All-In PodcastE158: Global trade disrupted, Adobe/Figma canceled, realtors sued, Trump blocked
EVERY SPOKEN WORD
150 min read · 30,093 words- 0:00 – 7:54
Bestie intros: Jason comes in hot, All-In's new Chairman Dictator, Holiday party recap, and more
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
What the (censored) do I care? I'm coming in hot.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
By quick time, I told you seven times, (censored) you, Nick. You don't work for me.
- DSDavid Sacks
(laughs)
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
You're a commercial on your own. Good luck working for Chamath.
- DSDavid Sacks
Do not attack my employees, Jason. (laughs)
- JCJason Calacanis
You guys are going to billionaire me, and that's going to be-
- DSDavid Sacks
This is so good.
- JCJason Calacanis
... the greatest revenge of all. You want to run the show in year four? Go (censored) ahead, Chairman. You guys won the vote. Guess what J-Cal's going to do? I'm going to (censored) ski, and you're going to make my 25% worth $500 million. Get to work, bitches.
- DSDavid Sacks
(laughs) Deal.
- JCJason Calacanis
Let's go.
- DSDavid Sacks
Deal. Chamath's title has been upgraded from Dictator to Chairman.
- JCJason Calacanis
Chairman Dictator.
- DSDavid Sacks
That is very funny, Chairman Dictator. (laughs) Chairman Dictator. He's got the super voting. (laughs)
- JCJason Calacanis
I have no say in anything.
- DSDavid Sacks
(laughs)
- JCJason Calacanis
I (censored) built this entire empire-
- DSDavid Sacks
(laughs)
- JCJason Calacanis
... and I have nothing now. I built the empire. I came up with the name of the show, I came up with the (censored) format. I invited you miserable pricks.
- DSDavid Sacks
(laughs)
- JCJason Calacanis
Make me rich, bitch. Let's go. Distribution checks. Daddy needs new skis. Three, two... All right, everybody. Welcome back to the All-In Podcast, if you can believe it. We're almost at four years of this meshuganah. Episode-
- DSDavid Sacks
(laughs)
- JCJason Calacanis
... 158 today. And we've got a full docket. I'm at half speed. I've got a little bit of, uh, uh, the sniffles, but we're going to power through the docket. With me again today-
- DSDavid Sacks
Oh, you've got the sniffles?
- JCJason Calacanis
I've got a little bit.
- DSDavid Sacks
Can I get you a tissue?
- JCJason Calacanis
Give me a little tissue and some, uh, some juicy, a juice box, and I'll be fine.
- DSDavid Sacks
Want some cough drops?
- 7:54 – 35:55
Understanding the trade disruption in the Red Sea: Houthis, global impact on trade, the dicey geopolitical situation, and how this compares to COVID freight prices with Flexport's Ryan Petersen
- JCJason Calacanis
Let's get to work. We got a full docket here. And, uh, the world continues to spin into chaos apparently. Members of the Houthi movement have been attacking commercial ships in the Red Sea with drones and with missiles. This is largely under-reported in the mainstream press, so we thought we would tackle it here. They are calling this revenge for Israel's, uh, military campaign in Gaza. The Houthis say they will only stop once Israel begins allowing food and medicine to freely enter Gaza, like something we would all like to see. Critics suggest this is a power play for more legitimacy in the region. US allies, including the UK, Canada, France, uh, are reportedly preparing to deploy naval vessels to the region to deter more strikes. Obviously, there's a lot of geopolitics here, and this is a business story. We can link this back, because the attacks have interrupted one of the world's busiest trade routes, as you know. All five of the world's largest shipping conglomerates have paused transfers through the Red Sea, and that means they've gotta go around Cape Horn, they've gotta go around South Africa to get things to Europe, uh, from Asia. It's thousands of extra miles, from what I understand. Uh, and this has caused oil and gas prices to rise. And if this becomes acute, it could be really, really impactful to the economy on a global basis. So, in order to understand what's happening, of course, we go to our foreign war correspondent. Yes, he's got his military cap on. He's now at a total of zero tours of duty.
- DFDavid Friedberg
(laughs)
- JCJason Calacanis
Now, Sacks, can you please, with your infinite wisdom and experience in the field, tell us what is happening in this- ... matchbox situation? Yeah, what's happening is, um, gee, yeah, what's happening? Um, you know- Come on, you're an expert. Yeah, I'm really, I'm really struggling with this one, J-Cal. Um, could I use a lifeline? (instrumental music playing) I'd like to phone a friend. Phone a friend to answer this one?
- DFDavid Friedberg
(laughs)
- JCJason Calacanis
For the first time, Sacks is unable to give us a confident answer. He's chosen to f- phone a friend, which we allow here on the All-In Podcast. Who would you like to phone? Have you thought about that? Who are you gonna phone? Since this is, uh, involving impact on global trade- Steve Bannon? Zuckerberg? Who do you wanna- No, I'd like to phone- ... Tucker. ... Ryan Petersen, the founder of Flexport. All right, here we go. We're going to the AT&T phone call, phone a friend. Zoom, we're gonna click through on Zoom, and can we get Ryan Petersen from Flexport? Ryan Petersen, you're here. (instrumental music playing) It's Jason Calacanis from the All-In Podcast. It's your boy J-Cal. Let's go skiing soon.
- DFDavid Friedberg
Are we live? Is this recording?
- JCJason Calacanis
We're welcome back to the ... We're live. We're live. You're on the All-In Podcast live. We've got an official phone a friend moment here. You, uh, you understand what's going on there better than anybody. Uh, Ryan obviously runs Flexport, and he is in the business of shipping containers. So Sacks, you want to ask him for some help? What is the impact on global trade here from what's happening in the Red Sea?
- DFDavid Friedberg
Well, it's, it's massive. About 30% of all ocean container traffic flows through the, flows through the Suez and through the Red Sea. Most of that is going Asia to Europe. So like, the biggest impact here is gonna be felt on those two areas. It's gonna make Chinese manufacturing that much more challenging. You have to go around the southern tip of Africa. It's adding about 20%, 20 to 25% longer journey.
- JCJason Calacanis
(clears throat)
- DFDavid Friedberg
And now in a network business, a longer journey means less capacity. Uh, so you're talking about a 20, 25% cut in shipping capacity on the th- 30% of all containers.
- JCJason Calacanis
So that's containers. I also understand that about 12% of global oil goes through and about 8% of liquified natural gas. And just to explain what we're talking about there, can we zoom in? There's a very narrow strait there called the Bab-el-Mandeb Strait. I hope I didn't massacre that pronunciation. So you go around the Gulf of Aden, through that Bab-el-Mandeb Strait, into the Red Sea, and then from there, you can go through the Suez Canal into the Mediterranean.
- DFDavid Friedberg
Yeah, and so it's a, it's a maritime choke point. By the way, this isn't going back. It always has been. Um, you know, there's, there's documentation. Caesar Augustus invaded Yemen in like-... 63 B.C., uh, forget, 63 A.D.? No, I forgot the dates. But it was during the reign of Caesar Augustus, so it would have been right around the, the birth of Jesus Christ.
- RPRyan Petersen
Right.
- DFDavid Friedberg
And you're talking about thousands of years of this being a really important choke point. Even the Egyptians actually built a canal. The ancient Egyptians had a canal that connected the Nile River, so this has always been the place to connect East and West. Uh, an incredibly important maritime choke point. And, uh, the rebel forces in Yemen have been firing missiles at ships, um, and th- what that does is spike the insurance cost. Obviously, it puts, uh, the crews' d- lives in danger, uh, which they can't tolerate, but it also, uh, really spikes the insurance cost. If you sail a ship into a region that's got missiles being fired, the insurers just won't cover it. And so you can't, you can't operate a ship without insurance, 'cause if it sinks, you go out, you go bankrupt.
- RPRyan Petersen
Right.
- DFDavid Friedberg
Um, and so they're just taking the long way around, which as I said is a 20% reduction in capacity. What we've seen... Remember with COVID, you had all the ships off the port, you guys brought me onto the show. The last time, I think, was when that happened. That was about a 20% reduction in capacity. But at the same... What happened during COVID was there was also a 20% increase in demand. So this time, there's not an increase of demand, so I don't think it's as impactful as what we saw to shipping prices during COVID, where you had, like, a 10X run up in price. But you're already seeing... Prices are coming out now for January freight, for ocean freight, Asia to Europe. You're seeing about a 3X increase in the price of ocean freight, uh, versus where we were a month or two ago, which was very, very cheap a month or two ago. So I, I wouldn't read too much into this. And frankly, the Suez Canal is too valuable, in my opinion, too valuable to civilization, to the modern world, to believe that, you know, a group of rebels, no matter how well-funded they may be, is gonna be able to disrupt that for any long period of time. I think there's too many interests aligned here to say... to keep this thing flowing.
- RPRyan Petersen
Well, okay, two points on that. So we call 'em a rebel group, and I guess they are. It's a Shia group in Yemen that rose up in 2014 and deposed the monarch there, and they basically control large swaths of the country, but they're not internationally recognized, so that's why they're called rebels. But make no mistake, they basically control the vast majority of, of Yemen. It's a Shia group, they're, you could say, sponsored by Iran, but I'm not sure they're controlled by Iran. People call 'em proxies, and that's true to some degree, but they also have agency. Like you said, uh, J-Cal, they are doing this, they say, in solidarity with the Palestinians. When the invasion of Gaza first began, they were firing rockets at Israel, but they had to go all the way over Saudi Arabia, they didn't make it. So now, they've started firing on ships that are going through the strait, they started mining the strait. And so, like Ryan's saying, this has basically put a damper on, on commerce, unless you're a country that the Houthis like. Apparently, Russia's been able to move its ships through still. They claim they're only targeting ships that are transacting with Israel, but that's not true. I mean, a lot of ships have been targeted that don't have a relationship with Israel. So let's just say, broadly speaking, for Western ships, they can't get through. Now, what the US has done in response, to Ryan's point, if, is that we've announced this Operation Prosperity Guardian, which is to restore the flow of trade through, you know, the Red Sea. But the question is what that's gonna involve, and I think we are bracing now for the US to start taking military action against the Houthis. The problem is, I think, Ryan, when you're saying this is gonna be resolved maybe quickly, is that the US was already backing the Saudis in a war against the Houthis that started in 2015. It only got sort of resolved with a ceasefire that's still pretty fragile last year. And so the Houthis have already survived almost a decade of Western-sponsored attacks on them. It's not clear what we have to do to basically stop them from taking these actions. And I think if the US starts a war, basically, against the Houthis in Yemen, we're talking about an expansion of this conflict in the Middle East from, you know, beyond what's happening in Gaza to now another front, uh, that directly involves the US. Moreover, uh, this is, I think, very underreported, but there've been almost 80 attacks on US bases in Syria and Iraq by Shia militias, again sponsored by Iran, over the last couple of months. So this whole region is a powder keg, and it's not clear to me that if the US attacks the Houthis, that this is gonna lead to a quick resolution. So I guess my question back to Ryan is, let's say there is a war here, let's say the Houthis don't stop, I don't think they will, um, and let's say the US gets in a war there, but isn't really able to bring it to a decisive conclusion, um, and let's say that this blockade of the Red Sea g- continues for all of 2024, what does that do to global prices? Because I think right now, the market is pricing in rate cuts next year on the theory that inflation is coming down and is a solved problem.
- DFDavid Friedberg
It's the right question. It'll be a big impact. Um, and if you listen to, like, retailer earning call, earnings calls, they're all talking about, "Hey, we've had six, 12 months of deflationary environment. Prices are coming down." A lot of what they cite is the lower ocean freight prices. And if s- and if that goes back, and it... if it goes back anywhere near... I mean, we're already seeing a 3X, but even that 3X is sort of, "Well, is this gonna last? Do I need to price it all in? Do I need to..." Uh, a- and it hasn't really, uh, taken hold of, like, that's not a true market dynamic of what is the supply and what is the demand. Freight is very inelastic, like, you're gonna ship the product w- regardless of the price of freight. E- you know, unless your business model has the tiniest of margins, eh, the price of freight goes up, it doesn't impact how many products you ship. You're gonna go sell as many products as you can.
- CPChamath Palihapitiya
Does it impact America as much as it impacts Europe?
- DFDavid Friedberg
... absolutely not. Um, it- now this is the, the fastest route for many parts of Asia to the East Coast of the United States, and especially with the Panama Canal is also congested at the same moment right now, uh, because of, they say it's because of a drought, but actually they built a bigger canal and it's just draining the lake faster and then, uh, that's my hypothesis, but I'd like to look into it a little further. But, uh, the, the Panama Canal is only going at about two-thirds capacity. So if you're going Asia to the East Coast, those are your options. But it- to go around the southern tip of Africa, around the Cape of Good Hope to get to the East Coast, it's like an 8% increase in transit time versus 20 to Europe and there's alternatives. So definitely impacts Europe much more. It impacts China. Like, the reason I think that this- there- there's so many people aligned up here, like, this is not good for China. China wants to be able to ship stuff quickly to Europe and get it to market, um, so to the extent that they have any impact, I think they're going to be clearly on the same side as the United States here. Europe obviously has a thing- and the other thing that I haven't heard anyone talk about is like if you look at that map, they're blockading not just the Suez but they're blockading Saudi Arabia. The- Saudi's biggest port is in Jeddah right up there. Well, I don't think they're gonna tolerate being cut off from the world and, uh, I know they-
- CPChamath Palihapitiya
Yemen taking on Saudis seems like an unwise idea.
- DFDavid Friedberg
Well, they've been at war in the past, as Da- as David pointed out.
- CPChamath Palihapitiya
Yeah.
- DFDavid Friedberg
So, um, and I'm not- I'm certainly no expert. By the way, I- I find this ship to be amazing. It's since, it's since transited but this is, uh, one of the ships that was there yesterday just going for it, uh. And if you look at the destination, it says, uh, "Armed guard on board," as they-
- CPChamath Palihapitiya
Mm.
- DFDavid Friedberg
They set that in the AIS, uh, J- G- GPS transponder so that if anyone comes after them, you know what you're gonna get.
- CPChamath Palihapitiya
I have two comments. When I looked at this in the last couple of days, that was sort of my takeaway, which is that the, the really significant impacts are downstream to Europe consumer prices. So I think like European inflation has more chance of upticking again than America does because I think the practical reality is what you said, Ryan, they'll just- the s- the need to ship is inelastic and so they'll just pay 8% more and they'll just go to the East Coast in a more- in a longer way through the Cape of Good Hope or whatever. The second comment, I think, to me is a little bit more macro in nature which is, if you look at what's happening now, there's a hot war in Israel and Gaza and theoretically now there's a hot war in Yemen. I think the positive take on this is that it actually puts the Middle East in a position to resolve all of these things. And what I mean is the following. If you're Saudi Arabia or if you're the UAE or if you're Qatar, what you really want to do is build for the next 30 to 40 years. They've said it as much. They want to pull trillions of dollars of oil and nat gas out of the ground, they want to monetize it, and then they want to invest in their people. The last thing they need is to be bookended by two hot wars largely propagated by a third party actor in Iran. And so I think if there was not resolve for them to get aligned, I think that the resolve now really amps up. Saudi Arabia doesn't want to be in the middle of this nonsense. Qatar doesn't want to be in the middle of this nonsense. UAE does not. And then the fact that Canada, America, Britain, France are now all of a sudden pulled in and China, as you said Ryan, I didn't even think about the implications of China as a supplier of record for most of these goods. All roads, I think lead, in my opinion, to a coming together of folks to say, "Okay, let's use this as a definitive moment to just clean the decks here." And I think that that'll put a lot of pressure on Iran, a lot of pressure on the money flows. I suspect that both of these two hot wars get resolved quickly because the larger multi-decade implications for the Middle East are too big to let it be subsumed by the Houthi rebels or Hamas.
- DFDavid Friedberg
It's interesting here, um, how you see like Israel is a relatively small economy in the world and the- and, and part- you know, you start to see in the same way that Ukraine is not a big economy, Russia is not that big, but it has a massive- the, the war there has just a massive impact via the commodities markets because Russia is such an important supplier of commodities. And now you see what, you know, Israel and Gaza are relatively small, potentially a small regional conflict, big global implications because of everything that's- goes behind it, but now you see this spread to something that really could impact, if this is an extension of that conflict, now you're seeing wow, this actually has the ability to extend to global markets in a way that's similar to what happened in Russia and Ukraine where all of a sudden commodity markets are impacted and you're seeing that inflation. But I- I don't know, Chamath, if your, your view is hey, we're gonna have progress because progress is good or something. I don't know that that's necessarily the, the direction that the world follows. Like you could have terrible stuff that-
- CPChamath Palihapitiya
I think if you're sitting in Dubai or Saudi or Qatar you're thinking this is the last thing we need.
- DFDavid Friedberg
For sure.
- 35:55 – 54:15
Major M&A deals called off, downstream impacts of a hawkish regulatory environment
- JCJason Calacanis
All right. There's been a ton of M&A activity and M&A deals that have been canceled. Adobe-Figma has been called off and Illumina and Graal has been unwound as well. The big headline is that after a 15-month review process, Adobe and Figma called off their merger. Now, we talked about it here multiple times. It was a $20 billion cash and stock merger that was agreed to back in September of 2022. Um, and there's tons to unpack here, shareholders, employees, the startup, uh, ecosystem, and of course, uh, limited partners who were expecting huge paydays from Figma.... being sold, uh, to Adobe are now back to a waiting game of figuring out if this company can go public, et cetera. Chamath, you had tons of thoughts on this, and maybe you could educate everybody on the Illumina-Grail deal, since I don't think people understand that one.
- CPChamath Palihapitiya
Yeah. I think there are three deals, or almost deals, that got essentially called off or canceled or never consummated in the last few weeks, which show a pretty interesting trend. So the first, as you said, Jason, was Adobe-Figma. The second was Cigna and Humana. They were proposing a multi-decabillion dollar merger, and it was very clear that the FTC was going to have a huge fit around it. So they said that, "We're not even going to do it," and then Cigna just said they'll do a $10 billion buyback instead. And then in the craziest example, Illumina and Grail. So Illumina makes these gene sequencing machines, and Grail makes one of the leading tests for free DNA cancer detection. And at the time, Illumina owned almost half the company, they bought the other half, they merged it in, even though the regulator said, "Hey, hold on, we have an issue with this." And now they're being forced to unwind the merger, so to, to pull this company back out and divest it. I think the point of this is two things. One is that there is no viable M&A path for early stage venture capital businesses. So if you can't have a $20 billion merger or a $40 billion merger or a 15 or $20 billion M&A with a high degree of confidence, then the path to liquidity through M&A is less than 20% of the outcomes. Which means that the overwhelming path to get liquid is what you said, Jason, which is IPO. But the problem is the second part, which is that the capital markets in the United States are not ready or not in a position to support all this IPO liquidity. Why? The banks won't underwrite. There aren't enough researchers, research analysts that'll cover these stocks. The ways in which the banks make money have become so constrained. And so I'm kind of left pondering to myself, how do you go back to a world of, like, the '90s, where startups four and five years old would go public to raise capital? Um, I don't think that that's gonna happen. So I don't know exactly what happens to us, except that we'll have companies gestating for 15 and 20 years, and I think that just has a chilling effect because it's like, what investor wants to put money away, locked up in highly illiquid stuff for 20 years? What rate of return do you need to give them that makes them want to do that? So something has to change, because if the M&A market can't exist, then we need to change the rules of the capital market so that there's incentives for these banks to underwrite these companies to go public.
- JCJason Calacanis
Well, I guess there's two things, Sax, that could change this dramatically. One is if we put in more, um, conservative Republican, Libertarian, et cetera, uh, less regulatory, uh, regime in Washington, that could open up M&A, you know, as soon as 2025 perhaps. Uh, and then the second is direct listings, um, dare I say SPACS and alternative ways to get companies public, it may not be, um, the gold standard as a traditional IPO, but at least it would get the s- liquidity started. And I guess third, Sax, I'm gonna get your, your thoughts on this, for private investors and their LPs, everybody seems to be focused on building strong, stable, cash-flowing businesses, and we've seen all the companies that went public, whether it's Airbnb or Uber, are now focused on ringing the cash register and being profitable. So ultimately, maybe this logjam in M&A blockage makes everybody focused on sustainable, profitable companies, and that's a good thing long term. What do you think, Sax?
- RPRyan Petersen
Look, like I said last week in relation to the Figma-Adobe deal, the fact that regulators took 15 months to analyze the deal only to come to the conclusion that they basically weren't going to allow it and then Adobe finally killed it is gonna have a chilling effect on M&A in Silicon Valley. I mean, if acquirers and targets can't have confidence that the deal will be approved, and in fact, they're going to be left in limbo for over a year waiting for speculative approval, they're going to be less likely to do deals in the first place. And I'm sure Adobe's not happy about the fact they gotta pay a billion-dollar breakup fee, which, by the way, was a really smart thing for Figma to negotiate. I mean, if you're, if you're a company that started that's gonna get acquired, you'd need a pretty big breakup fee now as insurance on the deal, because there's a very good chance the regulators aren't going to allow it. So yeah, absolutely, the fact that regulators got in the way of the Adobe deal, and moreover, the way that they did it with this protracted delay is a- actually gonna have a chilling effect on M&A in Silicon Valley. And look, there are only two good outcomes for a startup. You can either IPO or you can get acquired. That's it. The third is basically you go out of business. That's the third outcome. So when you take half the potential exits off the table, you're absolutely making it tougher for VCs and founders to get a good return. It's that simple. And that is gonna have a depressing effect on, you know, the investing of risk capital in Silicon Valley. I don't think it's a good thing for anyone. And by the way, even if the US sort of fixes this, even if we get a regime that's more friendly towards M&A, you still have the EU to worry about, and you also have the UK to worry about because they're not part of the EU thanks to Brexit. The UK, like I said last week, they're like the Chihuahua who's leading the pack. They're the smallest market, but they're the most aggressive on antitrust enforcement.
- CPChamath Palihapitiya
Sax, they may just be the byrd for the US and the Europeans.
- RPRyan Petersen
It's possible, but in any event, now you got three regulators to worry about, not just one. And you know, like I said last week, I think if you're a startup and you're trying to consider where to put your Europe office, I would not choose the UK anymore. I used to think that the UK was number one 'cause it was so easy, but you don't wanna create that nexus if you can help it. It might subject you to a-
- CPChamath Palihapitiya
... competition authority you don't wanna deal with later when you get acquired.
- JCJason Calacanis
Yeah, I would have just opted out of the UK. I would have called their bluff, as I said last week. Friedberg, any solutions here you think to solving this problem in VC land, or do we just have to build stronger, more profitable companies and be more patient about taking them public since M&A is not on the table?
- DFDavid Friedberg
I don't know if I'd take the antitrust regime as being the core driver of M&A not being on the table. I mean, there, there's a couple of these examples, but I don't think there's a predominance of this going on. I think that there's a lot of smaller deals that still end up being good outcomes. I mean, we've, we've also talked a lot about the lower cost of capital in starting software businesses in the era of AI type tools and that leads to, you know, being able to hit a 100X if you put, you know, small enough amount of capital in and have a decent outcome where you're not building the market monopoly in some particular market. It doesn't feel to me like that's the biggest driver of concern here. The biggest driver of concern is just all the return on capital metrics that the big buyers are having to face. You know, return on invested capital is becoming more important than it's ever been because we're talking about trillion dollar market cap buyers. And so that's how they're measured, and so they have to be really thoughtful about how they're deploying capital. In a high interest rate environment, that's... there's a greater sensitivity to a faster path to cash returns than there has been historically. So it feels to me like that's... And I would imagine if I'm Adobe and I'm looking at this Figma deal, do I keep fighting it? Or at this point, paying a billion dollars is probably net accretive to them. I think the stock price went up when they called the deal off, which highlights that it was probably a better investment for them to say, "I'm going to pay a billion dollars to actually get out of this deal," at this point. And I think we see more of that happening, which is this rationalization of, you know, timelines to ROIC in a high interest rate environment.
- JCJason Calacanis
Chemath, deals do get done.
- DFDavid Friedberg
There's a lot more tolerance-
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
... for smaller deals, obviously.
- JCJason Calacanis
Yeah, I mean, Salesforce was able to acquire Slack, that was 2020. Amazon was able to acquire Whole Foods, Walt Disney, 21st Century-
- CPChamath Palihapitiya
I, I think-
- JCJason Calacanis
... Fox with the X-Men. So-
- CPChamath Palihapitiya
Those were a different era. I, I, I really think that the large-
- JCJason Calacanis
No, these were all 2016 to 2020, you're right. Those are all under Trump.
- CPChamath Palihapitiya
Yeah, but those are a very different era. I don't think that that's w- what you can expect anymore. I don't think you can underwrite to get a $20 billion deal done in any industry.
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
Remember Meta or Facebook buying WhatsApp for, what was it, 17 billion? I mean, that was some-
- JCJason Calacanis
17 billion?
- CPChamath Palihapitiya
... of the biggest venture returns ever.
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
Today, that could never happen. Never happen.
- JCJason Calacanis
Today, that could never happen today.
- CPChamath Palihapitiya
And that, that Figma, Adobe deal, it was a $20 billion deal, but with the rise in Adobe stock, it's really a $30 billion deal if it would have been consummated because half the consideration was in Adobe stock and that has d- basically doubled. So all of those investors and employees were looking at a $30 billion exit. And look, Figma is going to do great. I think the numbers that came out about Figma where they're gonna do about 700 million of ARR growing 40%. So I don't know, they'll be able to IPO anytime based on that, but what's the multiple they're gonna get? Probably 12 to 15 times. So-
- JCJason Calacanis
8 to 10.
- CPChamath Palihapitiya
... maybe it's like a $10 billion company in the public markets.
- JCJason Calacanis
Yeah.
- 54:15 – 1:17:01
The new era of startup building: less capital raised, less overhead costs, more profitable, smaller exits with higher founder/employee ownership percentages
- CPChamath Palihapitiya
- JCJason Calacanis
So now that you're CEO of a company, how do you look long term at potential exits going public? What- what is the- the thoughts you have on this as you architect the company, Freebird as the CEO?
- DFDavid Friedberg
Do not care about exits.
- JCJason Calacanis
Don't care about ex- Expand on that. Yeah, explain.
- DFDavid Friedberg
I just want to build a great business that makes great products for our customers. That's it. So if you do that, all these discussions around, you know, giving shareholders liquidity, I- I'm the, I'm the main shareholder so I don't need liquidity. I just want to build the business.So it's a little different.
- JCJason Calacanis
How do you think about profitability then? Because if you have to fund it, or funding might be harder to come by, uh-
- DFDavid Friedberg
Yeah.
- JCJason Calacanis
... how do you think about funding over the next decade, this vision you have?
- DFDavid Friedberg
It freaks me out. You gotta keep businesses (laughs) capitalized. So, there's definitely, across businesses I'm on the board of or involved in, universally a bias towards profitability. I've seen a couple of decisions we've made at- at some companies to shift from making longer time cycle investments that may not pay off for many years, where you had the luxury of doing that in a ZIRP environment and you could always get capital to fund anything that's multiple years away from realizing any sort of return, to shifting towards a bias towards making things that can generate real revenue and real profitability in the near term, keeping costs low and building from there. So, it- it's definitely, I'd say, been a flip-flop in the environment. It's why the biotech landscape has largely kind of dried up. The funding landscape has dried up significantly because most of the investment opportunities are those multi-year out, before you know if you have a return on your investment kind of investment cycles. And so the ones that do get funded are those that have a nearer path to profitability and where you can build some sort of cash generative service in the near term on- on the path to building a bigger product down the road.
- JCJason Calacanis
So as you're strategizing, you're thinking, "How can we get to cash flow positive, breakeven, whatever, quicker?" You're not strategizing, "How do I get a huge multiple and get some dumb Tiger money?" Whatever, uh, no- no dig to Tiger, but they paid the highest prices at the end of the cycle.
- DFDavid Friedberg
I've got enough wisdom at this point to tell you that if you don't have to raise venture capital, you're better off. So... (laughs)
- JCJason Calacanis
Yeah. Chamath, you also, uh, became a CEO. You have the, I think it's Hustle is your company, and that's profitable and you're running it, I- I'm assuming, for growth, but maybe-
- DFDavid Friedberg
Yeah.
- JCJason Calacanis
... profit first, then growth. How- how- how do you think about those two dials? How much growth, how much profits?
- CPChamath Palihapitiya
We have the same beliefs that Freebird has, which is our job is just to make really great products for our customers. When I took over the business, we had to go through a difficult layoff and a rebasing of the business. But it's- it's a business that's growing kind of 45% a year and it's profitable. And- and what I talked to the team is that, you know, we will reinvest our profits and so we have an ambitious plan. And as long as we meet that, we'll take some percentage of that profit and reinvest it. But I, like Freebird, also have no plans for liquidity. I just wanna build this thing to be as big as possible and I don't want one single shred of pressure that isn't defined by our customers. And so by being profitable, we have complete control of the cap table, we can do whatever we want. And the people that benefit, frankly, are the employees 'cause they can get paid and our ability to hire people without being subject to, like, pressure to raise a new round and set a new random valuation.
- JCJason Calacanis
So no unnatural acts-
- CPChamath Palihapitiya
Just no unnatural acts.
- JCJason Calacanis
... just customer profits. And so...
- CPChamath Palihapitiya
By the way, if I can grow for 10 years, if we can grow for 10 years at 40% a year, this will be a ginormous business. Ginormous.
- JCJason Calacanis
So no trying to 3X and- and do it unnaturally. Yeah.
- DFDavid Friedberg
Jason, just- just to chime back on the- the- the question you asked a couple minutes ago. I, number one, if- if you can avoid raising capital, you're better off, 'cause then you don't have any shareholder pressure to get liquid and that can create contortions in what you do and how you operate the business. And second is if you're gonna raise capital, if you set too high a valuation, if that becomes the bogey, you set yourself up for challenges because now you've gotta have a multiple on that valuation to satisfy investor return hurdles. And the higher the- the valuation, the... and you apply a multiple to that, the higher the exit has to be. And suddenly, all the options start to fade away. You can no longer have a modest exit that can do really well for employees and the founders and early investors. And it becomes a necessity that you have a massive outcome. And by the way, we see this now in this post-ZIRP environment that a lot of businesses that raised a lot of capital at a very high valuation, and then you have this multiple compression that's just happened in the last two years, their valuation effectively, if they were to go public today or get sold, is less than the capital they've raised. And that's the most extreme scenario where, you know, suddenly all the common shareholders get wiped out in terms of their return.
- CPChamath Palihapitiya
It's such a great point. Like, the thing that people used to say was, "Oh, it's a tech company, so we need to give it a premium." The problem is now everything's a tech company. To say you're a tech company is a meaningless statement that means nothing.
- JCJason Calacanis
You're a company.
- CPChamath Palihapitiya
So the- you're a company, so then there's no premium for being a company.
- JCJason Calacanis
No. There's a premium for profits.
- RPRyan Petersen
Well, there- there's a premium based on quality of revenue, which has to do with gross margins. I mean, obviously a comp-
- DFDavid Friedberg
And unit economics.
- RPRyan Petersen
And unit economics. Obviously a company that has 80% gross margins is different than a company that has 20% gross margins and it's-
- CPChamath Palihapitiya
Not if it's unprofitable.
- RPRyan Petersen
W- No, no, I- I totally get that. I'm just saying that you can normalize based on gross margin as opposed to the type of company it is. Sometimes we'll see a company that markets itself as a tech company only has 20% gross margins. That's an indication that something is wrong usually, or it's not truly a software company.
Episode duration: 1:47:20
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