E81: All-In Summit: Bill Gurley & Brad Gerstner on markets, downturns & investment cycles

1. 0:00 – 12:27

   Bill Gurley & Brad Gerstner break down the state and historical significance of 2022's market downturn

   1. JCJason Calacanis0:00

      BG Squared.

   2. DSDavid Sacks0:01

      This is our BG Squared panel. Uh, everybody knows friends of the pod, Brad Gerstner and Bill Gurley. Give it up for our guests. (audience applauding)

   3. CPChamath Palihapitiya0:10

      What's going on?

   4. BGBrad Gerstner0:11

      Don't let your winner slide.

   5. CPChamath Palihapitiya0:14

      Rain Man, David Sacks. What's going on?

   6. BGBill Gurley0:18

      And I said- We open sourced it to the fans and they've just gone crazy with it.

   7. BGBrad Gerstner0:22

      Love you, besties.

   8. CPChamath Palihapitiya0:23

      Queen of quinoa. I'm going all in.

   9. DSDavid Sacks0:26

      Bill, you predicted five of the last three recessions.

   10. JCJason Calacanis0:31

       (laughs)

   11. DSDavid Sacks0:31

       Uh...

   12. JCJason Calacanis0:33

       (laughs)

   13. DSDavid Sacks0:34

       (laughs)

   14. BGBill Gurley0:34

       (laughs)

   15. JCJason Calacanis0:36

       A broken clock is still right twice a day. (laughs)

   16. DSDavid Sacks0:39

       Let- I mean, here we are again, you- you've sounded the alarm bell. And of course, you're right, and, um, you've seen this movie before. For all of us younger capital allocators, um, who, uh, are experiencing it for the second or third time, but you've experienced it a couple more times, um-

   17. BGBill Gurley0:56

       Not that old.

   18. DSDavid Sacks0:56

       How- how... I mean, it's pretty old. Um, how does it, how does this one measure up to Great Recession, dot-com bust, you know, '87 and the- and the many ones we've seen in between?

   19. BGBill Gurley1:08

       You know, one thing that I think's super important to put this into context, and I'll- I'll try and tell this quick. I had a meeting once with Howard Marks, who I'd wanted to meet for a long period of time. He's a famous bond investor that does a lot of writing. And for 15 minutes, he asked me questions about the vent- venture industry, a lot of structural questions. And I told him... Well, I answered as best I could. And he said, "Man, that's a really shitty industry." And I said, "Well, why do you say that? What do you mean?" He says, he says, "You know, cyclical collapse is built into the structure." And so we have funds that, you know, are taken, you know, committed to that have 10 to 15 year lives. So you have low barriers to entry, but you have very high barriers to exit. And so he- he felt that it was just systematically set up to- to rise and crash, rise and crash. Um, and one thing that- that I realized coming out of that is that it- it doesn't happen like a sine curve, which is what we all imagine when we think of a cyclical business. It's more like a sawtooth. It... Risk- risk-on is a very slow process, and it, and it's- it's reflexive, so it grows and grows and grows and grows, and then risk-off tends to be very abrupt. And we've seen that here, right? This- this cycle, risk-on was from '09-

   20. JCJason Calacanis2:31

       That's well said.

   21. BGBill Gurley2:31

       ... to five months ago.

   22. DSDavid Sacks2:33

       That's really well said.

   23. BGBill Gurley2:34

       And risk-off is five months. And- and the thing that- that- that's really tough about that is it- it requires, uh, mental adjustment very quickly. Like, because it- it didn't gradually change, it abruptly changed. And so, you know, cap charts might have, you know, systematic issues that are stuck, uh, because too much lick pref relative to the new reality. Valuations have shifted. The cost of capital is radically different. You may have, you know... On- on the way up as risk got... people took more risk, you tried crazier things. You- you're willing to- to, uh, take- take... make investments in businesses you might not if the cost of capital is a lot lower.

   24. DSDavid Sacks3:17

       You name a stadium for five years as a crypto company.

   25. BGBill Gurley3:19

       You might do that. And then... But then all of a sudden, it's- it's gone, and-

   26. DSDavid Sacks3:23

       And now the commitment to naming the stadium is greater-

   27. BGBill Gurley3:29

       That keeps you-

   28. DSDavid Sacks3:29

       ... than-

   29. BGBill Gurley3:29

       ... than your market cap.

   30. DSDavid Sacks3:30

       ... than the market cap.
2. 12:27 – 24:14

   How VCs will handle capital commitments from LPs, underwriting startups in the new reality

   1. BGBill Gurley12:27

   2. JCJason Calacanis12:27

      Bill, there's $250 billion of committed capital unallocated into companies. What happens in the cycle over the next five years if there is this expectation that we're not gonna be in the good part of the, the risk on part of the curve? That capital needs to be deployed at this point in the cycle. And do we end up having these, like, crazy bifurcations in the market where high-quality companies get 10X evaluation of the mean and all the money plows into a few companies that, that are kind of outperforming-

   3. BGBill Gurley12:54

      I'll give you some quick thoughts.

   4. JCJason Calacanis12:55

      ... or, or what, what's the dynamic here?

   5. BGBill Gurley12:55

      And, and I know Brad has some too, because we were talking about this this morning. Um, first of all, I- I've never ever felt as a, as a venture investor that I have to invest money.

   6. JCJason Calacanis13:07

      Right.

   7. BGBill Gurley13:08

      Like, and like, and if you remember, most of it's committed but not drawn down.

   8. JCJason Calacanis13:11

      Right.

   9. BGBill Gurley13:12

      And so y- you're gonna have to go ask for it.

   10. JCJason Calacanis13:14

       Mm-hmm.

   11. BGBill Gurley13:15

       If you're, if you're, if you, you know, deployed two-thirds of your fund into, uh, crypto assets with no board seat in the past 12 months, uh, are you gonna call Harvard and Penn and say, "Hey, I, I need some more right now"? Um, I don't think you're gonna make that call. And-

   12. BGBrad Gerstner13:32

       I wouldn't know.

   13. JCJason Calacanis13:33

       You're saying they'd let the capital sit there and never call it?

   14. BGBill Gurley13:36

       Well, here, well, you guys were talking about this on one of the recent pods. You know, in, in '01, a lot of people actually returned the commitment, and it was actually an act of greed, not, not an act of... (laughs) It, it came across-

   15. JCJason Calacanis13:48

       Because you don't understand this is-

   16. BGBill Gurley13:48

       ... like they were being nice, but they were getting out. I, I call it the burnt waffle theory. They were killing the fun in getting out of the overhang, um, and starting fresh, just like, uh, I guess it was Melvin that attempted to do. It was a version of that.

   17. JCJason Calacanis14:00

       It's like a recap in a way.

   18. BGBill Gurley14:01

       Yeah. Well, they just want to get started-

   19. BGBrad Gerstner14:03

       The re-... I would say fresh.

   20. BGBill Gurley14:03

       ... without the overhang-

   21. JCJason Calacanis14:04

       Exactly.

   22. BGBill Gurley14:04

       ... of the, of the look back.

   23. JCJason Calacanis14:05

       They deployed 200 or 300 million and... Yeah.

   24. BGBrad Gerstner14:08

       I, I think one thing, you know, Bill, not to interrupt, you know, the, the, the, the assumption of the question was will they be forced to deploy capital into a really bad vintage? Right? I actually think the upcoming vintage is gonna start getting real. It's gonna be a good vintage. I think that what... That, that was Bill's point. I think we both feel that way. I think the vintage of the last 18 months will be lousy, so the capital deployed over the last 18 months won't, won't have a lot of return. All of our LPs know it, right? I was just sitting with an LP, uh, you know, one of my investors at lunch today, right? Imagine this, they have 50 investments like Benchmark and Altimeter, right? Th- all of them are going down, and now you're gonna call them up and say, "I want all this money right now to go invest in a bunch of stuff that still may not yet have corrected enough." These are partnerships. Partnership means a partnership with me and my partners, all the people who gave me the money. We're not gonna put our partners in a headlock and drag their money into the market and put it into things that we don't think, um, accurately reflect the new world order. If you go back to that first chart, you can underwrite to the five-year average, the 10-year average where we've been. I think we're going back to trend. But you cannot underwrite to where we were last year. Disabuse yourself. One of the... Bill tweeted this last week. It's spot on. The biggest mistake we will all make is to anchor ourselves to prices that we saw in the world over the last 18 months. Pretend you never saw them.

   25. JCJason Calacanis15:47

       Yeah.

   26. BGBrad Gerstner15:47

       Not in venture, not in the stock market, because that is a delusional place to think we're getting back there. We're not unless we have another pandemic or a nuclear war and rates go to zero, and then we have bigger problems. So re-underwrite and underwrite to the five-year average de novo for all your businesses. That's how you survive through this, uh, and ultimately come out winning share.

   27. BGBill Gurley16:11

       And the, and the, and the other, the other point I would make, David, is that the, the, the new reality is a- apparent to all of us because of public comps. So, like, you just have a new world order. And so it's very hard. I don't think... I mean, there might be someone so sloppy that they just keep investing headstrong, but I think most of them look at where things are and the type of business that you're investing in and, and they feel like they want to make a return.

   28. JCJason Calacanis16:35

       I think, I think you're using the right word. It is borderline. It's... Well, it's definitely unprofessional and it's borderline idiotic for anybody with organized capital right now to be ripping money in, because you don't know what the terminal valuation of a business is. Like, at the end of the day, investing is like a line. It starts here with guys like Jason, and it ends here with guys like me and Brad, say. And in the middle are these guys that are helping along the way, and it's all hot potato. But by the time the hot potato gets to us, there is, there is a price, and that price has alternatives, meaning if you come to me and say, "This thing is worth $10," and I, and I say, "Actually, no, it's worth two, because that other thing which is better than you is actually worth five." And that's what's happened in the stock markets.

   29. BGBrad Gerstner17:25

       And by the time you get the potato, you put it on the scale.

   30. JCJason Calacanis17:27

       There is-
3. 24:14 – 33:52

   Bull run mistakes, why VCs don't underwrite lower valuations, handling distributions

   1. BGBrad Gerstner24:14

   2. HPHost (All-In Podcast)24:14

      Gurley-

   3. Yeah, what do you guys-

   4. Gurley, do you think it's weird that VCs don't...

   5. JCJason Calacanis24:18

      ... try to underwrite lower valuations. Like, the incentive is always to up your valuation. Even if the company's performing plan, you don't generally do these, like, market-driven value. It's like, "Oh, you were worth $500 million last round? We'll give you a billion dollars this round." And are we going to see-

   6. BGBill Gurley24:31

      Well...

   7. JCJason Calacanis24:31

      ... more VCs do down rounds?

   8. BGBill Gurley24:32

      I d- I just think that, well-

   9. JCJason Calacanis24:34

      In companies that they're in?

   10. BGBill Gurley24:35

       There's no, there's no VC club where they get together and discuss-

   11. DSDavid Sacks24:38

       (laughs)

   12. JCJason Calacanis24:38

       Yeah. Right.

   13. BGBill Gurley24:38

       ... how we're all gonna behave.

   14. JCJason Calacanis24:39

       Yeah.

   15. BGBill Gurley24:39

       But, um-

   16. DSDavid Sacks24:40

       They're still getting theirs.

   17. JCJason Calacanis24:40

       You're looking at it.

   18. DSDavid Sacks24:41

       They're still getting theirs. They're the boss.

   19. JCJason Calacanis24:42

       (laughs)

   20. BGBill Gurley24:42

       (laughs)

   21. DSDavid Sacks24:43

       The price fixing (cheers) .

   22. BGBill Gurley24:44

       But keep in mind, as, as that, as that risk gone, goes slowly up and up and up, and, you know, and w- and especially in Silicon Valley, we've had a systematic shift of power from the investor to the founder over a very long period of time.

   23. JCJason Calacanis24:58

       Yeah.

   24. BGBill Gurley24:58

       People are friendly because they want deal flow.

   25. JCJason Calacanis25:00

       Right.

   26. BGBill Gurley25:00

       So nobody, nobody does it. Nobody. Nobody does it.

   27. DSDavid Sacks25:03

       Well, let's talk about that.

   28. JCJason Calacanis25:04

       So interesting.

   29. DSDavid Sacks25:05

       You know, we, you've seen deals happen where, you know, one term sheet seems great for all shareholders, and then this term sheet includes some secondary for the founders, and no governance seems pretty great for the founders. And somehow this one magically wins, and then somebody wins the deal by not taking a board seat. You know, in the three decades you've been doing this now, I think it's three or four?

   30. BGBill Gurley25:26

       (laughs) Geez.
4. 33:52 – 47:54

   Gurley's take on WeCrashed & Super Pumped TV series, how sophisticated investors got "gaslit" by the market, influx of capital creating consumer-surplus businesses

   1. BGBill Gurley33:52

      they're very rare.

   2. JCJason Calacanis33:52

      Have you and your partners-

   3. DSDavid Sacks33:54

      Google.

   4. JCJason Calacanis33:54

      ... watched, uh, both WeCrashed and The Dropout?

   5. BGBill Gurley33:57

      (laughs) I can't speak for all of them. I've watched both of them.

   6. JCJason Calacanis34:00

      You watched both of them?

   7. DSDavid Sacks34:00

      Which one was more accurate?

   8. JCJason Calacanis34:02

      Yeah. What did you think?

   9. BGBill Gurley34:03

      Um, I think that... Well, I don't know about accurate because I- I only... I don't... The- the... We... Super Pump was not accurate just because they made up a lot of scenes.

   10. JCJason Calacanis34:14

       Yeah.

   11. BGBill Gurley34:14

       Like, Drummond wasn't very active at all, but he's in a lot of the scenes, so a lot of them were made up. Um, I think Leto did a better job of showing you who Adam Newman is.

   12. JCJason Calacanis34:26

       100%, yeah.

   13. BGBill Gurley34:26

       Um, and really got into the character.

   14. JCJason Calacanis34:27

       He was incredible as Adam Newman.

   15. BGBrad Gerstner34:28

       He was so good as an actor.

   16. BGBill Gurley34:30

       Yeah.

   17. BGBrad Gerstner34:30

       Yeah.

   18. DSDavid Sacks34:30

       And accurate.

   19. BGBill Gurley34:32

       Yeah.

   20. DSDavid Sacks34:32

       To your opinion, having met.

   21. BGBill Gurley34:33

       Yeah, and- and equally on the other side, I think that Travis, and you know him well, is- is way more nuanced. He's- he's- he's one of the grittiest, hardest working investors, I mean founders, I've ever worked with. He's super intelligent. He can be really charming.

   22. DSDavid Sacks34:48

       Yeah.

   23. BGBill Gurley34:48

       And those dimensions weren't explored in the characters.

   24. DSDavid Sacks34:51

       Right.

   25. BGBill Gurley34:52

       Which I think is unfortunate.

   26. JCJason Calacanis34:53

       I remember you telling me, this was, I don't know, in the height of WeWork, you said, "Chamath, this is the single greatest salesman I've ever met in my life."

   27. BGBrad Gerstner35:01

       Yeah, you told me, you said, you told me also-

   28. JCJason Calacanis35:04

       About Adam Newman, you said that.

   29. BGBrad Gerstner35:05

       You said the first time Adam Newman came in, you and your partners, he left the room and you guys looked at each other and you guys were like, "We just have to invest in this guy because he can just-"

   30. BGBill Gurley35:11

       I said-
5. 47:54 – 51:31

   Brad predicts the market for next year, Bill gives post-Benchmark plans

   1. BGBrad Gerstner47:54

      Brad, uh, where's the market gonna be, uh, at this time next year? Answer that question. We, we will be higher for growth stocks this time next year, but we may very well get there by way of lower and potentially meaningfully lower because the counterfactual to the hyperinflation argument is not, you can't deliver the counterfactual for at least four to five months. The facts don't exist until we actually see the facts play out. But my suspicion as we return to trend, things become more predictable and investable again, and we bounce back up to the five-year average.

   2. HPHost (All-In Podcast)48:35

      All right, back now for you, Bill. Final question.

   3. BGBill Gurley48:38

      Oh, I don't get that one?

   4. HPHost (All-In Podcast)48:39

      No, too easy.

   5. BGBill Gurley48:40

      (laughs)

   6. HPHost (All-In Podcast)48:41

      You can answer it if you like, but I got a more important one.

   7. BGBill Gurley48:43

      6.385% higher. (laughs)

   8. CPChamath Palihapitiya48:45

      (laughs)

   9. HPHost (All-In Podcast)48:45

      Okay. Uh, I know you're not going to answer it, so I got a better one for you. You, uh, you're not in the next Benchmark fund. Essentially, that means retirement of the spurs. Now, the market's down.

   10. DFDavid Friedberg48:59

       You seem like you're a little bit bored. Are you going to get back into early stage investing, yes or no? And are you missing it?

   11. BGBill Gurley49:07

       Um, I think... I don't know what that was. Um, I- I think I could, I might get intrigued with doing angel stuff the way Bezos did. I don't think I want to practice the art of taking board seats. I'm still on ten that I'm serving dutifully, and, and I've played that game, you know. Maybe similar to what David said about operating a business. I've played that game.

   12. DFDavid Friedberg49:30

       So you meet a great founder, they got a good idea, you vibe, you put in a 500K check?

   13. BGBill Gurley49:33

       Yeah, I'd be open to that.

   14. JCJason Calacanis49:35

       Do you wanna, do you wanna tell him-

   15. BGBill Gurley49:36

       And I'm very excited about public stocks here, actually.

   16. DFDavid Friedberg49:39

       Really?

   17. BGBill Gurley49:39

       Yeah.

   18. DFDavid Friedberg49:40

       Continue.

   19. JCJason Calacanis49:40

       You're excited about what?

   20. BGBill Gurley49:41

       Public stocks. Like, like the valuations are-

   21. JCJason Calacanis49:44

       Crazy.

   22. BGBill Gurley49:44

       ... are getting super interesting.

   23. JCJason Calacanis49:45

       Such good deals out there. Super interesting. Yeah. You wanna do your Bill Gurley, uh, imitation?

   24. BGBill Gurley49:49

       (laughs)

   25. JCJason Calacanis49:49

       Oh, yeah. You guys gotta hear this.

   26. DFDavid Friedberg49:50

       At the poker, at the poker table-

   27. JCJason Calacanis49:52

       JCow, JCal.

   28. DFDavid Friedberg49:53

       It's a great question.

   29. BGBill Gurley49:54

       Do I have to stay out here for this?

   30. DFDavid Friedberg49:55

       Yes.

Episode duration: 51:31