All-In PodcastE83: Market slide continues, and how to address Uvalde
EVERY SPOKEN WORD
155 min read · 30,525 words- 0:00 – 1:00
Bestie Guestie Brad Gerstner joins the show
- JCJason Calacanis
Hey, everybody. Welcome to another episode of the All In podcast. It's been a crazy, uh, couple of weeks here. We had the All In Summit, and boy, was it amazing. Our bestie, David Friedberg, couldn't make it today. Uh, he had, uh, some personal things he had to attend to. So joining us again is Brad Gerstner. Welcome back to the fifth bestie, uh, on his... Is this your fourth appearance now, including the, uh, All In Summit? I think you've been on four times now.
- BGBrad Gerstner
Hmm.
- JCJason Calacanis
Very good. All right. That's about 5% of the episodes. Oh, nice, nice, uh-
- BGBrad Gerstner
(laughs)
- JCJason Calacanis
I think that's a nice little chip in your, uh, in your, in your, your belt there.
- BGBrad Gerstner
I'm an unworthy replacement to Friedberg, but I do what I can do.
- JCJason Calacanis
Nobody can replace Friedberg. That is the truth.
- CPChamath Palihapitiya
What's going on? Let your winners ride.
- JCJason Calacanis
Rain Man David Sacks.
- CPChamath Palihapitiya
What's, what's going on? And they said we open sourced it to the fans and they've just gone crazy with it.
- JCJason Calacanis
Love you, bestie.
- CPChamath Palihapitiya
Queen of quinoa. What's going on?
- 1:00 – 16:45
All-In Summit recap and best moments
- CPChamath Palihapitiya
- JCJason Calacanis
Just, uh, going around the horn here, Chamath, did you have a, a favorite moment on stage, a favorite moment off stage? What, what is your general impressions of the All In Summit 2022?
- DFDavid Friedberg
I thought the people I met were, um, really impressive. I really enjoyed meeting people and learning what they did. I also thought you and your team organized, um, really an, an incredible event. And, um, I forgot how good you are at these things. But, um... So I give you a lot of credit. I really enjoyed participating. The only thing that I was nervous about during that whole thing, which probably limited a little bit of my fun, was my mom was coming.
- JCJason Calacanis
Mm-hmm.
- DFDavid Friedberg
She's 81. And so I was not, I was not super psyched to really be in the throws of all the parties, to be honest, just 'cause I was like... I didn't, I didn't necessarily wanna get COVID and then I didn't want to introduce it to her, and-
- JCJason Calacanis
Got it, yes.
- DFDavid Friedberg
You know, Nat ended up getting really, really sick but more, uh, like a flu and a cold.
- JCJason Calacanis
Yeah, for sure.
- DFDavid Friedberg
Um, but, you know, I've been fine. My mom's fine. I know a bunch of folks that came, unfortunately tested positive, so-
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
That was the only... That's the only downside where I would, I would have wanted to be a little bit more carefree, but, um, that was the only thing that was... But that's not in anybody's control, so.
- JCJason Calacanis
Yeah, but I think, I think it was great.
- BGBrad Gerstner
Well, hold, hold on a second. I, I recall that when I had a Christmas party-
- JCJason Calacanis
Here we go. (laughs)
- BGBrad Gerstner
... back in December.
- DFDavid Friedberg
Oh, here we go.
- JCJason Calacanis
Here we go, super spreader.
- BGBrad Gerstner
And J-Cal got COVID like a week later. He called my Christmas party a super spreader even though I tested everybody at the door. Every single person-
- JCJason Calacanis
Uh-huh.
- BGBrad Gerstner
... was negative. At this-
- JCJason Calacanis
Except the backdoor people, but okay.
- BGBrad Gerstner
... the All In Summit, AI- so, so my parents went to this conference, they both got COVID.
- JCJason Calacanis
Oh.
- BGBrad Gerstner
My aunt who lives in Miami, who's in her 70s, she got COVID.
- JCJason Calacanis
Oh.
- BGBrad Gerstner
J-Cal-
- JCJason Calacanis
How are they doing?
- DFDavid Friedberg
Are they okay, by the way?
- JCJason Calacanis
That's the most important is, uh, you know.
- BGBrad Gerstner
It's, you know, it's Omicron, it was like... You know, it's, like, bad for two days and then you get better. So they're going to be fine.
- 16:45 – 29:53
State of the markets, $ZM/$SNOW earnings, how much more uncertainty?
- JCJason Calacanis
on Sacks. All right. I guess we start with markets, and, um, S&P 500 down 15% year to date, DOW down 11%. Two stocks of note, uh, that did particularly well during COVID, uh, Zoom and Snowflake reported their earnings this week, and they beat expectations. Of course, (laughs) that, uh, gives them no reprieve. Uh, market cap for, uh, Zoom, 31 billion. They got almost $6 billion in cash, uh, which was a, a prescient move to, to cash up, I guess, during the, the boom times. Their stock jumped 18% after the earnings, so great for them. Uh, Q1 revenue 2023, 1 billion, 12% year over year. They got an 80% gross margin for that business. Pretty impressive. 500 million adjusted free cash flow, 7,000 employees. They're at almost 500,000 per employee, uh, at this point. And, uh, stock is still down 43% year to date. But a little bump here, so I, I guess we might be bumping along the bottoms. And then just to quickly, uh, recap Snowflake and get your comments after that. Snowflake reported their quarterly earnings yesterday. 41 billion dollar market cap. They got almost four billion in cash. They were down slightly, uh, at the taping of this episode today, and they're down 67% from the peak of $409 a share in November. So they're not in the 85% plus club like Coinbase and Peloton, uh, but still, they've lost two thirds of their market cap. 422 million in revenue, 85% year over year, beat their expectations. Uh, and, um-Gross margin, 72%. Net retention, 174%. Uh, 70% growth withi- within their existing customers. To David Sacks' point about why SaaS is so great, they got 4,000 employees, uh, 6,300 total customers. So, uh, I guess maybe starting with you, Brad, since you're, you're in this, in the thick of it. Thoughts on, uh, I know you're a major Snowflake early supporter. Thoughts on what's happening in the market, and maybe any indication, uh, from these two, let's face it, strong results, uh, in the bouncing along the bottom, I think is how we'd all describe what's happening right now.
- DSDavid Sacks
Well, I think, listen, what makes investing hard is sometimes you have to hold simultaneous truths, right? And the reality is, there's a lot of cognitive dissonance when you see something down 30, 40, 50%, but it may be still f- fair value, right? We were talking about last October, like make no mistake about it, just take Snowflake as an example. The move from 400 to 200 was probably just what I would describe as normalization in a world where rates were going back to 2.5 or 3%. Right? The market last October had gone too high. We discussed it on this pod, we discussed it on CNBC. And so I expected a return to what we call the five-year average, as we discussed at the summit. What's been surprising to me is the negative reflexivity that's kicked in as a result of the war in Ukraine, uncertainty about hyperinflation, uncertainty about hyper rates. And so now we're seeing software generally, all risk assets, growth assets, trading now 30, 40, 50% below the five-year average. Right? So, I don't think it's helpful to say, "Well, none of that should have happened." No, the reality is normalization meant that all of this stuff was going to be down 20 to 50% because it was way overvalued last fall. We gaslighted ourselves in many respects. We didn't hedge it perfectly in many respects. But that's, you know, that's what happens in late market cycles. So the question is, where are we today? And for example, like, why is the NASDAQ up 300 basis points today? Right? This, it feels like whiplash. I come in one day and, you know, you have market caps up 10% one day, down t- 10% the next. And so I think it's really important to help the people listening understand, you know, like what happened this week and what's going on.
- JCJason Calacanis
It has been kind of a, uh, a, a, a pretty mixed bag this week, in fact, of, of things going down. Chamath, what are you, you got any take on this, of what we're seeing in the market this week specifically, with precipitous drops and then, you know, the, the bouncing up again?
- DFDavid Friedberg
Look, we, we still had some amount of rate uncertainty from the Fed. I think people weren't sure how aggressively they were going to hike. But by early this week, it was pretty clear there was gonna be two 50 point hikes, one in June and one in July, and then effectively a pause, because then the Fed funds rate will be at around 2%. And everything from there will probably be path and data dependent, okay? That's effectively what they said. Now, I think the, the markets had actually already started to see that writing on the wall. So if you go back to, you know, one of our favorite measures, which is the 10-year break-even, it's effectively rolled over, which meant that, you know, which means that from the highs in sort of late April, it started to come down, which says that, you know, they were thinking that, you know, the inflation was not going to be as bad in the back half of the year. And then the second is that corporate credit, which is really what matters in some ways to the Fed, because that's where they can intervene. What is the spread above Treasuries that a company can issue debt? When it goes crazy and it goes up, it means, oh no, the cost of capital is going up. That's gonna be hard for companies to raise money. They may have to lay people off. They may need to get into cost-cutting mode, right? That's what goes through everybody's mind. But that's also now about 35 and 40 days rolled over, which means that the gap has started to shrink, you know, between the US Treasury price and what, you know, decent corporates can, can issue debt at. So it looks like we are set up for potentially a decent little rally here. The problem is, is it a rally that is sustainable or is it a rally that's basically what we call a dead cat bounce or a bear market rally where, you know, you just get some one or two weeks of relief before the thing spears down again? And we're not gonna know, although tomorrow, on Friday, there's gonna be a really important set of inflation data that gets released, and I think everybody's gonna be sweating these details. So right now, we're in a moment of pause, and there is the potential, if this data comes back as reasonably good, which means prices are s- you know, not escalating as much as we thought, um, inflation is not gonna be as bad, growth is gonna be moderate, that, that gives a lot of ammo for the Fed to kind of take their foot off the, um, off the gas here.
- JCJason Calacanis
So...
- DFDavid Friedberg
And in that case, markets will go boom.
- JCJason Calacanis
Sachs, um, the interesting note, I think, is, um, what we talked about here. Uh, everything was correcting except housing, and we were wondering when this, uh, you know, the, the increasing rates would hit mortgage rates. Mortgage is way above 5%, uh, in the last two weeks. I think it's come down a little bit. But the mortgage rate basically doubled, and then we finally saw it earlier in this week, um, uh, w- what day was it? It was two days ago, so we're taping this on Thursday, so I think on Tuesday, new home sales, 591,000. They expected 749, and, uh, I think the last month before that was 763. Is that, uh, indicative of the, uh, raising the rates and slowing down inflation has finally occurred, and that w- maybe we-... the Fed maybe, uh, steered too much into the turn? How do you interpret that mass- It was a pretty massive miss in terms of home sales in the estimate.
- BGBrad Gerstner
Well, the costs of, um, buying a home are going way up because home loans are now more expensive. So that's gonna factor into all sorts of consumer purchases. Anything that's financed is gonna be more expensive. Um, you're also seeing companies starting to slow down spending, uh, really starting to slam on the brakes. We see it in startup land. Startups are all slashing costs right now. But that's eventually gonna percolate up to big companies too. You saw Dara's memo, basically when he got back from Wall Street, remember he published that couple-
- JCJason Calacanis
Yep.
- BGBrad Gerstner
... weeks ago saying, "We need to sharpen our pencils, cut everything." Uh, what Wall Street is looking for now is free cash flow. Um, so it seems to me like we're headed into a pretty serious downturn or recession here. I mean, I've been saying we're in a recession for months. Um, the- the- the- the- you know, the tricky thing for the Fed is that they don't have a lot of good options because we have a lot of recession indicators blinking red right now. At the same time, inflation is still high so they're kinda caught between a rock and a hard place. I think what the Fed should have done is, in 20/20 hindsight is back last summer when we first got that shock CPI print, remember it was like 5.1%, seemed to come out of the blue because for years and years we've been talking about deflation. Nobody thought inflation was a problem. All of a sudden, we got that 5.1% print. They were in total denial about it. They s- they just dismissed it saying that inflation was transitory and, you know, Yellen said the same thing. And so basically, everyone just ignored the data for six months, and what they shoulda done was stop QE right then and there. They coulda taken a little bit of time to think out, you know, a rate increase strategy, but they were still basically engaging in QE for nine months after that, you know, first inflation warning. And if they had stopped QE there, then we wouldn't have had this asset bubble in the second half of last year. That's when it inflated the most. And we coulda had more of a soft landing. Unfortunately now, uh, they let the, they- they kept inflating un- really until the end of Q1 and they've yanked away the punch bowl so violently that I think the real economy's gonna go into recession. So that's where we are right now. I mean, I don't know what the ri- the right answer is now given that we're in this, you know, almost stagflationary position.
- JCJason Calacanis
Le- let's try and answer that, Brad. What is... If- if we didn't act soon enough, if you agree with, uh, Sachs' point, pretty hard to disagree with, um, and we didn't take the medicine a little bit at a time, um, and now maybe we've overreacted or maybe it's gonna get worse, what is the right thing for us to be doing now? Because all these companies doing hiring freezes, layoffs, at the same time that the housing market tanks, at the same time crypto tanks, at the same time the stock market tanks, this feels like a- a major shock to the system. Is it time to maybe reconsider some of these, um-
- DSDavid Sacks
No.
- JCJason Calacanis
... you know, for the Fed to reconsider or just slow and steady wins the race here? Wh- wh- what's the best option?
- DSDavid Sacks
First, we should erect statues to Senator Manchin for saving the republic by vetoing STMY II. That would have been-
- JCJason Calacanis
Build Back Better?
- DSDavid Sacks
... devastating. That would have been devastating. So we'll revisit that. Listen, the Fed said two really important things this week. They said number one, "Our communications have been helpful in shifting market expectations." What that means, the Fed is the air traffic control. They said to the markets at the beginning of the year, "You're 90 degrees off runway heading. Get your ass back on runway heading." It was a slap in the face to markets and it was a radical adjustment. Now you hear the Fed and these little statements. This week they said, "Hey, we're well-positioned this year to assess the effects of policy firming in the back half." So they're saying, "We're gonna hit it with 50/50 and then we're going to take a look." So now think of it as air traffic control. You're two degrees to the left, you're two degrees to the right. They're steering us on runway heading. I don't think the Fed wants to do anything at this moment to lose credibility in the inflation fight. We're going to get 50. We're going to get anoth- another 50. But they're doing what they want to do which is keeping markets sufficiently tight, right? They wanted to take the crypto market down. They wanted to take all the excessive risk in the stock market down, right? You're absolutely right. The inventory of $350,000 homes spiked from four months to nine months, right? Used car prices are rolling over the last three months. All the things they needed to do, they're doing, right? They need to stay the course. However, the hyperventilation this week by Bill Ackman on Twitter, that the Fed needs to be doing radically more, that somehow we need to be raising rates to 6, 7, 8% in order to- to squash inflation, to me seems highly misdirected and totally out of touch with the fact that on layoffs.fyi, they've already announced 750 companies that are announcing layoffs, right? The market is getting the drill.
- DFDavid Friedberg
I- I totally agree with this. I think we're in a- we're- we're- we're in a pretty reasonable place here. The real- the real question is now
- 29:53 – 51:10
$SNAP drops after miscalculating earnings targets, understanding signs of a true bottom, the end of entitlement
- DFDavid Friedberg
what do you need to take the market lower? And this is more of a nuance but, you know, when you look at companies that are now "cheap", right? Let's take an example like you, um, you know... Well, we hear a lot about Google or Facebook, right? And people will say, "My gosh, this is cheap," 'cause if you run a screen on it, it's like 10, 11, 12 times price to earnings. Well, the price you know because you can look on the screen. The real question is are the earnings right? And, um, the thing that can take the market lower is if you actually think earnings are modeled incorrectly, right? So we saw it this week as well, Snap-... I mean, completely just blew themselves up.
- JCJason Calacanis
46% down-
- DFDavid Friedberg
And-
- JCJason Calacanis
... intra-day yesterday, I think.
- DFDavid Friedberg
No, I just wanna say something about SNAP.
- JCJason Calacanis
In one day.
- DFDavid Friedberg
They have the most incredible propensity to self-immolate on earnings calls than any other company I've ever seen. There's probably been three times, no less than three times over the last four years, where I don't know whether it's just poorly scripted or not well rehearsed or the people that are helping Evan get ready for these things, but these are disastrous calls. You know, Facebook's had a couple in its lifetime, but SNAP consistently, probably once every 18 months, will do this. (fingers snapping) Anyways, the thing just completely implodes. The stock implodes by 48% or something, and then it, you know, rolls over to companies like Facebook and Google, who then are off 8% or 10%. My point in telling you this story is that if you think Facebook and Google, just as an example again, are cheap at 10 times, well, you better hope that the earnings are right, because if the earnings are actually wrong, that's actually 27 times and 19 times. You know, I'm- I'm making these numbers up to give you the example, because the earnings are fundamentally wrong. So that's the risk now that's left in the market, in my opinion, that could take it much, much lower, is if that, you know, all of this slowdown really contracts spend and the earnings are actually not accurate, the forecasted earnings will need to be revised over the next two or three quarters, and that's where we will probably see the low. If, however, growth is muted and the Fed can... As Brad said, it's a really good analogy, now just course correct by degrees, you know, a degree here, a degree there, uh, we've probably consolidated the lows.
- JCJason Calacanis
So, uh, said another way, we look at a company like SNAP, uh, or Google, a lot of their, um, expected value has to do with people's ad spend. We now see less homes being sold, so maybe people in real estate stop spending less on ads. They're a major advertising category. Maybe direct to consumer, uh, people are not buying because the supply chain issues, this stuff is too expensive, and we're not gonna spend on ads. And so all of this ad revenue, that's some of the first to come out of people's budgets, so, you know, even as great as SNAP's results actually looked, they were up 38% year over year, uh, they're generating over 100 million-
- DFDavid Friedberg
Uh-
- JCJason Calacanis
... in free cash flow.
- DFDavid Friedberg
The guide was terrible because what they said was, "Our E," right? "Our earnings-"
- JCJason Calacanis
Right.
- DFDavid Friedberg
... "are not modeled accurately."
- JCJason Calacanis
Right.
- DFDavid Friedberg
And so that's the risk that you now have to take to every company. You cannot look at a screen in Yahoo Finance or Bloomberg, look at a price-to-earnings ratio and say, "Wow, seven times? That's so cheap." It may not be seven. You have to do your own work. It could actually be much higher than that because the earnings may be at risk.
- JCJason Calacanis
The earnings being at risk is this contagion that we talked about, I don't know, six, maybe even s- going on almost a year now. Sacks, we talked about a contagion happening 'cause we've all experienced it in the last two recessions, 2000, the dot-com bust and the Great Recession. So what are you seeing in terms of, at companies, this contagion risk? Are people canceling SaaS contracts, on the margins? Obviously, people are doing hiring freezes. Obviously, people are laying people off. Are people gonna start renegotiating sh- uh, salaries? You know, what- what's the next couple of shoes to drop here, Sacks, that would signal to you a true bottom here? Like, have you seen... I thought maybe one would be if somebody offered somebody an investment with a- a two or three times liquidation preference. Have you seen one of those yet?
- DFDavid Friedberg
No.
- JCJason Calacanis
Have you seen people say, "We're gonna renegotiate salaries"? 'Cause that's when it was really dark, right? The last two times. That was the true darkness.
- BGBrad Gerstner
Yeah, no, it's gonna, it's gonna take time to get to, to that point. I mean, where you start seeing structure in deal is, is, in deals is when a founder is trying to preserve a valuation they got last year, and that can't really be justified, but they don't wanna just take the down round, so you try to preserve the optics of the last round by building in all these preferential terms. We don't like to do deals that way, but you'll start to see them happen later this year when f- you know, companies get more desperate. Uh, that's not the first thing that happens though. Um, I think that, that to your point about the talent market, it's definitely gonna happen. Has it happened yet? No. Uh, what has to happen is first, all these open reqs get canceled, companies freeze their hiring plans, then eventually they do layoffs. That's coming. And then the talent market-
- JCJason Calacanis
That's, that's here.
- BGBrad Gerstner
... cools down. That's here.
- JCJason Calacanis
Both of those things are here.
- BGBrad Gerstner
Right.
- JCJason Calacanis
Both are here.
- BGBrad Gerstner
Exactly.
- JCJason Calacanis
So what's the next intalent wars?
- BGBrad Gerstner
Well, yeah, I mean, look, by, within the next six months, the talent market's not gonna be as hot. And, you know, in the same way that startups aren't getting 10 term sheets, now that maybe they get one or two if they're a good company, same thing with talent, right? They're not gonna have 10 job offers. They might have one or two, and that's gonna create, uh, that's not gonna create the same upward pressure, continuing upward pressure for, um, for increases in, in comp. Um, to your point about, like, will SaaS contracts be cut, I mean, I think software's pretty sticky, I mean, if it's a good product. Um, will deal cycles get longer? Yes. Will there be more mortality risk in the startup or SMB customer bases of companies? Yes. Um, I think one concept that startups may wanna wrap their heads around is what I would call deferred mortality risk, meaning that during the last few years, during the boom times, the graduation rate from C to series A to series B was very high, perhaps artificially high. So there's a lot of companies that got funded and advanced to the next round-
- JCJason Calacanis
Mm.
- BGBrad Gerstner
... where in more normal times, they wouldn't have made it. So-
- JCJason Calacanis
Got it.
- 51:10 – 1:05:17
Down market end game, investor decisions, reasons for optimism, quick reset potential
- JCJason Calacanis
Chamath, all this adds up to companies' and the government's balance sheet becoming tighter, uh, and more efficient. So the talent diffusion across the industry, perhaps everybody being entitled and getting overpaid, uh, people not wanting to go to work, people who have jobs not wanting to go to the office, all of this seems to have actually reversed in three months. So this medicine we're taking, we stopped eating the bad food, we started working out, we're getting better sleep, this is gonna turn around for the sh- the companies that take the medicine, the management teams, the capital allocators who do the hard work and sharpen their pencils, as we've talked about, this will all result in a more efficient, uh, and vibrant economy. Yes?
- DFDavid Friedberg
I think for the most part. I think there's still gonna continue to be examples of folks who basically run themselves into a brick wall because they don't want to make the hard decisions. That is gonna be more exaggerated in Silicon Valley because we have a culture of tolerance and we have an economic business model that supports kind of irresponsible decision-making and supports poor governance. You know, uh, look, I, I've said this many times, but a fund's job ultimately is to make a very important decision about whether they truly care about generating massive returns or whether the fee income becomes so meaningful so as to drown out every other incentive that they have. And I think by and large in Silicon Valley, if you track all of the increased frequency in fundraising, you can also probably follow those dollars and they generally will be the most poorly run. Uh, they'll be held the least accountable, and I think those will have the largest negative outcomes. And then instead if you follow the dollars of the, the real practitioners who have discipline, they look kind of sheepish and silly for years in the middle of a rally, but they're the ones that are able to really reset and help some of these few companies really win. And I think that you're gonna go through that cycle over the next four or five years, and so, you know, if that's-
- JCJason Calacanis
I think it's super well said, Chamath, because I have felt at, or I've been made to feel silly (laughs) by some folks who said, "Why are you asking to do due diligence? Why do you want to have a board seat? Why do you want to talk to customers? Why are you asking for month-by-month revenue?"
- DFDavid Friedberg
You made a sub-economic decision. Like, the idea that over the last four or five years you optimized for anything except the market beta was kind of dumb. You know, and it's, and, and the worst thing that you could have done in that period was confuse alpha and beta, meaning alpha is what you are able to do because of your discrete skill versus anybody else. Beta is when just the market goes up. Said differently, you could take any NBA player and put them on, uh, a high school basketball team and they would be the, you know, college player of the year. Any single one. Okay? That's beta. (laughs)
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
If you then can be the MVP of the NBA, that's alpha.
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
Okay? And I think that a lot of folks, um, were made to feel very silly or, you know, a downer or a wet blanket, um, in these last few years who will probably have the last laugh.
- JCJason Calacanis
I- it's been unbelievable, Brad, to watch the changing of attitudes and the entitlement in fundraising and private markets in the last 60 days, and it's been even more pronounced in the last 30. Um, I literally have people we talked to last month who had really crazy expectations. They've come down by 50%.They want a 50, now they're at 25. They didn't want board seats, now they're okay with board seats. Information rights, they were fighting against information rights. I don't know why that's a hill to die on. Now they're like, "Information rights? Yeah, sure, here's our CFO's email. (laughs) We need to get money in the doors." So, um, I guess what's the silver lining here? It does seem to me as a great setup right now.
- DFDavid Friedberg
Wait, Jason, let me ask you a question. Hold on.
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
Or to Brad. Like, and then you're, you're forgetting one other key thing. In, in the, in the race to raise all of this money, what did these folks do? They hired these mid-level kids as partners into their venture firms and gave them money to put into companies. What do these people know?
- JCJason Calacanis
No mentoring.
- DFDavid Friedberg
I'm not saying it disparagingly. I'm just like, what do they know? How do they know how to actually invest? Investing is just not you see it and you just say, "Okay."
- JCJason Calacanis
Yeah. Sounds cool, yeah.
- DSDavid Sacks
Well, I think that, you know, there are some of those, uh, younger folks who are gonna turn out to be All Stars and they're... It's just like in the NBA and there are gonna be some that, you know, prove to be right in the beta. But let me answer Jason's question because, you know, maybe end on a, on a, on a note of, uh, optimism. You know, in some countries, you know, notably China right now, they're doing a lot to prop up a bunch of companies that should be allowed to fail. Right? One of the beautiful things about free market capitalism, the creative destruction, the cycle time on creative destruction in this country has never been faster. Right? Make no mistake about it, if you took money at a valuation over a billion dollars, okay, last year, you're not... That's not a venture capital bet. I call it quasi-public. Right? You stepped into the bigs and you said, "I will deliver this plan." And if you don't deliver the plan, there's not gonna be a lot of tolerance. There's not gonna be tolerance for just giving away a bunch of more stock. There's not gonna be tolerance for no course correction. Right? Maybe in seed or series A, right, there's a lot of tolerance, because you sign up to a lot of unpredictability. But the level of tolerance that you'll see out of late stage growth investors is going to be akin to what they do with a public company that runs them off a cliff. You know how that is. You've been on those earning calls. So I think this is going to shine a light on the bifurcation that we really have. We call all of this venture capital, but the truth of the matter is, series C and before is venture. Once you're stepping into the bigs and taking money at a billion, two billions, the expectations are different, your access to capital will be different, um, the expected course correction will be different, right? But I take it as a, um, I take it as a sign of strength that we're gonna work through this. We're going to have, you know, the, the private markets are absolutely going to go through a reset, but we'll get through it and the winners will win, and those who fail to course correct and wanna fly into the wall will do that. And we'll get on with the next generation of incredible entrepreneurs solving big problems. The secular curve of technology solving big problems has never been steeper, right? And the cycles that overlay that secular curve are not suspended. We have not suspended wars, we have not suspended economic cycles, and so we're gonna have to get through this one. It's happening in record pace.
- DFDavid Friedberg
Sax, uh-
- BGBrad Gerstner
Actually, that, that's an interesting point. I wanna... Let me ask B- Brad a question about that, which is, what's the potential here for more of like a, a V-shaped recession where, to your point, the market's correct more rapidly and violently than ever. Snap misses a f- you know, issues a new forecast down 40%. Um, w- is there a possibility that this thing gets resolved in, say, six months? That's not to say that, uh, valuation levels are ever back to where they were, you know, in the second half of 2021, but in six months, could we have sort of done this big reset, washed out a lot of the problems, and, um, you know, again, valuations are not back, but the market become... The, the capital market's become, become unfrozen and we're back to a more normal operating environment?
- DSDavid Sacks
A super flush, you know.
- BGBrad Gerstner
As opposed to, say... Yeah, as opposed to, say, like more of a U where we're kind of bouncing around the bottoms here in this volatile state for about 18 months, um, you know, and then it's more like the dot-com crash, we come out of it in two years. I see smart people on both sides of this. I hear Jason Lemkin's been saying, "I think this is kind of short, deep, sweet, six-month reset." Fred Wilson just wrote, "18 months at least." I think Sequoia's saying, "Two years." I mean, I think our instinct is 18 months to two years. But what do you think the possibility is that we could be in a more normal environment in six months?
- DSDavid Sacks
Right. So let's, let's separate public markets and venture markets, 'cause venture markets, as you know, have a six to 12 month lag just in terms of the reset. But I would say, you know, the future's a distribution of probable outcomes. There's a downside case, (laughs) an upside case, and a base case. I think the base case is by this fall we'll have very good evidence, right, of where inflation's rolling over. I think it is rolling over. What the Fed is likely to do, the upward bound on, on interest rates, and I think we'll be at a point where we can start underwriting to the five-year average again. Make no mistake about it, the S&P and the NASDAQ today are still 30% above where they were in January of 2020. 30% above where they were in January 2020. How much better is the world today than where it was in January 2020? Well, I think what the market is saying is that we've grown the economy on a nominal basis about 15% during that time, and earnings have about doubled, right? The earnings margins of those companies are about... Have about doubled. So you would expect normal course and trajectory, maybe that those companies would be 30% more valuable. The problem is, as we look ahead, to Chamath's point, the earnings are likely to come down. Profit margins are being squeezed. So I think there's a decent, decent argument there's more pain to come in the public markets, that we haven't seen the bottom-
- BGBrad Gerstner
However, I do think that the Fed is taking a good course here. I don't think that we have runaway inflation. I think that, um, you know, we're going to have an investable environment come this fall. However, I think for venture, there's a six to a 12-month lag to that. So I think you've got to add it to those six months to really get to the market-clearing prices for all these companies. But I think it's incumbent upon all of us to give really good feedback today, and I see a lot of it, right, to entrepreneurs about making that course correction. If they're only turning the plane 10 degrees when they see lightning dead ahead, they're making a huge mistake. The default action by every founder today should be a 90-degree course correction unless they have very good idiosyncratic reason in that business in terms of their outperformance to stay the course.
- DFDavid Friedberg
Plan for the worst, hope for the best.
- JCJason Calacanis
Yeah. A- and y- you could even bifurcate the companies in private markets to ones that have strong product-market fit and the ones that don't. There's a lot of companies, to David's point, that were getting Series Bs without product-market fit. You know, it's, it's one thing to get your Series A when you have this, like, weak product-market fit and a great story. But when you start seeing Series Bs happening on momentum, it's like, that to me is, is, is gonna be impossible to resolve. That company has to go to zero or has to reset or give, even give money back to founders. Those are the, really the three things I would see as a true bottom, like the really dark moment where people have two or three liquidation preferences, people reset, reset comp and tell people, "Listen, we're gonna cut comp 30% across the board for management. If you don't like it, leave." Um, and then finally people saying, "You know what? We're gonna give the 60 cents on the dollar back to investors." Those are the three things I saw during the two downturns.
- DFDavid Friedberg
You're saying something that I think is also important that's not really talked about, which is that there's gonna be a lot of really good companies with really horrible capital structures, really terrible cap tables, really bad valuations, really big overhangs of preference stock that are gonna have to get worked out. And in getting that worked out, going back to what Brad said, the person that course corrects 90 degrees will win. And the reason they'll win may not even be because they're being that courageous, they're just being less stupid than everybody else, quite honestly. Because you have to remember, in most of these markets over the last four or five years, we funded four or five versions of every imaginable company.
- JCJason Calacanis
Right, and there's gonna be two winners, 70 and 30%. Yeah.
- DFDavid Friedberg
And, and there's really only gonna be one winner, and then there's gonna be a marginal second kind of also-ran that captures some value, and everybody else is not that valuable. And, you know, that's roughly been true, but the reason we were able to support that was that every company looked kind of interesting. Anyone with traction, um, could be, you know, competed against because the only differentiator at the time was very cheap money that was effectively free and it was flowing in, you know, faster than you could count. So all of that has to get sorted out. N- so, I just think that, that those dynamics shouldn't be ignored. And so, you know, again, I-
- JCJason Calacanis
It's hard work, too. I mean, it, it... To the thing we've been saying here, the... It's hard work for a board and founders to do this, but what choice do you have? You have to do it.
- BGBrad Gerstner
Well, the problem is, the pro- Go ahead, Shamon.
- DFDavid Friedberg
If you take much more sophisticated markets like the debt markets, which I would say are much more sophisticated, okay?
- 1:05:17 – 1:12:27
Sacks explains his concept for "default investable," Besties share thoughts on proactive layoffs and course correction
- DFDavid Friedberg
support.
- JCJason Calacanis
Sacks, I mean, I-
- BGBrad Gerstner
Default investable.
- JCJason Calacanis
Default investible. I like that one too.
- BGBrad Gerstner
Default investible. Default investible, yeah.
- JCJason Calacanis
Sacks, um, I mean, Sacks made a great tweet. He basically said it's not default alive or dead, investable or not, and that's a- an even finer filter. ƒ
- BGBrad Gerstner
Well, no, def- default-
- JCJason Calacanis
Or a pretty fine filter.
- BGBrad Gerstner
Default alive is fantastic if you can get there. It basically just means cash flow positive. I mean, all default alive means is that you're cash flow positive or you're gonna be cash flow positive based on the money you have in the bank.
- JCJason Calacanis
You don't need money, yeah.
- BGBrad Gerstner
Exactly. You don't need money. Well, of course, that's the best place to be, is you don't need money. But I think, you know, for early stage companies, that's almost an impossible standard, you know?
- JCJason Calacanis
Right.
- BGBrad Gerstner
It takes time to get to the point of being cash flow positive. So therefore, I was trying to propose a standard that I thought was more actionable for founders because it was, because it wasn't impossible, and I call it default investable, which is, here are the metrics that you need. At least I can tell you what they are in, in the SaaS world. You know, here's what great metrics look like. Here's what good metrics look like. Here's some danger zone metrics. And you need, you know, out of the five key metrics, you really need three or four great ones and one or two good ones to raise in this environment, and no dangerous metrics. And if you don't have those, you need to give yourself the time to fix the problems in your business to get to those metrics. Um, on that note, you know, Sequoia had a really good chart, um, called Survival of the Quickest that illustrates this concept of giving yourself time. And I threw it in the chat. Um, but basically what it shows is, there's a, a green line and an orange line. The, the green line is the company that realizes in May of 2022 that we've gone into a very different environment, and they slash their burn in half and it, they basically have doubled their runway. And then there's the other company that just keeps going along the same path they were at until they realize, "Oh, wait a second." You know? And then they, you know, some point in the future, they realize there's been a change. They make a small cut, they make another small cut, and they're always behind the eight-ball. And I've seen this so many times before, that the company doesn't make cuts until they're forced to.... and so they never really lengthen their runway, and then when they finally do make the cuts, they go into a death spiral and die.
- JCJason Calacanis
And now they're over the Atlantic and there's not enough fuel to get to a landing strip-
- BGBrad Gerstner
Right.
- JCJason Calacanis
... and you just plunge into the cold ocean and die.
- BGBrad Gerstner
Fo- fo- founders really have to think about the f- the asymmetry of the risks that they face, right, which is, let's say that you cut too much and the environment is better than you think it's gonna be. Well, you can always hire back. I promise you-
- JCJason Calacanis
At a lower price, in all likelihood.
- BGBrad Gerstner
I promise you you'll be able to hire back, okay? But on the other hand, if you don't cut enough and the situation is worse than you think, then you just die. So you... This is why Andy Gross said, "Only the paranoid survive." You've gotta think about the downside risk and be more skewed towards the bad scenario than sort of the, the sort of wishful thinking scenario.
- JCJason Calacanis
Hey, David-
- BGBrad Gerstner
Survive to remain.
- DSDavid Sacks
Uh, just, just one final point here. You know, because we have all these decks flying around now by venture capitalists telling founders to go make these really tough decisions. Being a little self-reflective, where were we all six months ago? Where were we in October when we were putting more money in and they were hiring like crazy? Where were we in November? Right? I remember some of the conversations that we were having. But I... Look, I posted in, in, in chat, layoffs.fyi. Right? The number one company on that list, get here. Sequoia Company. Okay? Are they making a course correction? You bet your ass they are. They're laying off 4,500 people, 15% of the workforce. The second company on that list, Lacework, an altimeter software company that's doing terrific, growing hundreds of percent, laying off 300 people, 20%. Right? A 90 degrees turn of the plane. Right? That company will never need cash again. But it's not just flying toward the lightning. They're making the tough decisions because that's what leaders do in businesses that are even good businesses. There are a lot of companies that are shit businesses that should be on this list, but they're bumbling along and not making the tough decisions. We need venture capitalists that instead of, you know, this being a popularity contest. Venture capitalists need to look inside as well and say, "What about our firm didn't, didn't work?" Right? "Why weren't we issuing these course corrections and telling people to tap the brakes a little bit when we knew markets were overheated last year?" Right? And so I think there's, there's a lot of responsibility that sits on both sides of the table. Um, but I'm... You know, there's 714 startups on this list. By the time we're done, there are gonna be at least 3,000 startups on that list.
- JCJason Calacanis
I was about to say, add a zero, add a zero.
- DSDavid Sacks
That's another reason I say the Fed is getting what it wants, right? This labor market is, uh, uh, you know, is cooling down very quickly, at least in Silicon Valley.
- JCJason Calacanis
Well, I mean, and the fact that people felt like they didn't need to take a job and they could live off credit and there would always be jobs for them, I think people are gonna have to rethink, like, "Can I be fun-employed forever? And, you know, do I need to take my career se- seriously? Do I need to pay down my debt? Do I need to have a, a, a balanced, uh, balance sheet? Do I need to... My, my personal balance sheet needs to be in order as well." I think that's what individual workers need to think about.
- BGBrad Gerstner
Yeah. I mean, B- Br- Brad's right that there's certainly enough blame to go around in the ecosystem, and, you know, VCs bought into these frothy evaluation levels last year. Um, to some degree, we were all gaslit by-
- JCJason Calacanis
Sounded it, yeah.
- BGBrad Gerstner
... by the Fed and these low interest rate policies. I wrote my post about burn multiple and how to measure capital efficiency two years ago. Um, it's getting a lot more retweets now than it did back then. But, uh, but look, uh, do VCs have some self-reflecting to do? Definitely. But, you know, I'm seeing a lot of tweets going around basically saying, like people objecting to this advice on the grounds... You'll hear something like, "If you VCs wanted us to operate more efficiently, then you should have invested more efficiently." Or, "If you wanted us to be disciplined, you should have been more disciplined in your investing." And to me, that's kinda missing the point. It's kinda cutting off your nose to spite your face. The reason we're giving this advice is because we just want our companies to survive and we've been through-
- JCJason Calacanis
We don't want a zero.
- BGBrad Gerstner
We don't want a zero. We've been through multiple down cycles. And the truth of the matter is, unless you've been in the business world for over 14 years, you've never been through a down cycle. I mean, that means that, you know, no founder under the age of, what, like, 36 has even seen a down cycle before. They don't know what it can be like when you go into a two-year nuclear winter.
- 1:12:27 – 1:17:36
Addressing Uvalde, legislative disappointment, potential preventative solutions
- JCJason Calacanis
I, I, we, we would be remiss if we didn't talk about, uh, at least for, uh, this last segment, about the tragedy in Uvalde, Uvalde, Texas, uh, 80 miles west of San Antonio on Tuesday. 19 elementary kids and two adults were murdered. Um-
- DSDavid Sacks
How are we gonna talk about this without losing our shit?
- JCJason Calacanis
It, it's really hard. I think maybe the roadmap from our... Like, I did give this a lot of thought.
- DSDavid Sacks
I, you know, you don't... You, you-
- JCJason Calacanis
Yeah.
- DSDavid Sacks
I was like, "Why is this, why is this first segment on the market trundling along on fucking life support for an hour and 10 minutes?" And I think part of it is because none of us can really talk about this without losing our cool.
- JCJason Calacanis
It's really hard. And, but I do think we did good work, Chamath. I, I was thinking about the good work we did in the episode of Roe v. Wade, and we actually came to a point where we said, you know, "Here are the extreme positions," and then you were like, "Hey, wait a second. I found this data point, I found this data point," and we c- actually figured out, "Hey, 80% of people want this definition."... of abortion in the United States. So I- I- I'll throw it to you, Chamath. You know, we're all outraged, we're all frustrated, but maybe we could start there. Is there a consensus of what could be accomplished here that you've come to? I've started to think about it a whole bunch, but, you know, d- we're all outraged. We could all yell and scream here, but a path forward is where my mind goes.
- DFDavid Friedberg
I'll just tell you what I, what I, um, have been thinking about.
- JCJason Calacanis
Okay.
- DFDavid Friedberg
Um, this is just a random stream of consciousness. Um-
- JCJason Calacanis
Let's do it.
- DFDavid Friedberg
... I think that the Democrats will not make any progress because they try to make this, unfortunately, uh, a moral virtue signaling issue. The Republicans will not make any progress because they become sort of very binary, adamant, um, absolutists about Constitutional rights and the interpretation of that right in a very specific way. Um, the truth is in the middle. You know, if you go back, before we talk about Uvalde, um, Payton Gendron, who was the kid that shot up a Tops supermarket in Buffalo and killed umpteen, you know, Black shoppers, lived in a state where there was a red flag law. For those that don't understand what red flag laws are, David, you know, tweeted some stuff about it as well, but essentially, it allows a community member or a family member or a school, uh, teacher or a police officer to essentially put, um, a restraining order around an individual that they think could cause harm and use that as a way to confiscate their weapons. People have talked about red flag laws as being possible. Well, he lived in a state, the kid was, you know, put under a psych hold f- you know, a year ago, and it- it all just falls through the cracks. Now, you know, Ted Cruz or somebody else said, "Let's spend $10 billion and only have one door into a school and put an armed guard there." Well, then you find out that Uvalde, you know, doubled their security spend over the last two or three years. They actually had a person that may or may not have just kind of, like, stepped to the side or something to let them in. The police, according to the, uh, AP, showed up and stood around for 40 minutes before they were able to actually breach the school. You know, so much so that the quote in the AP article was that there was a parent that tried to get other parents to- f- for 40 minutes, they were standing there. You know, in California, you have, you know, very restrictive measures, um, but we've had, you know, in San Bernardino and other places, we've had mass shootings here as well because the guns can just get transported across state lines and there's- there's no real way to stop this. The NRA, I find out, just so if you guys are interested, uh, Mitt Romney took $13.6 million from the NRA. This is the moral finger-wagger of the Republican side, who, you know, last time I checked, is a multi-senti-millionaire, but somehow still needs to take $13 million from these folks. Rich Burr took $7 million, Roy Blunt, $4.5 million, Thom Tillis, $4.4 million, Cory Gardner, $4 million, Marco Rubio, $3.3 million. There's no effective counter-lobby that says, "How about we have a more moderate and restrained pro-gun set of rights and field candidates on the left and the right that could, Jason, find this middle ground?" And so, you know, we're in this two or three day period, it seems like, where folks will get extreme and then nothing will happen. Here is one thing that I think we can all agree as well: if you look at the underlying family situation of all of these mass shooters, there is a really disturbing theme that I think is worth putting out there. These are all universally young men, 18, 19-odd years old, they come from broken families. This individual, Salvator Ramos, um, father was absent, uh, acc- again, according to the Times and the Wall Street Journal article I read, mother, intermittent drug use issues, lived with the grandmother.
Episode duration: 1:49:25
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