellion or mutiny by Prigozhin was evidence that the Russian regime was about to collapse, that Russia was, in fact, on the verge of civil war. And you saw the exact same people who had oversold the counteroffensive now overselling this mutiny as something that would bring down the Russian regime and, and the war, and, of course, that, that did not happen. It was certainly a highly unusual event. And I've read takes now from every different corner of the internet about what it was and what took place. You have people speculating that this was all staged. I do not believe that. I do believe that it was an insurrection or mutiny by Prigozhin. I think the trigger for it was the fact that his Wagner organization was being merged in with the Ministry of Defense and the regular Russian Army, and his men were all being made to sign contracts with the Ministry of Defense. That would have resulted in a giant loss of income and status for Prigozhin. Simultaneously, for months now, he's been criticizing the Ministry of Defense, specifically the Minister of Defense, Shoigu, and the-... Chief General of the General Staff, Gerasimov. So he's been vocally critical of them, and I think that this basically erupted into a, a mutiny by him where he basically tried to leverage his position, like you said. He marched what they now think are about 8,000 men, which is about a quarter of Wagner, into Rostov-on-Don. He then took the ministry headquarters and sent about 3,000 of his men on a convoy to Moscow. I think that, although this is probably best described as a mutiny, I think that it did have coup optionality to it. I think that Prigozhin was seeking to find out how much support Putin had and who might join him, and he had put out a number of statements that I think, from the Russian regime's point of view, could be described as seditious that morning. And he, uh, there's a lot of evidence that he staged this attack on his base. He claimed that there was a missile attack by the Ministry of Defense, and that's what launched this march for justice. And in his comments, he was careful not to criticize Putin directly, but he had a lot to say about the Ministry of Defense and the overall conduct of the war, and it was, I think, harshly critical indirectly of, of Putin. And I think he was looking to see who might support him, and what happened is that on the way to Moscow during this convoy, nobody supported him. In fact, all the statements came out from the other generals, including Suvoikin, including all the regional governors, uh, uh, members of the Duma, and other important figures in Russian society, and there wasn't a single person willing to publicly support Prigozhin. And that's when Putin went on TV, called this basically an act of treason and a stab in the back, and at that point, I think Prigozhin's options were pretty limited, and he basically took a deal that was brokered by Lukashenko in which he would go into exile in Belarus, uh, in exchange for basically being allowed to live. Uh, that was basically the deal that was ultimately cut.

   5. DFDavid Friedberg8:03

      Mm.

   6. DSDavid Sacks8:04

      And so I think where things stand today is that although I think this was an embarrassment and a black eye for the Russian regime, uh, it never looks good for a regime to have any kind of mutiny or insurrection, and I think that it does raise questions that Putin's now gonna have to answer to his various allies and supporters about how stable his regime is. I think ultimately, Putin has ended up in a place of consolidating Russian society behind him. Like I said, there were no power centers that supported this mutiny. They all rallied to Putin's defense, and the people of Russia, even though Prigozhin is a popular figure being kind of a war hero from the Battle of Bakhmut, the, the Russian society supported Putin. I think he's at something like 80% poll numbers.

   7. DFDavid Friedberg8:50

      (laughs)

   8. DSDavid Sacks8:50

      So I think where things stand-

   9. DFDavid Friedberg8:52

      Who's poll? (laughs)

   10. DSDavid Sacks8:53

       Well, L- like Levada Center, which is an independent polling agency, for example. These are not the Russian regime's own numbers, and when the poll numbers-

   11. DFDavid Friedberg9:00

       No, no, the point is would you say in a poll that you don't support Putin? (laughs) Yeah.

   12. DSDavid Sacks9:05

       Well, I don't know how Levada Center, what their methodology is-

   13. DFDavid Friedberg9:08

       Yeah.

   14. DSDavid Sacks9:08

       ... but these numbers, when the numbers are bad, are cited by Western sources. But there are other forms and evidence too. You may have seen this video that went viral over the past few days of this song that's now the number one chart buster in, in Russia, where it's this very patriotic Russian song, where they're basically singing, "I am Russian." That's sort of the main chorus.

   15. DFDavid Friedberg9:29

       Nick, can you pull up the song? I'd like to see this, please.

   16. JCJason Calacanis9:32

       Coming at you, 95.5.

   17. DFDavid Friedberg9:34

       (laughs)

   18. JCJason Calacanis9:34

       I love Russia.

   19. DFDavid Friedberg9:36

       (laughs) I love Russia. Oh my God, this is some serious propaganda.

   20. NANarrator9:39

       (Russian music playing)

   21. DFDavid Friedberg9:40

       Wow, yeah. I mean, that looks like a pretty good party.

   22. NANarrator9:49

       (Russian music playing)

   23. DSDavid Sacks9:50

       If you look up the, the lyrics to the song, the English translation of the lyrics, the gist of it is, "I- I'm basically proud to be Russian, and I don't care who doesn't like it." That's basically the-

   24. DFDavid Friedberg10:01

       Mm.

   25. DSDavid Sacks10:02

       ... the lyrics of it.

   26. DFDavid Friedberg10:03

       How do you get invited to that party? (laughs)

   27. DSDavid Sacks10:06

       (laughs)

   28. DFDavid Friedberg10:06

       It looks like... I got so many jokes I'm not gonna make them hard. (laughs) I know. You gotta be careful. Be careful here, folks. You gotta be careful here. Well,

   29. CPChamath Palihapitiya10:12

       You wanna, right? It looks like a fun party. It's a catchy song. I mean, I love to dress up and show up. Tell me where to show up, Putin.

   30. DSDavid Sacks10:19

       I think the point here is that Russian society is united behind the state in wanting to fight this war, and I think that part of the reason why Prigozhin's mutiny was so oversold as an imminent coup that would bring about the collapse of the Putin regime and of the Russian war effort and of their frontline is because that we, since the beginning of this war, we've had this narrative that if we applied enough pressure to Russia that there would be a palace intrigue and a palace coup, and that liberal forces inside of Russia would rise up and topple the dictator Putin and basically get them out of this war. And I think what's happened is fairly predictable, but it's the opposite of that, which is the Russian people are rallying around the flag and rallying around Putin, the war leader, and they are a patriotic people just like the Ukrainians. And I think both these countries, uh, both the Russians and the Ukrainians, are a proud people, and I think they're in a fight to the death, and I think that both countries-
3. 23:15 – 51:03

   SCOTUS strikes down Affirmative Action

   1. DFDavid Friedberg23:15

      I went to Cal, UC Berkeley, 1997, fall of '97. And it was the last year that Cal had affirmative action admissions. And I remember at that time, there was a big case, a guy named Bakke was rejected by the University of California Davis Medical School and he alleged reverse discrimination in 1974 and sued the University of California. And eventually, it became a landmark US Supreme Court case, Regents of the University of California v. Bakke. And in 1995, the UC Regents voted to eliminate affirmative action. So the year that I was at Cal, I think, was the last year of affirmative action admissions. And it's obviously been a pretty hot topic here in California for the past, you know, 25, uh, 30 years. This morning, the Supreme Court ruled on two separate cases regarding using...... race as an admissions criteria in college admissions. And the votes were six to three against affirmative action in the University of North Carolina case and six to two against affirmative action in the Harvard case. Ketanji Brown Jackson recused herself because she previously served on Harvard's Board of Overseers. All the conservative, as they're, you know, kind of, characterized judges, voted to strike down affirmative action and all the, as they're characterized, liberal judges voted to keep it. Both of these cases were filed in 2014 by a group called Students for Fair Admissions and effectively, the court said that at Harvard, at UNC, the schools were systematically discriminating against Asian-Americans in violation of civil rights laws by using, uh, their race as a, as a system for, for profiling, excluding, and trying to be more inclusive of a more, uh, diverse and racially diverse set of applicants. So Chamath, I, I, I'd love your read, I guess, on the surprise or this was an except- e- expected case?

   2. CPChamath Palihapitiya25:13

      I think Saxon and I mentioned this before, but I think we both expected this to happen. I think it's probably important to maybe set up a more practical explainer, Friedberg. So Nick, if you wanna just throw up that image that I just sent you, we can sort of explain the genesis of the lawsuit. So what you can see here is admit rates into Harvard by race, ethnicity, but also by academic decile.

   3. DFDavid Friedberg25:47

      Yeah.

   4. CPChamath Palihapitiya25:47

      And so what it basically shows in a nutshell is an African American student in the 40th percentile of the academic index is actually more likely to get in than an Asian student at the 100th percentile. And so that, at the core, is sort of-

   5. DFDavid Friedberg26:04

      Sorry.

   6. CPChamath Palihapitiya26:04

      ... what was being-

   7. DFDavid Friedberg26:04

      When you... That means, that means that the Asian American student had better scores than 99% of-

   8. CPChamath Palihapitiya26:12

      Yeah.

   9. DFDavid Friedberg26:12

      ... other applicants.

   10. CPChamath Palihapitiya26:14

       Right.

   11. DFDavid Friedberg26:14

       And still didn't get in.

   12. CPChamath Palihapitiya26:15

       Right.

   13. DFDavid Friedberg26:16

       Right.

   14. CPChamath Palihapitiya26:18

       So you have to go back, I think, to 2003 when essentially what the Supreme Court said is like, "Look, we're gonna allow this affirmative action stuff to last roughly for another 25 years, but by that point, we expect that the work that needed to be done will have been done." Again, this is them saying this, not me. And so I think what today does is actually quite important, not just for what it means for universities, but also what it means for private enterprises. So just to take a second on this, I think what happens today is the pretty obvious stuff, which is that you have to change university applications, you have to change all of the admissions profiling, all of the stuff that you would normally do. You probably... I'm not even sure if you can even have a box where you can declare race. Maybe you can or cannot. I don't even know. But all of that changes today. So then the question is, well, what's the first order derivative? What changes next? And I called someone who's a pretty well-known constitutional Supreme Court lawyer on this and the next step is probably going to be around athletics-based and legacy-based admissions. So athletics-based admissions are pretty obvious, which is you don't really have great grades, but you're really stupendous at a sport that's important to that school so then they let you in because they want to compete in said sport for whatever reason. The legacy one is even more prickly which is, nah, you're kind of a dummy, but your parents are rich and/or went to the school before and so then they let you in as well. And his thought on this is that those things will go away because if you can't use race-based admissions to kind of balance the scales, then it'll become pretty quick where somebody launches a legacy-based lawsuit or an athletic-based biased lawsuit and wins that as well. So that's the first order derivative. So, you know, the thought-

   15. DFDavid Friedberg28:27

       Are those... 'Cause those aren't constitutionally protected, whereas equality based on race-

   16. CPChamath Palihapitiya28:35

       No, but it becomes a huge headache for these schools, right? And so you're going to be fighting these admission standards constantly changing and so if you're not going to let, you know, a bunch of poor minority Black and brown kids in, but you're letting in the sons and daughters of rich, important people, I think that that's going to paint that school in a very bad light. And I think that's also-

   17. DFDavid Friedberg28:58

       So I think it's important, Chamath, white, typically white-

   18. CPChamath Palihapitiya29:02

       Typically white.

   19. DFDavid Friedberg29:02

       ... legacy. Yeah.

   20. CPChamath Palihapitiya29:02

       Although one would say the great thing over the last couple of decades is there have been a lot of minorities that have gotten into these very elite schools, which means this, their kids would be the first generation that's eligible for legacy, but you're gonna wipe that away. So I think from, uh, just a social stigma perspective, and I have a solution for this, which I'll get to at the end for those people, but so I think that's the first order derivative. The second order derivative is now what lawsuits get launched and what are the implications for private companies, right? So right now this affects any institution that receives federal funding and that includes all the universities. So there's no private or public university really, except for a handful that don't take this money. So they'll all have to do this, but the really important question after that will be what happens to companies like Apple or Facebook or Exxon who have race-based programs to try to attract African American engineers or Hispanic chemists. What- whatever the program is that you want to come up with, will those get challenged and will those companies have to change? And my friend's thoughts on that were that, yes, that those would also change.... and that's gonna have a really important impact on private enterprise, and how they approach this stuff, and how DEI stuff works, and frankly, downstream, how ESG works because all these ESG checkboxes now, some of them will actually become illegal, right? So I think the importance of decision can't be really understated. It's going to... The changes will be slow, and then they'll be fast. They'll first touch higher ed, but then I think they'll touch private enterprise. And so I think it was a, it was a very important decision in America that just happened.

   21. DFDavid Friedberg30:47

       Chamath, what is, what is the right ethics and, and values? I, I mean, what are you guys... I guess we could just do this around the table. J-Cal, maybe you kick it off. Should we... I mean, from your point of view, do you think that values should include racial diversity in admissions in universities?

   22. Yeah, this is like the ultimate...

   23. Or is the values about equality of opportunity for everyone regardless-

   24. Yeah.

   25. ... of race, right?

   26. You're asking the exact right question, I think. That's why I'm surprised.

   27. Because I'm the world's greatest moderator. But, yeah, go ahead. Yeah.

   28. Doing a solid job so far. And this creates a lot of cognitive dissonance for people, right, because you, you really want to believe that the world is a meritocracy. And, uh, you know, if you were to take other pursuits in the world, you'd never say, like, "We should let race, gender, age affect people's performance in the 100-yard dash or their, their compensation at a company," right? All of that should be based on achievement. And so there is a question on what achievements should be taken into account when you apply to a school, and it's pretty obvious the legacy thing, you know, is, you know, a backdoor into these schools, but we want to feel like we're also making progress because, listen, the world has been unfair. The world was built on slavery and our country has, you know, it's only 150 years past that, and Civil Rights Act was what, 1964 or '65? Like, we've g- we've, we really wanna see everybody achieve here. So I think you have to pause for a second and say, well, if the goal is you wanna see, you know, Black Americans perform better, and I think that's the, the underlying concern here, and it is based on the legacy of America, well, how do you do that? And I think we're looking way too far down in the educational pipeline. The solution here is really childcare. The solution here is nursery schools, pre-K, elementary school education. And those things need competition, and that's where people fall behind. To be looking at this at the end of the academic journey is, I think, crazy. So, you know, when I'm president, I'm gonna have 365 day a year, you know, uh, childcare and pre-K, and, and that's where we should if we really wanna try to make up for some wrongs, uh, in the history of this country and try to have better outcomes. We need competition in schools, which means probably breaking some of these unions and giving people vouchers and choice, and then we have to invest more in the earliest stages of education. And I think everybody wants to see a better system here. DEI, to Chamath's point, is... It is illegal to hire people based on race, gender, any of those criteria, obviously. And the DEI programs are trying to fill more applicants. So their goal typically, and the way they don't break the law, is to just try to, in their best cases, find more applicants. Uh, but even that does feel like there's many times in life when, um, people will say things in corporate America like, "We have too many white guys in this, these positions. We need... We cannot hire another white guy." So the reality of DEI that I've seen up close and personal when I was at AOL, I've told this story before, somebody said to me, "There's no way for us to make you an EVP. You have to stay at SVP." And I said, "Why is that? Like, I'm doing all this EVP level work." And they said, "Because you're a white guy, and the entire company is white guys at EVP, and we cannot add another white guy there, but we'll just give you the same bonus compensation, so don't worry about it." And so there's all kinds of games being played here, but I think it's great that we're having this conversation, right? It's a hard conversation for America to have.

   29. I think for, for me, the, I, I've talked about this in the past. I've always had concern when we make the shift away from equality of opportunity to equality of outcome because we all have this objective that we wanna see everyone have equal rights to success in some way in the United States. The question is, at what point do you move beyond opportunity, where everyone is given an equal opportunity in this country to invest themselves in transforming their own lives, versus a equality of outcome, where regardless of how much you do, how much effort or your trials, you are given the same as everyone else? And that ends up looking a lot like socialism, and it's very concerning because I think it limits progress and opportunity for everyone. The real challenge with this particular topic is college admissions about outcome or is it about opportunity? It's outcome in the sense that you spend 12 years going to elementary school and high school and working hard to get yourself into college, so it's the outcome of all of that effort. And some people aren't given the opportunity to have success during those 12 years. And, you know, and it is an outcome.

   30. What do you think we should do?
4. 51:03 – 1:09:35

   Databricks acquires MosaicML for $1.3B, Inflection raises $1.3B

   1. DFDavid Friedberg51:03

      couple big news items. You know, the AI frenzy continues here in Silicon Valley, all the way from early to growth stage funding through to M&A events. We saw this week Databricks, which is a privately held data infrastructure company, announced that they were acquiring MosaicML for $1.3 billion. That headline number is based on a cash and stock purchase price where the value of the stock that was being used to acquire MosaicML was based off of the last round's valuation for Databricks, uh, which was $38 billion from a fundraising that they did in 2021. So-

   2. CPChamath Palihapitiya51:42

      But-

   3. DFDavid Friedberg51:42

      ... arguably the valuation should be lower and the overall purchase price could be considered lower. But that's besides the point. MosaicML, as you guys may remember, is a company I mentioned a number of episodes ago, led by, um, the founder of Nirvana, which was an early AI business that was acquired by Intel. Uh, and then he started MosaicML and he offers open source models. And I shared the performance data of their most recent announcement on the show a few weeks ago. You know, th- there's rumors, I don't have any confirmed reports, but there's rumors that MosaicML saw their ARR grow from one million to $20 million since January. There was other rumors that said they were only at six million of revenue. Regardless, Databricks is paying a pretty hefty premium, and I think it begs the question, what do data infrastructure database companies end up looking like in the future if AI has to become part of the core infrastructure of every enterprise? And this is creating a big shift. So Sachs, as our enterprise software investor, expert, maybe you can share with us what this means for the sector. Does this buoy excitement for AI infrastructure startups? Does this change the investing landscape? Is it just reinforcing what folks are already doing?

   4. DSDavid Sacks53:02

      I think it's a, a reinforcement. I mean, this space is probably the hottest spa- where you're talking about like AI infrastructure for enterprises. I think it's probably the hottest space right now in, in venture land. We actually looked at this deal. We had a small allocation in their next round. They had a term sheet for a series B. Emergence was actually gonna lead it, and-

   5. DFDavid Friedberg53:21

      This is MosaicML?

   6. DSDavid Sacks53:23

      Yeah, yeah.

   7. DFDavid Friedberg53:24

      Mm-hmm.

   8. DSDavid Sacks53:25

      I don't know if I'm supposed to be telling you all this, but-

   9. DFDavid Friedberg53:27

      No, it's done now.

   10. No, no, it's wonderful. The bre- Yeah, go ahead, Brent. Yeah, it's fine, totally fine.

   11. This is great. This is why people tune in.

   12. NANarrator53:31

       Yeah.

   13. DSDavid Sacks53:31

       Breaking news?

   14. DFDavid Friedberg53:32

       Breaking news.

   15. DSDavid Sacks53:33

       They had a term sheet from Emergence to raise 50 million at 400 post.

   16. DFDavid Friedberg53:39

       Wow.

   17. DSDavid Sacks53:39

       And we, yeah, and we were gonna have a small allocation in that. And as I recall, the valuation was somewhere around 30 to 35 times ARR, which actually is not that insane for a very fast growing company in a hot space. So that implies about 10 million of ARR. I don't remember-

   18. DFDavid Friedberg53:56

       Hmm.

   19. DSDavid Sacks53:56

       ... the exact figure, but I think it's, that's sort of the ballpark, but-

   20. DFDavid Friedberg53:59

       Hmm.

   21. DSDavid Sacks53:59

       ... growing very, very quickly. I mean, up from like one or two at the beginning of the year.

   22. DFDavid Friedberg54:04

       Right.

   23. DSDavid Sacks54:06

       So I actually, uh, understand why someone would want to a- acquire or invest in this company. Like I said, I think we wanted to invest, and while we were sort of, you know, trying our best to get-

   24. DFDavid Friedberg54:16

       But you didn't say anything when I talked about him on the show a few weeks ago. You were just sitting there, mom's the word, or-

   25. DSDavid Sacks54:21

       Actually, I knew that this deal was, was basically in the works-

   26. DFDavid Friedberg54:24

       Okay.

   27. DSDavid Sacks54:24

       ... because the founder called us up and he had already promised us a small allocation in the round.

   28. DFDavid Friedberg54:29

       ... Naveen did and he called up and said, "Actually, I've got this deal, so putting the round on hold." And so I didn't think I should say anything 'cause-

   29. Right.

   30. ... obviously it was still ongoing. But yeah, we, we knew about this deal that was kinda coming down the p- pipe. Uh, we didn't know for sure that it would happen. But, but yeah, we, we heard it was in the ballpark of this like 1.2, $1.3 billion number, which like you said, because Databricks is a private stock, maybe it's only-
5. 1:09:35 – 1:26:38

   IRL shuts down after faking 95% of users, Byju's seeks to raise emergency $1B as founder control in jeopardy

   1. DFDavid Friedberg1:09:35

      couple of articles this week, and Chamath, this is your red meat as much as Ukraine is Sax's, 'cause you've talked about this at length. Social messaging startup IRL is shutting down after a board investigation found 95% of its claimed 20 million users were actually fake. This is a company that in June of 2021 raised $170 million Series C at a valuation of over a billion dollars, making it one of the many proclaimed unicorns of Silicon Valley, led by SoftBank's Vision Fund. The investor who was sitting on the board said, uh, that they didn't know if, uh, we've ever given an investment term sheet to a startup faster than SoftBank gave to IRL a- at the time. At the same time, different story, but in the same week, a company called, uh, Byju's, which, Chamath, you have talked about in the past, was once valued at $22 billion and claimed to be India's most valuable startup is in turmoil as shareholders and creditors are seeking to dilute the founder. And he's rushing to find capital and raise a billion dollars to try and buoy the company. Prosus, one of the investors, marked the company's valuation down to 5.1 billion, so down 75%. I guess the question is, overall, are we still seeing this kind of turmoil in Silicon Valley from the ZIRP-era funding of startups in stark juxtaposition to the excitement and the frenzy around AI?

   2. CPChamath Palihapitiya1:10:53

      It's a characteristic of the exact same thing, meaning if you replaced AI with crypto, it's the exact same thing. If you replaced AI with coworking, if you replaced AI with, I don't know, synthetic biology, if you replaced AI with SaaS, this has all happened before. I think it's important to identify what this is. What this is, is that there aren't enough checks and balances and there are fundamentally people who are deeply inexperienced, who are in the wrong job. And in the few key moments where the venture capitalist is supposed to add value, that person is ill-equipped and unprepared. Why? Because they were the VP of X, Y and Z at some startup and they got hired, through no fault of their own, into a dynamic because these venture funds wanted to raise larger and larger amounts of money. So what happens? You don't even know how to ask the basic questions or even more insidiously, you don't have the courage to say the hard thing. And so these things happen that are frankly inexcusable, right? So in the case of one of these companies, and I've mentioned this before, they approached us for financing and when we asked for a data room, we got a Google Doc link to a spreadsheet. Now, there's no reasonable world in which a company is that unsophisticated when it comes to understanding their business. Right? A data room should include an enormous amount of operational and financial metrics that you can use to come to your own conclusion, so that you can present it transparently to the investor. The idea that boards wouldn't even hold these companies accountable is just a sign that the board members themselves are pretty fundamentally inexperienced people.And I think the thing that we do, which is a mistake, is we say, "Oh, well, X, Y, and Z firm led this deal." Yeah, that may be true, but really what it means is that firm, in a grab to get the money, hired some person that checks some boxes, put them in the job, that person led around, and there just wasn't any infrastructure to either teach that person or then that person to have the courage to hold the founder responsible. That will play out in AI as well. It's just that we're at the beginning of the hype cycle, right? Because we replace AI, again, as I said, with any of these other things. We sat here a little bit hand-wringing when we saw these crazy valuations for these NFT projects. Where are those now, right? So you name it.

   3. DFDavid Friedberg1:13:39

      Zero.

   4. CPChamath Palihapitiya1:13:39

      This is about fundamentally inexperienced people doing a job that seems pretty easy from the outside, but in practical reality, there are only a few legends in our business. Most people, and I think it was Shai Goldman that did the math on this, most people do not know how to run these businesses well. Nick will find that tweet you can show. I think it's, like, two and a half percent of all of the funds that are in PitchBook, so over 800 of them, have ever generated more than 3X in two funds. So this is a hard business, it turns out. You can't just wake up and be an investor, it turns out, and that's what we're finding.

   5. DFDavid Friedberg1:14:17

      Yeah.

   6. CPChamath Palihapitiya1:14:17

      So I don't know. It's not very surprising in the end. None of this is surprising. Good summary.

   7. DFDavid Friedberg1:14:21

      A- and Chamath had a really good point in the middle there, is that there is a generation of venture capitalists who were added during the boom, who were operators, but they've never been taught to have the discipline of capital allocators. And one of those key pieces of discipline is asking uncomfortable questions and doing uncomfortable diligence. And you can trust people, but you need to verify. That is a key part of the job. You can trust the founders, but you have to verify that the data you have is correct. The fact that SoftBank did this at an incredible valuation and the person who did this deal never checked that the cons- customers were real is, uh, uh, makes you unfit to serve in the job. And I will do diligence, and during that time period, Freyberg, I had many founders say to me, "You're asking for more diligence than the lead, and this deal is closing, and we are oversubscribed." And I said, "Okay," and they said, "Okay, so you're not gonna a- you're not gonna require us..." I said, "Oh, no, we require this diligence. We wanna see your, you know, very basic stuff, your bank statements, your PnL. We wanna talk to, why don't you give us a list of your first 1,000, give us a list of 500 customers from last month? We'll give you five numbers. We're gonna talk to five random customers." Like, people did not want to do this stuff. We do that, this work at our firm when we start to own 5, 10% of this and we train our founders to do, to be ready for proper diligence. All that diligence is happening now. Now, in the early stages, there's not much to go on, but you can check stuff. During this period, people, founders used the hot market to not participate in the due diligence process. And when you look at companies, a lot of times people will suscen- suspend disbelief. You know, this company, uh, Baiju, I don't know a ton about it, but it seems to have, you know, like an educational app, like a company, Brilliant.org, that Chamath and I are, um, inve- early investors in and Chamath incubated. Great, great business, um, and, but then their business and their revenue seems to be based on a series of, like, Kumon, like, in-person instruction. Oh, that's not a high gross margin business. Sorry, if you have to have a storefront, you're not a software business anymore. And so people started giving valuations, and this is the second part, and I'll just wrap up on this. People started giving valuations to these companies that were real world businesses, that were low margin businesses, direct to consumer, whatever it was, they suspended disbelief, and they gave them valuations for high growth, high gross margin businesses. And that was another mistake. And you put those two things together, not doing diligence a- and then just misvaluing of actual assets, that's the cleanup work that's been, that's going on right now. And it takes years. I mean, it took decades for them to pinch Bernie Madoff. It can take 10 years for these frauds to come out. Th- there was a guy who kept telling the SEC about Bernie Madoff. I think it was, like, nine years since the first time he, he let them know that the, you know, perfect returns were just not possible statistically. So it, it takes time, but they're, they're picking these, uh, folks up everywhere. Do Kwon got picked up in Montenegro, you know, the guy from Luna. And it's gonna take a decade to clean up all of the fraud in our space.

   8. DSDavid Sacks1:17:32

      I think this was sort of mentioned by Chamath, but I think it needs to be a bigger point, which is the influence of fund size on these decisions. I mean, Craft's funds are s- in the six to 700 million range. So when we write a check, it's usually 10, 15, $20 million check in a Series A company. That's like a big check for us. We're really gonna sweat that decision. For SoftBank, a 10 to $20 million check in a $100 billion fund, which is what they had, it doesn't even make sense. It's a waste of their time. It's not even a rounding error. For them to basically make a decision-

   9. CPChamath Palihapitiya1:18:06

      It's like a $2,000 check for you.

   10. DSDavid Sacks1:18:08

       Yeah, exactly. So for them-

   11. CPChamath Palihapitiya1:18:09

       Why would you do that, mm-hmm.

   12. DSDavid Sacks1:18:10

       ... they had to write $200 million checks f- to justify their time managing a $100 billion. And so the mistake when they make a mistake is 20 times bigger than it should be. That should have been maybe a $10 million mistake, not a $200 million m- mistake. But their fund size forced them to basically write these gigantic checks, and they were writing them into companies that were effectively seed stage or Series A companies. If it was into a growth stage company, I think that's fine. There's a lot more data and there's a lot more customer references that you can check at a later stage company. By the way, the number one part of due diligence, I'd say for us, other than looking at metrics, which is a- anyone can do, is the off-sheet references. Talking to customers from a list that you figured out yourself, not from the company itself, is probably the single most important qualitative part of, of diligence.So I don't know what happened here but-

Episode duration: 1:36:57