E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

1. 0:00 – 4:40

   Bestie catchup and Friedberg intros!

   1. JCJason Calacanis0:00

      When are you coming to Miami?

   2. CPChamath Palihapitiya0:02

      Are you there already?

   3. JCJason Calacanis0:03

      I'm here, yeah. I just got here.

   4. CPChamath Palihapitiya0:04

      Oh, cool.

   5. JCJason Calacanis0:04

      Come tomorrow, we'll have a big weekend.

   6. CPChamath Palihapitiya0:06

      I may need to get a ride on someone else's plane. Mine's been repossessed.

   7. JCJason Calacanis0:09

      Ah. (laughs)

   8. CPChamath Palihapitiya0:11

      (laughs) You can give me a ride.

   9. DFDavid Friedberg0:13

      I'll have mine for at least another couple weeks.

   10. JCJason Calacanis0:15

       (laughs)

   11. DFDavid Friedberg0:15

       (laughs)

   12. JCJason Calacanis0:16

       Ah, I love, I love flying commercial. You know why I love flying commercial? Every fan of All-In and This Week in Startups stops me and takes a selfie. I cannot tell you the love in Miami. I sat down to have a meal outside.

   13. DFDavid Friedberg0:28

       Were you by yourself or you were with someone else?

   14. JCJason Calacanis0:29

       By myself. It's 11:30, I, it's like, hey, everything's closed. There was this one little place that's open. I kid you not, I sit down, two guys come over, "We love the pod," and I'm, I'm trying to eat my meal, and they're asking me questions, and they wanna know, where's Friedberg's introduction. And I'm like, "It's so bad." Well, I showed them the video, and they were in stitches. I was like, "Guys, there's only, like, five people have seen this video, and now it's you two, so there's seven people in the world." They were so over the moon.

   15. CPChamath Palihapitiya0:57

       We should never have cut that.

   16. JCJason Calacanis0:58

       Well, we could play it now.

   17. CPChamath Palihapitiya0:59

       It was good.

   18. DFDavid Friedberg1:00

       Thank you.

   19. JCJason Calacanis1:01

       It was incredible. I say we just, we, we just throw to it right now. Is that a good, uh, plan maybe?

   20. DFDavid Friedberg1:05

       And here we go. (laughs)

   21. JCJason Calacanis1:08

       In three, two...

   22. DFDavid Friedberg1:09

       This is like the nerd Olympics for Friedberg. He's, like, nerd stretching.

   23. DSDavid Sacks1:13

       He's having a nerd, uh, freak out right now.

   24. DFDavid Friedberg1:16

       You know what I'm most excited about? That I don't have to listen to Jason's intros. Oh my God, you're on, like, nerdderall. That's like nerd Adderall.

   25. DSDavid Sacks1:23

       Take it easy, dungeon master. (laughs)

   26. CPChamath Palihapitiya1:25

       (laughs)

   27. DSDavid Sacks1:26

       Uh, this guy hasn't been so happy since he rolled a 30 on the 30-sided die. (laughs) Jesus.

   28. CPChamath Palihapitiya1:31

       (laughs)

   29. DFDavid Friedberg1:31

       Oh my God, I've got a plus seven broadsword.

   30. DSDavid Sacks1:34

       Where does that come from? Where did... Oh, from Dungeons &... I've never played.
2. 4:40 – 31:55

   Breaking down current macro risks, Great Recession comparisons

   1. JCJason Calacanis4:40

   2. All right. All right, listen, stocks and crypto have plummeted. Tiger Coinbase, Shopify, employee RSUs, meme stocks, it's all gone, everybody. Uh, the world's over.

   3. DFDavid Friedberg4:49

      (laughs)

   4. JCJason Calacanis4:50

      Uh, so, uh-

   5. DFDavid Friedberg4:52

      (laughs)

   6. JCJason Calacanis4:52

      ... where do we start? You guys wanna start with crypto? Stocks? Where do we even begin?

   7. DFDavid Friedberg5:00

      Should we talk about what happened when rates went to zero and how financial assets inflated? And I think we talked about this during the pandemic, right when the pandemic was starting. Chamath, I remember an early show we did where you and I talked about how it felt like we were going into, like, the roaring rapids ride at, like, Magic Mountain or Disneyland. I kind of described it like that, like it feels like you're going through a rushing river, and there was just all this capital flowing so fast, like overnight. There were... It would... So, like, all of a sudden, we went from this, like, COVID standstill to, oh my God, this rush of capital. And you could feel it, right? All the businesses we're all involved in started getting term sheets and doing deals, and there were SPACs and transactions. It was an incredible rush of capital. And so when the central bank made interest rates zero, and then banks could lend out money at close to zero and still make money, and then people could lever up assets, and then those asset values inflated and they could borrow more and keep, you know, investing in more and buying more. Ultimately, you know, we had bubble after bubble, and, uh, we saw a lot of...... things that, um, you know, may not have necessarily been valued based on a historical set of multiples or comparables or cash flow, but really it was just about, "Hey if I invest X dollars and someone else is willing to pay Y dollars for this asset tomorrow, I'm gonna make money." And, you know, suddenly the frigging vacuum came out which was like, "Let's take all that money back." And so when interest rates got hiked it was like, "All that money's coming back out of the system." And it was like this whooshing sound, like the airlock got opened and (whoosh sound) all the cash came back out, and as a result, the bubbles just all deflated. And it happened so quickly that it's, what- what was crazy to me was that for so long everyone's been talking about how everything feels so overvalued, so everyone was just waiting for the moment when the whooshing sound began, and then everyone laid off all the risk. And it happened so fast, and it's still happening. People are still trying to unwind the things where they're, you know, in huge positions. But, uh, you know, it, I think it really is just, uh, it really is this, uh, this kind of incredible moment where you see all the money get pumped in, it all gets rushed out just as fast, um, and I think we're all kind of like, you know, i- in awe at how quickly the- the- the response has been.

   8. CPChamath Palihapitiya7:17

      So maybe some context is helpful. From 2018 up until the beginning, or not really the beginning of this year but probably Q4 of last year, you could have calculated an incredibly tight correlation between the stock market and the Fed money printer. So the Fed is in control of how they can introduce dollars into the economy. How do they do that? They literally manifest money. They don't actually technically print it, but let's just assume for these purposes that they actually do print it, and they literally take that money and they enter the market and they buy things with it and they're giving you this newly created money that they just created out of thin air. From 19... No, from 2018 up until about Q4 of last year, there was a .92 correlation between that and the S&P 500 going up. What does that mean? So if you look at a negative one correlation, that means that if something goes up, this thing goes down, dollar for dollar, that would be com- perfectly negatively correlated. If you look at something that has a zero correlation, that means it's just random. Whether the, whether one thing goes up and down has no influence on the other. But a .92% correlation effectively means that for every dollar the Fed created, the stock market was going up by that same dollar, and that is literally what we had up until November of, uh, 2021. Since the beginning of this year till about yesterday, so I think the number is still going up probably by at least by a trillion dollars, we have destroyed collectively as a society, um, $35 trillion in global market value. Now to give you a sense of that, that's 14% of all global wealth that has been destroyed in basically five months. And for reference, in 2008 when we went through, you know, a cataclysmic shock to the system that threatened the banking infrastructure of America and po- a potential contagion to the world, that destroyed 19% of the world's global wealth at that point. So, you know, we're, uh, approaching some really crazy heady moments in time where, in terms of the market correction and the value destruction. The difference here is that the last time around it was really about a handful of financial institutions and some very specific assets, right, mortgage-backed securities, um, you know, some parts of the, of the credit market, and then a bunch of financial stocks, and that was largely it. This time around, as you just said, Freidberg, it's literally everything that's getting smoked. There is not a place that you can effectively hide that has been safe. Crypto, smoked. The credit markets, totally frozen. The equity markets, NASDAQ is in a bear market, the S&P is basically flirting with a bear market now, and I don't really see any end in sight. Meanwhile, we're waiting for CPI to down tick. Inflation hasn't really done that. It looks like-

   9. JCJason Calacanis10:29

      Consumer price index, how much stuff costs.

   10. CPChamath Palihapitiya10:32

       So that's taking a lot longer than we thought to sort of roll over. Separately, jobless claims are now starting to tick up, which means that companies are beginning to effect layoffs because they feel this pressure, so now you're gonna see an unemployment rate that starts to go up. And then meanwhile we're fighting a proxy war in the Ukraine against Russia to the tune of about, you know, $40 billion every sort of month or so when we open the paper and decide to read about it. So you put all these things together, it's not clear that there is the momentum to create a market bottom.

   11. JCJason Calacanis11:03

       Real estate, Chamath, if you look at it, was a major, uh, compression in 2008. Real estate held up, is holding up, seems to be holding up a little bit. I don't know how that, long that's gonna last with mortgages going up. So, and when you were talking about all the different categories, I was like, "That's the one category that I guess hasn't fallen yet." Sachs, what's your take on all this?

   12. DSDavid Sacks11:20

       Yeah, I mean, look, we're in a stock market crash that, uh, I think over the last week sort of became a panic. I mean, I think now there's panic selling going on. That's not to say that it's all oversold, but certainly there are names now that are starting to become screaming buys. Um, but nobody has the capital to- to buy. I mean, it's easy to say, you know, in theory that you should be greedy when others are fearful and fearful wh- when others are greedy. The problem is that everyone's already fully deployed, and then when the stock market crashes, they've got no cash left to buy up new names. And, you know, that's one of the things that you've noticed in this downturn, and I'd say especially with crypto, is with all the other crypto downturns, there were always, you know, the crypto accounts saying, "HODL," or, "Buy the dip," or-

   13. JCJason Calacanis12:01

       Mm-hmm.

   14. DSDavid Sacks12:01

       ... you know, they had the laser eyes going. I don't see any of that right now. Like, you know?

   15. JCJason Calacanis12:05

       No, pure capitulation. Fear.

   16. DSDavid Sacks12:06

       Exac- Yeah, exactly. So this is just a- a route across the board. I agree, it's every asset class. I think-... home prices. That's coming, Jason, because like you said, mortgages are going up.

   17. JCJason Calacanis12:18

       Inventory is going up, so that's a leading indicator, yeah.

   18. DSDavid Sacks12:22

       People can't afford, uh, the same mortgage they did before because rates are going up very fast. So, you know, ho- sellers are gonna have to drop prices and until they're willing to do that-

   19. JCJason Calacanis12:33

       Yeah.

   20. DSDavid Sacks12:33

       ... inventories go up.

   21. JCJason Calacanis12:35

       That's a little-

   22. DSDavid Sacks12:35

       So that's coming.

   23. JCJason Calacanis12:35

       ... dance that happens in real estate is the sellers don't want to accept reality and they don't have to sell-

   24. DSDavid Sacks12:39

       Right.

   25. JCJason Calacanis12:39

       ... because they're living in it.

   26. DSDavid Sacks12:40

       Right.

   27. JCJason Calacanis12:40

       As opposed to their crypto holdings which they're not living in and they're not getting value from.

   28. DSDavid Sacks12:45

       And frankly, I think the consumer in general, that's the next shoe to drop here. Because right now, it's been... You had this sort of, uh, financial correction, you had this massive asset inflation, and now that- that sort of the- the air has come out of the balloon, but the consumer has generally been holding up pretty well. Um, obviously we had unemployment, you know, near 3%, very low, although the labor participation wasn't great, but the consumer was doing fine. It was sort of holding up the economy. Now, I think you've got a bunch of different factors that are gonna really hurt the consumer over the next several months. Like you said, interest rates going up means that home loans become more expensive, car loans, any other, uh, you know, uh, personal consumption loans go up. Credit card debt now has all of a sudden, uh, skyrocketed. So, uh, there's an article in Axios on this, that the amount of, uh, consumer debt is, uh, surging and, uh, to this highest level of increase in over a decade. So consumers are turning to plastic to cover the soaring cost of everything and then because of inflation, that, uh, wages in real terms fell 2.6% over the past year. So in other words-

   29. JCJason Calacanis13:53

       Because of inflation, when you said-

   30. DSDavid Sacks13:54

       Because of inflation.
3. 31:55 – 41:31

   How a historically large amount of dry powder is impacting VC firms as the market shifts, problems with mega funds

   1. CPChamath Palihapitiya31:55

      raised. But at the end of 2021, if you look at the total funds raised and the total capital deployed by venture funds, we have a $230 billion capital dry powder hangover.

   2. JCJason Calacanis32:05

      Mm-hmm.

   3. CPChamath Palihapitiya32:05

      So there's a quarter, there's a quarter trillion dollars of cash sitting in venture coffers that they can call and write the checks into. So, I, I think it provides a really interesting contrast that sets us up for a dynamic over the next few years on what's going to happen in private markets, because you're going to have the haves and the have-nots. The haves are going to have a lot of friggin' money available to them because these venture funds need to be deployed over the next few years. The have-nots are the ones that don't have proof points to a viable outcome in, in their business. But the haves are going to have v- a lot of capital available to them, and they can be sh-

   4. JCJason Calacanis32:38

      With one caveat, with one caveat.

   5. CPChamath Palihapitiya32:38

      One caveat.

   6. JCJason Calacanis32:39

      Which is? Pricing and valuation.

   7. CPChamath Palihapitiya32:41

      So what do you guys think will happen, right?

   8. JCJason Calacanis32:42

      Well, no, there's two caveats.

   9. CPChamath Palihapitiya32:43

      In the contrast of everyone saying, "Hey, there's no capital available, there's no capital available," that's not true. There's more capital than has ever been available. So how does it get allocated?

   10. JCJason Calacanis32:50

       So the first thing, um, is, to Chamath's point, at what valuation? And so there's going to need to be discipline, and they're going to, you're right, the, the, that money will go to the winners. Other thing to remember is during the great financial crisis, for about a year, maybe even two, many venture firms did not want to call capital from LPs whose portfolios were crushed, and LP said, "I know we're on the hook for this, but I would appreciate it if you don't make a ton of investments right now, because we don't want to clear our already, you know, demolished portfolios to then fund your venture fund." So those are commitments. It's not cash in the bank. And those commitments only come from Harvard, Yale, CalPERS, Ford Foundation, whoever, Morelos and Kettering, if the GPs can ask the LPs for that, and the last time this happened, and I don't know if it will happen this time, but I think you remember it too, Chamath, the LPs specifically said, "Hey, pump the brakes."

   11. CPChamath Palihapitiya33:44

       Yeah, let me build on what you said. In 2000, the more extreme measure happened with, which is that most of these venture investors returned the money and just canceled and tore up the LPA.

   12. JCJason Calacanis33:53

       Mm-hmm.

   13. CPChamath Palihapitiya33:54

       Now, why would they do that?

   14. JCJason Calacanis33:55

       (laughs)

   15. CPChamath Palihapitiya33:55

       Why would you tear up commitments for a quarter trillion dollars? It's because your portfolio is trash. Meaning, if you have made a bunch of horrible investments that you know are now totally upside down, you have a responsibility to manage those investments to a reasonable outcome, and ideally, even try to get some salvage value. And so, you know, it's very hard for you to look at an LP in the eye and all of a sudden say, "You know what? I'm going to deploy this fresh capital, and I'm in a psychologically good state of mind to do that well." And I think that what history shows is that when you have these drawdowns, the money is made by new entrants or fresh capital which doesn't have the legacy of a bad portfolio. The returns are not captured by the same people, and the reason is because they have the psychological baggage of a horrible portfolio or horrible marks. So for example, there was a tweet, and I'll, I'll send this to you guys. This is from a guy named Matt Turk. He said, "To put the depth of the reset in context, to justify a $1 billion value, valuation, $1 billion valuation, a cloud unicorn today would need to plan on doing $178 million in revenue in the next 12 months if you apply the current median cloud software multiple of 5.6 times forward revenue." Now, let's put it in a different way. If you're a company that's worth 10 billion, that means that you have to come up with $1.78 billion of annual recurring revenue for the market to give you a median multiple. How many SaaS companies, and SaaS would, and SaaS, you will know this, how many SaaS companies even get close to two billion of ARR? Probably a lot less than the number of SaaS companies that are worth 10 billion on paper. So, you know, by the way, we should also talk about who's the bag holder in that transaction. It's the employees, and we should, we should explain why that is in a second. But just to build on what, you know, Jason is saying, and Freeberg, what you're saying, is in moments like this, I would ignore all of the dry powder and all of that stuff. I think that there are a lot of venture investors today who've deployed way too quickly, and if they want to have any reputation over the next 10 years, we'll have to rehabilitate their portfolio.

   16. JCJason Calacanis36:13

       And try to return money.

   17. CPChamath Palihapitiya36:14

       Let me just say one thing. I saw, um, an analysis from one of the biggest venture firms in the Valley over a 14-fund cycle. So they, they looked at data from 14 funds, and they showed that 40% of their capital...

   18. DFDavid Friedberg36:28

       ... was deployed in businesses that they were chasing valuation, meaning, like, the business wasn't performing well and they needed to bridge the company or support it through a down round or, you know, some other sort of situation where at the time, it was, "Let's support our portfolio," 40% of their capital. On that 40%, they made like 50% losses. So they deployed money in a situation that was not kind of an accelerating, successful, you know, up-round kind of business. It was a declining business. And in that support, they lost half their money. The other 60%, they make like 3X, right? So it kind of averages out that they make kind of whatever it is, two, two and a half X on the whole portfolio. But I think it really speaks to the condition that a lot of venture firms may make the mistake around doing over the next couple of years, which is, "I've got all of these businesses that are suffering through down rounds or need supportive capital and I know it can get there," but that belief ultimately costs the LPs and costs the fund more, and it's why we saw such negative return cycles happen after the dot-com crash.

   19. CPChamath Palihapitiya37:28

       Okay. How about this? Since 1994, okay, just guess, how many funds, private equity growth venture funds, even existed that are greater than a billion dollars? So this is over, you know, 30 years, say.

   20. DFDavid Friedberg37:44

       What do you mean?

   21. CPChamath Palihapitiya37:45

       How many fu- how many funds do you think even existed over a billion dollars since 1994 to today? How many funds?

   22. DFDavid Friedberg37:51

       Like, how many funds have been raised that are over a billion?

   23. JCJason Calacanis37:53

       Individual funds or the brand names?

   24. CPChamath Palihapitiya37:55

       Yeah, yeah, since 1994, how many do you think there are?

   25. DFDavid Friedberg37:58

       40?

   26. JCJason Calacanis37:58

       50.

   27. CPChamath Palihapitiya37:59

       1,276.

   28. DFDavid Friedberg38:02

       Oh, you're including private equity and stuff.

   29. JCJason Calacanis38:03

       Oh, I was... Yeah, there was reentry. Yeah, yeah, okay, sorry.

   30. CPChamath Palihapitiya38:05

       Okay, so now of those 1,276 private equity funds or growth funds or crossover funds or crossover funds-
4. 41:31 – 58:35

   Tiger Global's historic loss and where they might have gone wrong; Sacks' gives his playbook for raising capital in a downturn

   1. DSDavid Sacks41:31

      article in TechCrunch just two days ago that said that Tiger Global, you know, which the hedge fund, as of the end of April, the hedge fund had lost about 45%, and then May, the first weeks of May have been even worse. So who knows what they're at now? But they had a separate venture vehicle and their, their history of their venture vehicles is that they raised, um, 3.75 for a fund in 2020, then 6.65 billion in 2021. And then just this year, they closed a $12.7 billion fund in March. Now I think that fund was raised as early as September last year, but maybe there was some money that still trickled in and they finally closed it in March. But basically, what this article said is that this $12.7 billion fund that they just raised is already nearly depleted. It's something like two-thirds of the fund has already been deployed. So this idea that they've got, like, a lot of dry powder sitting on the sidelines, I don't think they do. And then meanwhile-You know, the other big crossover funds, D1, Co2, they are completely risk off. I don't think they were ever as aggressive as Tiger, so they're not in as bad shape as Tiger, but they're just basically sitting on the sidelines till this thing sorts itself out. So basically, all of this capital that flooded the venture markets, this growth capital that came in over the last couple of years, it's gone. I mean, that's basically dried up.

   2. JCJason Calacanis42:52

      Why did they go so fast, Alex? What was their thinking? Because you and I met with these folks. We saw them marking up our companies because you and I, you typically do a series A, that's your sweet spot. I typically do C into series A. You do A into B. They were coming in and marking up our... In the B and C rounds. What was their thinking? What was their mistake here?

   3. DSDavid Sacks43:10

      I think the thinking was that we can create an index fund for pre-IPO tech companies, for sort of late-stage private tech companies.

   4. JCJason Calacanis43:19

      Mm-hmm.

   5. DSDavid Sacks43:19

      The only problem was... And by the way, they did a r- uh, if you could s-... I think they did a good job sort of productizing that solution. I mean, if you send them your numbers in a certain format and do a meeting, they were like a term sheet generator. I mean, they spit you out a term sheet in a couple of days.

   6. JCJason Calacanis43:32

      Wasn't that your original idea, Chamath?

   7. DSDavid Sacks43:33

      (laughs)

   8. JCJason Calacanis43:33

      You had S- you had, uh, funding as a service at one point?

   9. CPChamath Palihapitiya43:37

      I did this thing called capital as a service-

   10. JCJason Calacanis43:38

       Yes.

   11. CPChamath Palihapitiya43:39

       ... where you would send us, you would send us... But, uh, you would send us your data or we would plug in to whatever you use, say it was Stripe or Shopify, we would suck out the data, we would run it against a bunch of models, we would do a few simple regressions, and then we would just index you and then send you a term sheet. So we did do that all around the world but we did it on very small dollars, you know. We did it on $500,000 checks, 250K checks. It was called capital as a service. It's still a phenomenally good idea but you would want to cure that business for probably 10 years. I wouldn't want it to do that on 10 years on my own money-

   12. JCJason Calacanis44:11

       Mm-hmm.

   13. CPChamath Palihapitiya44:11

       ... you know, 10, 15, 20, 30, 50 million bucks before I would even dare raise LP money around that idea because it's... I mean, at that point, it's the machines doing the work and you have to really be sure your models are right.

   14. DSDavid Sacks44:21

       So you asked the question sort of wha- what was wrong with it. Um, I think that the- the- the- the thing that was wrong with it actually was just that the public comps were all wrong, right? So they were modeling-

   15. JCJason Calacanis44:31

       Got it.

   16. DSDavid Sacks44:31

       ... to the public valuation. These are hedge fund guys, right?

   17. JCJason Calacanis44:35

       Their output was wrong, yeah.

   18. DSDavid Sacks44:36

       Well, no, it's... Look, they're hedge fund guys, so they're looking at, they're looking at the public valuations, they're looking at the last private rounds, and they see a spread, a large spread, and they're like, "We can arb this." So they go in with a massive amount of money, create a term sheet generator, and they arb the spread. The problem is that all the public valuations we now know were inflated. I actually think they did a reasonably good job in creating a- a- a great approach for founders who want late-stage capital. If the valuations had been correct, I think it would have worked.

   19. JCJason Calacanis45:05

       Here's the problem.

   20. DSDavid Sacks45:07

       Yeah.

   21. JCJason Calacanis45:07

       Right now, Peloton and Coinbase are both, their market caps are trading at lower than their last private market valuation. So let that sink in. Like, if you did that last private round, you're underwater big time in those names. Or I- I don't know if Coinbase popped today.

   22. DSDavid Sacks45:22

       Right. But they weren't, they weren't taking their signals from the public markets.

   23. JCJason Calacanis45:25

       Yes. Yes.

   24. DSDavid Sacks45:25

       And this is the problem with the Fed and the administration and Congress basically flooding the zone with all this fake money, is that it distorts all the signals in the economy.

   25. JCJason Calacanis45:34

       Yes.

   26. DSDavid Sacks45:35

       And then people start making investment decisions that don't work, and then you have this massive correction.

   27. JCJason Calacanis45:40

       How long have we been doing this, Chamath? How long have we been overfeeding the market? It was... Obviously happened under Biden and Trump. Does it go back to Obama or no?

   28. CPChamath Palihapitiya45:50

       Yeah, it started in 2008, 9 with TARP.

   29. JCJason Calacanis45:53

       That was the bailout, yeah.

   30. CPChamath Palihapitiya45:54

       Troubled Asset Relief Program, which is basically a fund, you know, to create market, um, liquidity essentially. But what it also did on the heels of the great financial crisis was, um, we introduced comfort around this idea of quantitative easing or, you know, having what's called the Fed Put. You may hear that a lot. What does that mean? Which is that when market conditions get too, you know, uh, stiff or rigid or inflexible, the Fed will generally step in with liquidity, typically into the credit market, never into the equity market. But what that does is that that also still flows into the equity market. So everybody behaves like there's a downside price at which the Fed is guaranteed to act and that really started to be-
5. 58:35 – 1:13:21

   How startup employees can protect themselves in a down market, questions to ask and metrics to know while evaluating startups to work at

   1. JCJason Calacanis58:35

      Let's do it, let's do it.

   2. CPChamath Palihapitiya58:35

      When you start a company and you're a founder, you have, uh, you're taking the most risk. You're the person with the idea. You should be justly rewarded for that. The way that that happens economically in a company is you get founder shares. The basis of those founder shares are effectively zero. And you're able to do a bunch of structuring when you first start a company that gives founders specifically some incredible tax advantages. You can, you know, do an 83 (b) election, which is effectively you buying the stock, starting the clock on long-term capital gains, et cetera, et cetera. Then you have stock that you give to employees. They're one of two kinds, non-qualified stock options and incentivized stock options, NSOs and ISOs. And you know, those have different tax treatments. But again, you know, when you're a very early employee, you get a mixture of these things, also hugely accretive. It has a very low basis. You're building value. But here's what people don't understand. When a venture investor like myself or Jason would back-

   3. JCJason Calacanis59:41

      Explain basis, by the way, for people. For the basis-

   4. CPChamath Palihapitiya59:45

      You know, there's no cost basis. Your, your, the price of your stock is effectively zero, you know?

   5. JCJason Calacanis59:49

      Paying a penny for it or something, you know?

   6. CPChamath Palihapitiya59:51

      Yeah. Like, like the, the, my stock at Facebook costs like half a penny.

   7. JCJason Calacanis59:54

      Got it.

   8. CPChamath Palihapitiya59:55

      You know, whatever.

   9. JCJason Calacanis59:56

      It goes public, it's $15, $20, you get the spread. Got it.

   10. CPChamath Palihapitiya59:58

       You get the spread. And you pay long-term capital gains on that if you've been able to, you know, buy the stock-

   11. JCJason Calacanis1:00:03

       Not income tax. Yeah, yeah.

   12. CPChamath Palihapitiya1:00:05

       And, and, and shift it to long-term capital gains. Okay. So now Sax or Jason or myself come and invest in your company. What happens? We actually don't get equity. We don't get common stock. We actually get a synthetic form of debt called a preferred share, okay? And typically, the way that it works is when we invest in a company, and this is how the entire venture ecosystem works, we actually create what's called a preference stack, which means we get an instrument that is senior to the common equity. Now, what does that mean? Well, it means that if your business goes out of business...... we get our money back first. We also get an interest rate and we're able to convert all of that at some point, the magical moment when a company goes public, into common stock. And we give up our preferred rights and we now have the same instrument as everybody else when a company goes public. That's the typical mechanism.

   13. JCJason Calacanis1:01:03

       Why does that exist, by the way, the preferred shares? Maybe explaining the why. Why do VCs need that protection?

   14. CPChamath Palihapitiya1:01:08

       To be honest with you, I don't know why it started, but it's a historical artifact of, you know, the 1960s and '70s.

   15. DSDavid Sacks1:01:14

       I think I, I think I know why it started.

   16. JCJason Calacanis1:01:16

       Go ahead.

   17. DSDavid Sacks1:01:16

       Okay. So the, the, the, this got lawyered because l- let's say you start a company and just to use some round numbers, a investor wants to give you $10 million to start the company and for 10% of the company, $100 million valuation. If you didn't have preferred shares, then the founders could basically on the- the- fir- the day after the money comes they could say, "Hey, we want to liquidate the company. We decided we don't want to do this anymore," and they own 90% of the company and they could basically then distribute out the $10 million to all the shareholders and they would keep nine and one million would go back to the investor.

   18. CPChamath Palihapitiya1:01:48

       Correct.

   19. DSDavid Sacks1:01:48

       So that's why lawyers came up with this idea of seniority, so that, okay, if you disband the company with the investors' money still in there, it goes back first to the people who put in the money. That was the idea.

   20. JCJason Calacanis1:02:01

       And when- an- and the second piece was, if the company gets sold for less than the cash put into it, at least the people who put the cash in get their money out first.

   21. DSDavid Sacks1:02:08

       Right.

   22. CPChamath Palihapitiya1:02:08

       So the-

   23. JCJason Calacanis1:02:08

       So if it sells for 10 million, you get your 10 million back, or at 11, you get one million after that.

   24. DSDavid Sacks1:02:13

       Yeah.

   25. CPChamath Palihapitiya1:02:13

       So let's just say Jason does the first million, so then now there's a million of preferred. Then Sax does the series A and he puts in 10. Now there's 11 million of preferred, even if it's at a much higher valuation. And then I come in and I give 100 at an even higher valuation. So now there's $111 million of preferred shares. Now, if the company goes through all kinds of, um, complications and mess, and let's just say we have to sell it to somebody else for $200 million, well guess what happens? The first 111 of it comes back to myself, Jason, and David.

   26. JCJason Calacanis1:02:46

       Plus interest.

   27. CPChamath Palihapitiya1:02:46

       So this is why venture investors have an incentive to pay and set these crazy valuations, because they don't really care what the valuation is as much as they care how much of all this preference is building and do I rationally believe that the liquidation value of the company is at least that much money? So if I think that Freedberg's company is worth at least $111 million, I'll do it and I add my 100. Now, why is this important for employees? Before you join a startup, especially in this moment, I think it's very important for you to understand how much money have they raised? How much is this preference stack that exists? And do you believe that the company is going to be worth much more than that? Because that's the only way that you're going to r- actually participate in the equity. And we know now what the public markets say, so if you go back to that tweet, you know, if it's a 10 or an $11 billion company, okay, well, you need to generate, uh, two billion dollars of revenue. And if you're at 100 million, that means you have to 20X the revenue for the valuation to be worthwhile, for you to believe that this valuation is real. So this is just a little guide for employees. I just think it's very important that you guys start to do the math and start to figure this out. Ask the hard questions. Have the people in the company-

   28. JCJason Calacanis1:04:04

       How many shares are outstanding? How many preferred shares? What's the overhang? What's my strike price?

   29. CPChamath Palihapitiya1:04:09

       What's the preference stock?

   30. JCJason Calacanis1:04:11

       Yes.
6. 1:13:21 – 1:29:00

   Psychological impact of investing after taking huge losses

   1. DFDavid Friedberg1:13:21

Episode duration: 1:41:13