E85: SBF's crypto bailout, Zendesk sells for ~$10B, buyout targets, US diplomacy, AlphaFold & more

Chamath Palihapitiya 0:00 Let's go, Jason start. Let's go. Do you have any intros? Let's go. Let's go. Let's go. Let's go.

Jason Calacanis 0:03 All right, if you want intros.

David Sacks 0:04 (laughs)

David Friedberg 0:06 We're not willing to pay for them, so don't even go there.

David Sacks 0:09 (laughs) Sax is awake.

Jason Calacanis 0:11 All right, well then (laughs) we'll start with you Sax.

David Friedberg 0:13 If you wanna do your job, you'll do the intros-

David Sacks 0:15 (laughs)

Jason Calacanis 0:16 Here.

David Friedberg 0:16 ... but if you wanna, if you wanna slow roll your effort because you think you're negotiating with us-

David Sacks 0:20 (laughs)

David Friedberg 0:20 ... don't. We don't give a shit.

Jason Calacanis 0:22 Listen, I'm doing all the projects outside of here.

David Friedberg 0:23 You think we care about your intros?

David Sacks 0:25 (laughs)

David Friedberg 0:25 Do a bad job, we don't care.

David Sacks 0:26 (laughs)

David Friedberg 0:29 (laughs)

David Sacks 0:29 It's so true. (beep) waiting in the wings. All we need is-

Jason Calacanis 0:31 All right, then I'll just do three Sax intros in a row.

David Sacks 0:34 ... three of four. (laughs) Oh my God, it's so true. Do, could you do a couple of bad jobs so that we can boot you off the show. Oh, that would be so cool.

David Friedberg 0:39 (laughs)

Jason Calacanis 0:39 All right. Here we go.

Narrator 0:41 Don't let your winner slide. Rain Man David Sax. And I said. We open sourced it to the fans and they've just gone crazy with it. Love you Betsy. Queen of Kinwa. I'm going all in.

Jason Calacanis 0:57 All In Summit, I packed the joint. But Sax won't give me an extra point. His crypto holdings, they can't find a floor. Going to have him flying commercial for the first time since 2004. Welcome David Sax back to the program, the Rain Man.

David Friedberg 1:11 Good to be here.

Jason Calacanis 1:12 Ah, now Friedberg, I never wanted to see him go. But you gotta show up for work, you can't do every other show. The Sultan of Science, he's certainly not a fad. Then again, did you see those ratings with Brad? Welcome back the Sultan of Science.

David Sacks 1:25 (laughs)

David Friedberg 1:26 (laughs)

Chamath Palihapitiya 1:26 By the way, our show beat Brad's ratings. So thank you very much, J-Cal.

Jason Calacanis 1:30 Oh, okay. Well, a little, a little drama always builds a little audience. Okay here we go. Chamath-

Chamath Palihapitiya 1:34 A little healthy competition.

Jason Calacanis 1:35 Well, Chamath, he's in Italy living a life so grand. His next SPAC, a luxury wine and sweater brand. This market is leaving him in a daze, so he's been tipsy in the Mediterranean for the past 10 days. Welcome back, The Dictator.

David Friedberg 1:47 Thank you. Thank you.

Jason Calacanis 1:49 Way to go. I just, I put them on stun. I didn't want to do any kill shots there.

David Friedberg 1:53 (laughs)

Jason Calacanis 1:53 Just, you know, since everybody's a little on edge including the audience. The audience had a lot to say about whether we cover a lot of the controversial topics, um, Roe v. Wade, January 6th, and Ukraine, all... I did a bunch of surveys. 50% of people want us to talk about it, 50% don't. So, uh, we'll see which ones we get today.

Chamath Palihapitiya 2:13 Can I ask you a question?

Jason Calacanis 2:13 Yeah.

Chamath Palihapitiya 2:13 Do you think we should be surveying the audience to ask them what they want us to talk about? Because when we started this show, we just talked about stuff that we thought was interesting.

Jason Calacanis 2:21 Sure.

Chamath Palihapitiya 2:21 And people happened to li- like it and listen and tune in for it. If you end up asking the audience what they want, don't you end up becoming like a Fox News or like any other kind of media company-

Jason Calacanis 2:31 Yeah, I mean-

Chamath Palihapitiya 2:31 ... where you just ultimately use the feedback loop to drive, you know...

Jason Calacanis 2:34 Yeah, I mean, I wouldn't... Every week of the show I will tweet like, "Hey, anything you want on the docket?" 'Cause sometimes people have good ideas. Um, but yeah, certainly you shouldn't base it on like a survey, no.

Chamath Palihapitiya 2:45 I think we should talk about what we find interesting.

Jason Calacanis 2:45 It was just like a way to get some feedback.

Chamath Palihapitiya 2:47 Yeah, we were just... Yeah, that's how we started was we were just kind of being intellectually honest with each other and curious about stuff we were interested in.

Jason Calacanis 2:53 Yeah, absolutely.

Chamath Palihapitiya 2:53 And it, and it worked. And if people don't like it, they don't like it. I mean, I don't think we should-

Jason Calacanis 2:57 I think th- the big controversial thing-

Chamath Palihapitiya 2:58 ... I don't think we should be doing like a, like a vote for your topics and that's what we follow.

Jason Calacanis 3:01 Definitely not. We should, I think we all agree on that. I think just there is an ongoing debate amongst the audience of what percentage of this show should be politics and when should we talk about politics and are we doing too much politics. And so-

Chamath Palihapitiya 3:12 I think that's hard.

Jason Calacanis 3:12 ... let's start with markets. Yeah.

Chamath Palihapitiya 3:13 Let me ask you one more question.

Jason Calacanis 3:14 Yeah.

Chamath Palihapitiya 3:14 Do you think our objective should be to grow the audience or should our objective to be talking about the things we want to talk about?

Jason Calacanis 3:19 Yeah, what do you think?

Chamath Palihapitiya 3:20 I mean, what do you think Sax?

David Friedberg 3:21 Yeah, I don't think it's a good idea to poll the audience about what we want to talk about.

Chamath Palihapitiya 3:24 But do you know-

David Friedberg 3:24 I mean, the, what your polls show-

Chamath Palihapitiya 3:26 ... is the objective to grow the audience? Yeah.

David Friedberg 3:28 Well, I think it's good to have an audience, otherwise what are we doing? But-

Jason Calacanis 3:31 Yeah.

David Friedberg 3:31 ... um, but look, what the audience showed is that half of them wanted to talk about those topics roughly and half didn't. I suspect that most topics are going to be like that, you know. Unless there's just some-

Jason Calacanis 3:41 Well, not markets. And, and people want, like I think 80, 90% of people want to hear us talk about markets and startups.

Chamath Palihapitiya 3:47 Yes.

Jason Calacanis 3:47 Like our core stuff, right David?

Chamath Palihapitiya 3:49 I'm just saying if your objective function is to maximize your audience, you're going to end up making a TikTok video of people twerking or something. You know, it's not like the show-

Jason Calacanis 3:57 Could you just volunteer to twerk on the show? (laughs)

Chamath Palihapitiya 3:59 I'm not gonna do that, no. But- (laughs)

Jason Calacanis 4:02 No? (laughs)

Chamath Palihapitiya 4:02 (laughs)

Jason Calacanis 4:02 I think Sa- I'm pretty sure it's Chamath will. I have the video of Friedberg twerking at, uh, All In Summit anyway.

Chamath Palihapitiya 4:08 Hey

Chamath Palihapitiya 4:09 ho.

Jason Calacanis 4:09 Hey ho. All right, let's get started with, um, I think what's going on in crypto, because people do want to hear about that, and it's been quite stunning. A British Virgin Island court ordered the liquidation of Three Arrows Capital, 3AC, after creditors sued the crypto hedge fund for failing to repay its debt. They had three billion in assets under management. They had a huge position in the now defunct, uh, stable coin Terra and its token Luna and they were trading on some massive amount of margin. Uh, how much and what deposits they were using to do this, uh, we will find out. Um, now they're being forced to liquidated, to be liquidated. 3AC owed Voyager Digital $650 million, could not pay it which sent Voyager's stock down 60% and caused them to need a bailout from Sam Bankman-Fried, which has led to, uh, SBF, as he's known in the industry, bailing out a couple of other major folks in crypto. He provided a $200 million credit line to Voyager Digital. This is a Canadian crypto lender. Uh, they'll lend you money against your crypto. Uh, and FTX provided a $250 million credit line to BlockFi. Uh, FTX is obviously SBF's company. And according to early BlockFi investors, the FTX credit line would wipe out all existing shareholders. So we're starting to see the really, uh, onerous term sheets to keep these things alive. This is, of course, in the face of entire crypto collapse, with many crypto coins seeing what we saw in growth stocks. Is this the end of crypto? Uh, is it going to rebound again? What are your thoughts? Chamath, Sax, Friedberg, who wants to start on crypto?

Chamath Palihapitiya 5:50 Did you guys see the chart that I posted into the group chat that showed Bitcoin activity as a function of year and value? Nick, can you just put that up just so that we can look at that together? The crazy thing about this chart when you look at it is, it, and it's pretty obvious, is that we are collectively in one way, shape, or form basically trading up, uh, ever since 2018, really with all the stimulus. Because if you look at, you know, the mean price of Bitcoin-

David Sacks 6:18 ... of 2018, it was a nothing burger. You know, what we were talking about was, you know, a price that was sort of between a few $1000, two, 3000-

Jason Calacanis 6:27 10,000.

David Sacks 6:27 ... and then 3000. You know, and then all of a sudden, when all of this stimulus money hit the market, look what happened to it.

Jason Calacanis 6:34 Yeah.

David Sacks 6:34 But I think something unique also happened, which is that people really understood how to run these very complicated off-chain Bitcoin arbs. And I think we should explain what those are, because those are what's behind the Three Arrows Capital. It's behind, you know, I think Sam had this kind of, um, oblique tweet that said, you know, some of these exchanges are actually already insolvent. They're already the walking dead. So the first thing to keep in mind is that, you know, this is a completely unregulated market. Right? There are no middle maker, uh, market makers per se that actually have reporting requirements to any regulatory authority. There aren't any clearing houses. There isn't a way for us to understand systemic risks as it builds in the crypto market. So what happened starting in 2018 and '19 is people realized the following things were true. It's sort of what we talked about last week. You go and do some crazy round, you, uh, you know, mark up some phantom equity in a company. That company then issues tokens. You then list the tokens, not on, you know, a blockchain per se, obviously, but, uh, in a place where trades can happen off chain, right? And there's a bunch of exchanges where these things happen off chain, because it's one, you know, uh, company, and then they have a bunch of segregated sub-accounts. And what happens is when these things initially get listed, retail goes crazy, the price goes up, folks basically dump on retail. Um, and, you know, you spin that loop as fast as you can, and you can extract an enormous amount of money. Along the way, all these things like DeFi all of a sudden popped out of nowhere, and it's like, "Hey, you can earn 15, 16, 17, 18%. Just deposit the Bitcoin." And so folks would deposit Bitcoin. But then what would happen is, like the places where those deposits were held would then need to obviously find places to make that 11, 12, or 13%, and so then they would go off chain to some other random person who was offering to pay them even more than that, and they would try to arb the difference. But it all catches up with you, because when something like a Terra goes to zero, all the Bitcoin that was used to basically, you know, uh, run that DeFi process around Terra vanishes. You know, and then all of a sudden, you, the lender, are like, "Hey, can I have my, uh, Bitcoin back?" And the broker is like, "Well, actually I don't have it. I lent it to somebody else. Let me go ask that someone else." And they're like, "I'm sorry, I don't have it, but I have these Terra coins," you know, (laughs) 'cause I was running some arb, and now it went to zero. And that's essentially what we're seeing right now. So we have two big problems, and then I think we have a third that's kind of funny. The, the first big problem is like, obviously, in the absence of any regulatory oversight, this stuff is gonna happen. Systemic risks are gonna build up. That's what we're facing right now, is an enormous amount of systemic risk, largely around Bitcoin. A bunch of this money, I think, has been essentially just vaporized. And so all these people that try to find their deposits, especially in custodial accounts in off-chain brokers, may be SOL at some point, and I think that's just gonna be a huge shit show if that actually happens.

Jason Calacanis 9:48 And to be clear, Chamath, they don't have the keys to their own Bitcoin. They gave money to a custodial account. They then did this lending, went out to get them the 15%, and they don't have any recourse here. They can't get their Bitcoin.

David Sacks 10:04 Well, look at this article now. Does anybody, does anybody-

Jason Calacanis 10:04 This is why real Bitcoin owners put them in a wallet and own the keys.

David Sacks 10:08 Does anybody have recourse to this Three Arrows Capital and all of this other interrelated parties that are now, you know, gone completely bankrupt because of this scam? The answer is absolutely not. Um, so that, that's the first problem. You have absolutely zero oversight, which means systemic risk has been built up in the system. Um, the second thing is that, exactly what you just said, Jason, is that people don't even understand chain of custody here, which is that you thought that you owned this Bitcoin. It turns out you actually may not actually own them at all. You thought that you were properly lending them out. You actually don't. There is no enforceable contract, it turns out. And so I think that's gonna be an entire set of different legal issues that are now gonna come to the surface, because people who actually legitimately lent this stuff out... For example, like if you short a stock and you go and borrow stock from any one of us, there are really tight guardrails, you know? If you wanted to go and put a credit derivative swap on against debt, there's a central clearing house that makes sure you're not over levered. You know, you have to go and get audited by a bank to even get an ac- the kind of account that allows you to put these derivatives on. None of that was possible in crypto. And then the last thing, which I think is kind of funny, is that we've had to listen to every Millennial and Gen Z market observer in crypto tout how this is not like Boomers, and they turned out to be the same, same, same, same. (laughs) I mean, this is the funniest thing of all. It's like of all of the fu- times you've had to hear how it's so different, it turns out it is entirely the same. Entirely, entirely the same. In fact, worse.

Jason Calacanis 11:39 The custodian issue is definitely a major one. Sacks, what do you think is happening in crypto right now?

David Sacks 11:44 The price is obviously going down a lot. I don't really have a new point of view on it. I'm mainly pissed off that SBF is trying to raise my taxes in California.

Jason Calacanis 11:54 (laughs) Explain that.

David Sacks 11:56 Sam Bankman-Fried, he runs FTX, and his company, he lives in the Bahamas, okay? And there are probably reasons for that related to liability or taxes or something like that.

Jason Calacanis 12:07 Can you tell us what e- what FTX does?

David Sacks 12:08 They're like a Coinbase competitor, but they obviously think it's beneficial to be offshore and not under US jurisdiction.

Jason Calacanis 12:14 And they're very profitable, right?

David Sacks 12:16 Su- yeah, supposedly they're super profitable. I mean, he's worth like 10 or $15 billion, is my understanding.So, he's been very successful at this. I don't know why they're in the Bahamas. I think either they're in there for securities regulation reasons or for tax reasons, but... It's one of those two. In any event, he doesn't live in California and yet he is sponsoring a ballot initiative here that would add a 0.75% tax on incomes over five million to finance a pandemic prevention institute of his design. He's doing this with Dustin Moskovitz, another billionaire who doesn't know what to do with his money. He was... You may remember that Dustin was the guy funding Chesa Boudin. In any event, this would be... This pandemic prevention institute would be governed by an unaccountable board, as opposed to something like the University of California. This is like them using the ballot initiative system to fund their pet philanthropic projects. I mean, there's really no need for this. I mean, first of all, this is-

Jason Calacanis 13:15 Sounds like something that should be done federally.

David Sacks 13:17 Yeah, exactly. It's... Well, first of all, it's looking in the rearview mirror in terms of, like, a, a budgetary priority, but even if you believe this was a priority, I don't know why it'd be the responsibility of California taxpayers exclusively. And even if it was, you'd wanna do it under, say, the UC system, some sort of accountable board as opposed to having it report to, you know, Sam and Dustin. So it makes no sense, and this is really gonna hurt the California tax base because if you start raising taxes on, you know, California millionaires, th- more of them are gonna leave the state, and then that tax revenue leaves the state. And so it actually hurts the general budget. And that's why, you know, California Teachers Association, for example, opposes this, is because they know that this is gonna have a negative impact on core services.

Jason Calacanis 14:05 What is i-

David Sacks 14:06 But what's offensive to me is... I mean, so first of all, this is just a, a stupid idea in, like, every possible way. But what is a guy who lives in the Bahamas doing funding ballot initiatives in California to raise our taxes, thereby worsening the California fiscal situation, to fund his pat- philanthropic projects? If you're worth ten billion, just fund it on your own, you know? Do it through your family foundation. I don't know why you need to raise the taxes on all of us.

Jason Calacanis 14:32 Yeah. Th- that's very bizarre.

David Sacks 14:34 I, I think I-

Jason Calacanis 14:34 Why is he giving-

David Sacks 14:35 Well, the simple answer is because I think it helps curry favor with politicians that he needs for other things.

14:41 This is, this is currying-

14:41 That's why, that's why, that's why you would do it, that's why I would do it.

14:44 This is currying negative favor because first of all, every millionaire in California should be up in arms over this. But even, I'd say, your liberal pol-

14:54 Well, I think we know his game plan.

14:55 Yeah, I mean, but I'd say even liberal politicians and interest groups in California, like the, the, like the Teachers Association, don't want this because the money is not going to a cause they support, and it will probably... It will almost certainly drive down the state's tax base, right? Because people on the margins are gonna leave. We already have the highest taxes in the nation. We're at, what, like, 13.3% for the top end of California-

Jason Calacanis 15:21 We have $100 billion surplus for a reason. All these IPOs, all of these venture capitalists, CEOs, and rank-and-file tech workers are just paying massive amounts of tax here, and they're leaving.

David Sacks 15:32 Right, but that's highly levered to capital gains, right?

Jason Calacanis 15:35 Sure.

David Sacks 15:35 And so last year, we had a boom market. We now know, in hindsight, that it was inflated.

Jason Calacanis 15:40 Yep.

David Sacks 15:40 That was all driven by this liquidity bubble. So, do you think that's gonna be the case this year?

Jason Calacanis 15:44 No.

David Sacks 15:44 I think we're due for a huge budget shortfall next year because there's gonna be no capital gains this year.

Jason Calacanis 15:50 They better hold onto that 100 billion, for sure.

David Sacks 15:52 The California tax base is highly leveraged to this boom-bust cycle, and driving the top earners out of the state is only gonna worsen that impact. So, you know, but again, I question, why is a guy in the Behan- it's, it'd be one thing if it was just Dustin doing it, I guess, but I don't understand why Sam's taking the lead-

Jason Calacanis 16:10 I mean-

David Sacks 16:10 ... when he's not even a California taxpayer.

16:12 Because I think he's a very sophisticated player in not just crypto, but frankly, uh, regulated and unregulated finance. And look, he... I think he spends a lot of money in DC as well, and I think that he has a very thoughtful game plan. And then, you know, when you look at who his parents are, his parents are really, really smart, thoughtful people as well, two law professors at Stanford. And so, I suspect, not knowing and having spoken to him, um, that I think that there's a really specific strategy that these guys have around who they need to influence and what they care about, and then willing to, as a pass-through, fund those things in order to create the, you know, influence that he needs for the things that he cares about. And I suspect-

Jason Calacanis 17:01 Wow.

David Sacks 17:01 ... it is that kind of horse trading, which is, I think it's pretty typical in US politics. Um, the, the, the question, though, is what will happen if FDX, um, has to really talk about, you know, everything that's actually happening in crypto-crypto. You know, I'm sure that FDX could do a lot to help understand a lot of this off-chain activity. Some of the, you know, especially the stuff that's really in the gray, especially the stuff that's gonna come to light over the next few years is... I mean, you, you, we have to understand, guys, like, you know, we've torched $2 trillion and it's not of institutional capital, you know? This is overwhelmingly retail capital. And so-

Jason Calacanis 17:36 All of this is going to inspire a lot of, uh, district attorneys and DOJ activity. The discovery is gonna be bonkers and it's all gonna be regulated to the point of, in which it kills a lot of the opportunity, I think. This is gonna become the most regulated space we've ever seen.

David Sacks 17:53 Well, I don't know. I mean, I, I, if, if the goal here was to curry favor, then I think Sam must think there's not gonna be a red wave in November, because I don't think Republican politicians are gonna look very favorably on a guy who's using his money to raise taxes in a state he doesn't even live in.

Jason Calacanis 18:10 All right, all right. Let, let, well, let's move back to the crypto piece.

David Sacks 18:12 Let's move back to crypto for now.

18:13 Yeah, yeah.

Jason Calacanis 18:13 Yeah, let's move back to the crypto piece here.

David Sacks 18:15 'Cause I think that's the important thing. That's the bigger-

18:16 It's the important thing, isn't it?

18:16 That's the bigger thing, not a few million dollars of, of lobbying.

Jason Calacanis 18:19 At this point, with this many retail investors... Well, actually, let me, let me start with this, Friedberg.Is

Jason Calacanis 18:24 there a real technology here, and how much of what we just witnessed with this crypto collapse and the crypto boom-bust cycle, how much is this based on what you would perceive as real technology that is going to advance (laughs) the human species forward, and how much of this was hype, if you were to put a percentage on it? You know, trillions of dollars in assets, you know, created and then wiped out. How much of this was actually real technology? How much of it was a complete utter waste of fucking time and a grift?

Chamath Palihapitiya 18:52 I'm no crypto expert, and I've not been an investor in cryptocurrencies. I read the original Bitcoin white paper. Makes sense. Bitcoin itself, to me, makes sense as a potential... Uh, initially, it was kind of interesting as a potential alternative currency, but the transaction fees were very high. And so it never really seemed to make sense as a replacement for traditional financial networks until those transaction fees dropped below those of the traditional financial networks. Um, and the, the biggest concern I've always had, which I've mentioned multiple times on this show, is that whenever anyone talks about a cr- quote, cryptocurrency, they talk about the price of it in dollars. And if it really is meant to be an alternative to the US dollar, why are you talking about it in the price of US dollars, and it's up and it's down, relative to dollars? And that implies, ultimately, that the intention would be to transact back to US dollars, which implies that the intent is not to be a replacement for the US dollar, which was a lot of the early prognostication of Bitcoin, was it was gonna be a replacement for the US dollar, it's gonna be an alternative to traditional monetary systems. But ultimately, if you're just measuring this in dollars, and it's up and it's down, everyone's freaking out every day about crypto's up, crypto's down, that means it really is more like a security. Except securities, definitionally, are supposed to have a secured interest in some underlying set of assets. And there's no underlying asset. It's not actually a security because it doesn't provide you a secured interest in anything. So it is effectively a bet on some systems of computers that are meant to facilitate some set of activities that, you know, ultimately people really only seem to value in US dollars. So, um, so I, I don't know. I mean, like, where does it all go? It seems like I mentioned, uh, at our predictions, uh, episode last year, that all of these smaller things are gonna get blown out, these quote/unquote "cryptocurrencies," even though many of them don't really act like a currency, and, you know, maybe Bitcoin itself persists, and it seems to me like that's always gonna have good staying power, as an observer. I'm not a participant. And, uh, you know, any time someone telling you something's in dollars and it's going up and it's going down and you're betting on whether it's gonna go up or go down and your intention is to transact back to dollars, you know, and, and there's no one, there's, there, there's, there's-

Jason Calacanis 21:16 These have been securities the whole time.

Chamath Palihapitiya 21:17 Yeah, there's no-

Jason Calacanis 21:18 I mean, this is the problem-

Chamath Palihapitiya 21:18 ... there's no underlying-

Jason Calacanis 21:19 This is the problem I have with it. This has been, you know, a shadow securities stack that was created in parallel to the existing one with a lot of, you know, oversight. And what did we think would happen if you created-

Chamath Palihapitiya 21:32 Well, other securities Jake, uh-

Jason Calacanis 21:33 ... a, a global casino with no rules?

Chamath Palihapitiya 21:35 Other securities have an underlying interest in something. This has an underlying-

Jason Calacanis 21:38 Sure.

Chamath Palihapitiya 21:39 ... interest in some line on the blockchain of that-

Jason Calacanis 21:42 Yes.

Chamath Palihapitiya 21:42 ... particular network.

David Sacks 21:44 That's exa-

Chamath Palihapitiya 21:44 Um-

David Sacks 21:44 That's exactly what it does.

Chamath Palihapitiya 21:46 Yeah, it's a secured interest in a line of code in, on a distributed-

David Sacks 21:49 No, it's a, it's a, it's, it has a secure-

Chamath Palihapitiya 21:52 ... database.

David Sacks 21:52 A, a Bitcoin has a legitimate, uh, non-fungible entry in a blockchain that says it and only it represents that thing. And I think that that, you know, is, is I guess the, the, the link-

Chamath Palihapitiya 22:04 It's a secured interest.

David Sacks 22:05 ... some, some may call it tenuous, but I, I mean, I tend to think at this point, Bitcoin probably has to be regulated like a security, even, even if it is not and it's more of a commodity only because of the, the volume and the sheer size of both the market and the secondary markets-

Jason Calacanis 22:23 The potential fallout is the way you're saying it, right? The potential fallout when things go off the rails is so great, you kinda need to have some rails.

David Sacks 22:30 Yeah, I mean, I mean, like, like, again, as I've said, like, look, if you're a, a market participant trying to trade, you know, very sophisticated, you know, derivatives of any kind, for example, in the credit markets, we have to go and we create these things called ISDAs, they're called ISDAs, you know, and it's basically a kind of an account that allows us to go and, you know, take risk in some of these very esoteric, -teric markets, but the, the underlying principle around that is a common set of parameters, a clearinghouse, the ability to monitor risk. None of those things exist here, and I think that's really what folks have to solve for now. Secondarily is, what were all these kind of, like, shadow activities, you know, it just, it turn- you know, it w- it seemed too good to be true when you would hear, "Wow, this DeFi protocol will yield you 24%." And you're just like-

Jason Calacanis 23:20 Who was paying the 24%?

David Sacks 23:21 How is it... It never made sense, really, but then none of us really questioned it enough.

Jason Calacanis 23:25 I, you know, I had people on This Week in Startups, I questioned it all the time, and they could never explain it to me, and then now the explanation was, "Well, we were giving you, uh, we were giving short-term loans to other people who basically wanted a margin loan." You know, they wanna, they don't want, they wanna HODL their Bitcoin, but that was only 4 or 5%. What they were also doing was giving you tokens in some other cryptocurrencies, um, that they were basically originating, so they basically were like, "We'll give you 4% on your Bitcoin loan. Somebody else will pay that. Uh, you'll pay that. But then the other 11% is coming from some tokens we're giving you that actually, you know-

David Sacks 24:00 Well, you have to-

Jason Calacanis 24:01 ... were airline miles."

David Sacks 24:02 We have to answer really-

Jason Calacanis 24:02 "We're giving you airline miles."

David Sacks 24:03 We have to answer a really important question. If you... We've, we, you know, look, the, the markets have incinerated many trillions of dollars. I just saw, like, for example, there was 1.7 trillion, you know, that was just torched in ETFs alone, just in the, since the beginning of this year, right? We've done that or more, uh, in the crypto side.... we've done that or more on public equities, right? We're probably gonna do that or more in other markets. But every other market is regulated, and there's a full accounting of the P&Ls on the dollars that are won and the dollars that are lost. And here, some folks have just, you know, basically escaped with billions and billions and billions of dollars, and the bag-holder is just, you know-

Jason Calacanis 24:49 Well, yeah. (laughs)

David Sacks 24:50 ... uh, a, a retail investor. So the real question is, are regulators going to actually care to try to do something? Because-

Jason Calacanis 24:56 Oh, yes.

David Sacks 24:56 ... the lev- the level of grift that's happened in this market is extreme. And especially when, especially when everybody was telling you, "No, this time is different. This market is completely different. It's transparent. It's on chain. You can see every..." And it turns out, actually most of it was not on chain. It was off chain. (laughs) Crazy.

Jason Calacanis 25:15 Uh, and they were using, they were using this, "Hey, have fun being poor," this, like, psyops to get you to participate. "Okay, Boomer, you don't get it." Gensler, uh, was talking to Cramer on CNBC. Here's the quote. "Some, like Bitcoin..." And that's the only one, Jim, I'm gonna say, because I'm not going to talk about any of those, these tokens that my predecessors and others have said are a commodity. Um, and then he said, "Many of these crypto financial assets have the key attributes of a security." Aside from Bitcoin, he believes, you know, like these things are securities, and that makes sense because 99% of people buying them, Sax, were buying them because they wanted to see them appreciate. They were never using these as utility tokens. They were buying them to, you know, uh, see them appreciate and to flip them. So what do you think, Sax? Is there, is there... When we look back on this whole mess in 10 years, is it gonna be like the dot-com era where we're like, "Yeah, it got overheated, but Amazon and Google came out of it," or are we gonna look at it and go, "Well, that was tulip season"?

David Sacks 26:11 Well, I, I think there is, um, a future technology platform here with crypto. Um, but, uh, I mean, I've been saying this for the last year, that just because there's a future technology platform doesn't tell you what the pricing should be, and the price action got decoupled from the level of progress in the space. Um, you know, you should always be looking at what is the real usage, use cases, customers, revenue, things like that. And people stopped doing that. And I think part of the reason why the narrative was so powerful, if you go back to last year and the chart that Chamath showed about the, the increase in the price of Bitcoin, which is really the, the root of everything, right? Because, you know, first, Bitcoin appreciates, and then if you think about it, like Ethereum is... Ethereum's market cap is like a derivative of, of the Bitcoin market cap. It's been roughly 40%. And then the alt coins sort of get... The, the market cap of the alt coins is sort of derivative off Ethereum's market cap. So the whole thing kind of moved up in, in sync. And the reason why Bitcoin moved up so much is that as the Fed kept printing more and more money, you had fans of Bitcoin saying, "Look, the Fed is debasing the US dollar. We're gonna need an alternative currency." That was a powerful narrative that the Fed seemed to be vindicating, and there was a positive feedback loop, which is the more the Fed debased the currency, the more that the price of Bitcoin went up. Now, the reason the price went up was not because they were debasing the currency. It was because they were creating so much liquidity that, that... it created a liquidity effect that then drove up the price. And, and so, you had this-

Jason Calacanis 27:50 So consumers had money that they could buy Bitcoin because they were... there was more money in the system.

David Sacks 27:55 Yeah, you saw it-

Jason Calacanis 27:56 So you created more buyers of Bitcoin.

David Sacks 27:57 That's exactly what happened. They... I mean, all of this idiotic narrative-

28:01 You started-

28:02 Sorry, go ahead, Sax.

28:02 Yeah, you, you saw an increase in speculative investments across the board, including but not limited to crypto. So again, you know, when the Fed prints too much money, it creates asset bubbles. But there's a powerful reinforcement because as the Fed was printing, Bitcoin and supporters of Bitcoin had a really great explanation for why Bitcoin was going up, which is, "They're destroying the US dollar. We're gonna need an alternative soon." Now, I think in the very, very long term, could Bitcoin be a non-fiat currency? Yes. I mean, I actually think the technology works. You could create a, a new kind of currency that's backed by math and by cryptography as opposed to fiat government. But that could take a really long time. I mean, that could be decades in the future. And, but what happened is the market started thinking, "Well, that's gonna happen soon." And that's where it just got ahead of itself. That was the tulip part of it.

28:54 Yeah, I think that, I think that they found all of these words, you know, written in these economic textbooks that allowed them frankly to justify what a lot of people were doing in a lot of other markets, which is just straight-up speculation because the money printer was going berk. And, you know, if the... if you look at this 92% correlation to the equity markets, I suspect in Bitcoin and crypto is probably closer to the, to even 100%, um, because it really was the furthest out on the risk curve. And it just made the most sense when you thought money was, you know, effectively infinitely going to be available to just buy the riskiest risk assets.

Jason Calacanis 29:31 Think about the friction taken out of this, Chamath. You could buy these, you know, uh, cryptocurrencies so easily. You could trade them so easily. You could create one so easily. People were popping up forks of these things. So in a way, what technology has done over the last 30 or 40 years, from cloud computing, to software, to open source, has made it very easy to pop up a startup. Well, you could pop up a currency, and then you could get an incredible reward, and you get this incredible reward before you-

David Sacks 29:59 And?

Jason Calacanis 29:59 ... actually make a product for consumers.

David Sacks 30:02 And?

Jason Calacanis 30:03 And?

David Sacks 30:03 With absolutely zero rules and oversight. And-

Jason Calacanis 30:06 No oversight, yeah.

David Sacks 30:08 The feature that was touted was actually the first one to get thrown away, which was transparency.

Jason Calacanis 30:15 Yeah.

David Sacks 30:15 When all of this activity was actually happening off chain, this is why you have this systemic risk issue now. When Sam is saying some of these exchanges are actually insolvent, what he's saying is, well, that exchange has one master wallet address.... every time you open an account and transact on such exchange, you're actually just transferring between a database entry inside of that company. And so it may look like it is fine, but it is actually not fine. That's what he's claiming. This is the problem with all of this. So all of this activity, you know, built on these principles of openness and, you know, defensibility and, you know, you, you can't inflate it and, you know, devalue it and debase it, turned out to not even matter because the fundamental principle that would allow us to verify all of that was violated right from the get-go, which was transparency. All of it is happening in the dark. Most of this stuff is happening off chain. And if you think that, you know, it's okay to torch a trillion dollars of equities, well, at least there's rules on the equity side. But to torch two and a half trillion dollars in crypto where there are no rules, it'll be really, you know, it'll be a very telling sign to see if these folks get their act together and but, uh, meaning regulators and politicians and do something.

Jason Calacanis 31:33 Well, then we made this crazy hybrid where we had the venture community, and I'm not gonna talk about any specific firm here, and to be clear, you know, nobody knows exactly what's happening, but you had coins-

David Sacks 31:43 You can't know. By the way, you can't know because it was happening off chain.

Jason Calacanis 31:48 Exactly. So somebody would originate a coin, and I was, you know, offered these deals, and you would, as a venture capitalist, be buying some equity in a company, and then some amount of tokens would be created. Before the token was released to the public or before anybody had insights into this, these tokens were swapping around. Everybody had different rights. Some people could sell early. Some people could never sell. And it was as if, you know, you took the process of going public and you gave that to a seed stage or a series A company before they launched their product. So you're taking a company public essentially before they go-

David Sacks 32:20 But if you, if you subpoena the exchanges-

Jason Calacanis 32:22 ... you know, they, they launch their product.

David Sacks 32:24 If you subpoena the exchanges, all of this gets turned over.

Jason Calacanis 32:27 Yeah.

David Sacks 32:27 Because the exchanges are the honeypot of off-chain activity.

Jason Calacanis 32:32 Yeah. So th- that, and that's what's gonna happen, I think, in all of this, and it's gonna be really funky. This is... And what's terrible about this is, this is why the accreditation laws exist, is like o- only sophisticated people, top 6% of Americans are allowed to participate in private companies. And what did we do? We allowed 100% of people on the globe to participate in private companies.

David Sacks 32:51 Backed, backed by pure math, backed... that less than 1,000 people in the world actually understand. (laughs) That makes no sense.

Jason Calacanis 32:57 What could go wrong? What could go wrong?

David Sacks 32:58 (laughs) You cannot buy a stock, but you can buy this cryptographically secured

Narrator 33:04 Yeah.

Jason Calacanis 33:04 You're not allowed to buy a share of LinkedIn or Uber or Airbnb, even though you stayed at an Airbnb or you're an Airbnb host. You're too stupid to buy Airbnb shares when it's private, but you can buy this cryptocurrency that doesn't even have a product in market.

David Sacks 33:17 No, and, and here's this white paper that has, you know, university level pure math as the explanation of why it, nothing can go wrong. And you turn, it turns out it can because nobody actually understood it in the first place. (laughs)

Jason Calacanis 33:30 This is gonna be a decade of discovery.

David Sacks 33:32 Jason, if you look at that, if you look at that price chart, what it-

Jason Calacanis 33:34 Yeah.

David Sacks 33:34 ... really means is like, again, you know, we talked about this. If the equity markets have to rebase-

Jason Calacanis 33:39 Mm-hmm.

David Sacks 33:39 ... and get all this Qt- uh, uh, QE out of it.

Jason Calacanis 33:42 Yeah.

David Sacks 33:42 Right? And then you have to rebase for earnings if you believe you're in a recession, and then you have to rebase for margins if you believe that there's rampant inflation. Those three things have to happen in the equity markets. We're in the midst of that.

Jason Calacanis 33:53 Yeah.

David Sacks 33:54 But that also has to happen on the crypto markets, in the crypto markets. And if you look at that chart, what it really tells you is that the baseline price of Bitcoin where things seemed, you know, where rational supply and demand were meeting each other before all these, you know, schemes-

Jason Calacanis 34:07 5, 10,000?

David Sacks 34:09 3,500 to 5,000.

Jason Calacanis 34:11 Yeah, I'd say about 5,000

David Sacks 34:12 That's-

34:12 ... still 75% from here.

Jason Calacanis 34:14 Yeah, it's 20,000 now. So yeah, we got, we got, we got... could be have a ways

Jason Calacanis 34:17 to go. One thing that I thought was an interesting sign of potentially bouncing along the bottom, um, Zendesk has agreed to be acquired by an investor group in an all cash transaction. They're basically going private here, uh, for around 10.2 billion. Uh, if you don't know, Zendesk is a helpdesk software company. It's a SaaS software company. They turned down a similar acquisition of 17 billion earlier this year. Their market cap is 9.1 billion in the public markets. It's, it's gone up, obviously, since it's announced, this was announced, but, um, they have, uh, a billion three in revenue. They're up 30% year over year. So this is a strong company, but the acquisition price is 7.7 times their 2021 multiple.

David Sacks 34:57 Sorry, did you say they're up 30%?

Jason Calacanis 35:00 Year over year.

David Sacks 35:00 Oh, the rev- the revenue's up 30%.

Jason Calacanis 35:01 Revenue is up 30% year over year. They have $1.5 billion in cash and securities, uh, that are, you know, marketable securities. So they, they're cash rich. Small loss, 223 million for the year in 2021. So they have six years of runway if nothing were to change. Yeah, what do you make of this, Sax? Is... why would they do this? They don't have to. So... And is this to you like the sign of a bottom if we start seeing a bunch of these companies that went public that are seemingly strong start to go private and to go maybe clean up their balance sheet and go public again in three years? What's going on here?

David Sacks 35:36 Well, I mean, this isn't a horrible outcome. And by the way, I mean, I remember we shared, uh, when I was doing Yammer a decade ago, we shared a floor in, uh, our, an office building at 410 Townsend with, um, with Zendesk. And they had-

Jason Calacanis 35:50 They launched at TechCrunch 50. Yeah.

David Sacks 35:51 Yeah, exactly. So we had, I think, 5,000 square feet, and they had the other 5,000 square feet, and we were in a standoff. Both of us were expanding, and we needed the other half of the floor.

Jason Calacanis 36:00 (laughs)

David Sacks 36:00 And it was like, who would move first, basically. And, and anyway, they ended up moving, and we took over their space. But, so, I mean, look, this is a company that, you know, was worth 100 million bucks 10 years ago. So whatever it was, I mean, they were still, you know, they were very early stage. So this is still a great outcome. Should they have taken the 17 billion? Sure. With 20/20 hindsight, that would have been better. Uh, but look, you're seeing the valuations here being roughly reflected. The SaaS index is now down to about five and a half times revenue, I think next 12 months revenue, for the, for the median SaaS company. And the median SaaS company is growing about 20%. If...... you're a high growth company, which starts at 40%. You're trading at about eight times next 12 months revenue. So Dene- Zendesk is sort of in there. I mean, that is what they're trading for. And SaaS founders need-

Jason Calacanis 36:49 But why go, why would the founders, the board-

David Sacks 36:51 I'll tell you why.

Jason Calacanis 36:52 ... want to go private, is the question on people's minds?

David Sacks 36:55 It's not, it's not that they wanted to go private. I think that they wanted to stay public, and they wanted to build a large business. But this is where the law of large numbers catches up with every company. That's why it's so rare to have an Apple or a Google or a Microsoft or a Facebook or Netflix, where you can grow for 20 years at 25 plus percent, because at some point, 25% growth over last year just becomes too hard of amount to climb.

Jason Calacanis 37:20 It's a big number.

David Sacks 37:22 And so what Zendesk suffered from is what most of these SaaS companies, not, and I'm not trying to disparage them, just calling it out, will have to go through, which is the following. The easiest kind of SaaS company to start, and the one that folks, you know, really talented investors like Sachs will fund overwhelmingly over others, are what's called bottoms-up SaaS, right? Things that sell to the low end of the market, things that sell into, you know, SMBs.

Jason Calacanis 37:48 Individuals can buy them in a corporation, as opposed to the CIO.

David Sacks 37:52 Yeah. The, the unfortunate part of that growth curve is that it's pretty terminal within seven to 10 years. And after that, you're forced to go to the mid-market, and then eventually you're forced to go enterprise. But when you go to the mid-market and you're selling to 500 and, you know, 1000, 2000 person companies, and then eventually even enterprise, you're talking about massive investments of OPEX. People, engineers, product managers, salespeople, and all of that stuff costs money, and it's not clear that your product is any good. So in the Zendesk example, it's not to say their products were bad, but all of a sudden they were going up in selling a CRM tool, a Salesforce automation tool, and now you're going head-to-head against companies like Salesforce who are going down market. And all of a sudden, Salesforce and Microsoft and all these companies can play very aggressive pricing games with their products. They can bundle all kinds of other things in for free. They can give you discounts, and it's very hard to compete as a single individual company. So your growth starts to stall. So I suspect what happened at Zendesk is they said, "We can make it, and we believe in ourselves." And they found that it was hard. Then instead of organically growing, that's when they turned down the $17 billion offer, they tried to grow inorganically. They looked at SurveyMonkey, right, which our friend Zander runs, and said, "We're gonna try to buy that for $4.1 billion." And the market said, "Uh-uh. No." And then the market basically contracts, and now they're like, "Well, if we go and now torch our EBITDA goals and tell the market we're going to go and spend all that billion dollars we have to try to go up against Salesforce and Microsoft with a product that we don't know is gonna work, our stock's gonna be at a dollar." And so I think that that's sort of the, the parade of terribles that happened for them. But it's a little bit of a warning sign for how difficult it is to get big. Like, what Salesforce pulled off, right, and what Workday is starting to pull off, what ServiceNow has pulled off, I mean, it, you can't underestimate the quality of those teams and those CEOs to pull that off.

Jason Calacanis 39:52 I mean Google, Apple, Facebook, yeah. Yeah.

David Sacks 39:53 No, no, I'm saying, I'm saying specifically enterprise SaaS.

Jason Calacanis 39:55 And SaaS, yes, yes.

David Sacks 39:56 Those companies, ServiceNow probably being the last one that's really did it, incredible. So difficult. Palo Alto Networks is probably the next closest one now, Nicatiora-

Jason Calacanis 40:05 And Salesforce did two acquisitions, let's be clear, right?

David Sacks 40:08 ... amazing CEO.

Jason Calacanis 40:08 Salesforce kept adding-

David Sacks 40:09 It doesn't matter how you get there.

Jason Calacanis 40:10 Yeah.

David Sacks 40:10 Organically, inorganically, it doesn't matter. The point is, it's very hard, rare M- most CEOs fail, nobody accomplishes it.

Jason Calacanis 40:16 So is this going, but okay, so my original question is, is this the bouncing along the bottom moment?

David Sacks 40:20 No.

Jason Calacanis 40:21 If, 'cause we have Peloton-

David Sacks 40:22 No. This is a-

Jason Calacanis 40:22 ... we have BuzzFeed, we have so many of these companies-

David Sacks 40:24 Jason, this is a warning sign.

Jason Calacanis 40:26 Okay. Why? How so?

David Sacks 40:28 This is not yet the bottom. Well, this is a warning sign that says, "You cannot go into a massive investment cycle for all companies unless you can prove that you can sustain margins, sustain growth, and minimize OPEX."

Jason Calacanis 40:45 But isn't this a very sophisticated buyer taking it private? They must have a thesis of how they're gonna get their money back. Right? So that's my point is, Sachs, do you think-

David Sacks 40:55 Yeah.

Jason Calacanis 40:55 ... like tha- this is like ... If, if the company's already public and somebody thinks, "Hey, you know, if I take this private, I can do better than if it's public, and I'll reintroduce it to the public markets to get liquidity later," isn't that what's gonna happen here in all likelihood?

David Sacks 41:09 You're making that statement in the absence of understanding how these things are financed.

Jason Calacanis 41:12 Well, it's got a billion five and it's, and it's break even almost. So what is it?

David Sacks 41:16 Okay. But what about the, what about the, the billions of dollars of debt they're gonna take out and slab off this company? Right? What about the number of people they may fire?

Jason Calacanis 41:22 You're talking about post going private.

David Sacks 41:24 At the end of the day, the private equity firms are not trying to make, you know, this $10 billion go to 25. They're trying to make the two billion of equity they put in go to three. And there's a lot of ways that two can go to three before 10 goes to 25.

Jason Calacanis 41:40 So they want a modest return.

David Sacks 41:42 It's not a modest return.

Jason Calacanis 41:42 And I still don't understand why-

David Sacks 41:43 It's 50% return. It's a lot. It's, it's making a billion dollars. It's hard.

Jason Calacanis 41:48 Yeah. But, but compared to the management team and the board's view of being a public company and growing 20% a year, or actually in their case, 30, wouldn't that be a better opportunity for those shareholders? That's what doesn't add up here. Sachs, what do you think?

David Sacks 42:00 If I had to guess, I mean, I haven't talked to Mikkel about why they're doing it. I think that they're operating at a new stage of the business. I don't think it's as fun to be growing a company at, call it 20 to 30% a year, and now all of a sudden you have to generate cash flow and you're being valued on that. I mean, they're past the high growth phase.

Jason Calacanis 42:17 So management burnout is your thesis?

David Sacks 42:19 I don't know. I mean, it's, it seems-

Jason Calacanis 42:20 Well, a potential thesis.

David Sacks 42:21 I think that's basically why people sell good businesses. Like, I actually don't think there's a problem in their business. I think that growing 30% a year with 1.3 billion in revenue, plenty of cash in the bank, I think they have a good product. I don't think there's anything wrong with the business.

Jason Calacanis 42:36 Yeah.

David Sacks 42:37 I think that, that I do think founders get burned out, and this is an exit.And I do think that the phase of their business they're in right now is not gonna be as fun as the high growth phase. Look, when you're growing 100, 200% a year and investors are willing to fund that growth and they don't really care if you're profitable, that is just more fun-

Jason Calacanis 42:54 Mm-hmm.

David Sacks 42:54 ... than growing a business 20 to 30% a year and investors are breathing down your neck saying, "When are you gonna deliver cash flow?" And what the private equity guys do is they're gonna go in there and they're gonna restructure the business to deliver cash flow. Now I think ultimately these types of businesses, they're great, these software businesses, they're great businesses to own because they're high gross margin and, you know, they- they've got a subscription base that just keeps growing organically if they've got positive net dollar retention. So you've got a w- let's call it a $1.3 billion subscription base that will grow to 2 billion over the next, whatever, half dozen years. And quite frankly, I bet you the private equity guys are gonna take out half the cost structure. There's no reason this thing couldn't be generating 500 million a year in free cash flow.

Jason Calacanis 43:42 But the management team-

David Sacks 43:43 And by the way, that would-

Jason Calacanis 43:43 ... would be unwilling to do that because it would suck.

David Sacks 43:46 It's a different cu- it's, it's-

Jason Calacanis 43:46 It kind of sucks to do that every day.

David Sacks 43:47 It would suck.

Jason Calacanis 43:48 To come in-

David Sacks 43:48 Yes.

Jason Calacanis 43:48 ... and fire half the team that you hired and take that hard medicine. It just is a bummer for that personality type.

David Sacks 43:56 I think it is a d- I think it is a different kind of management challenge. And yeah, I don't think it's that fun.

Jason Calacanis 44:00 Yeah, it's interesting.

David Sacks 44:00 And, but look, the thesis behind software companies, the justification for them burning money was, look, we're gonna, we're gonna spend every dollar in revenue that we make and then some because we're building a subscription revenue base-

Jason Calacanis 44:14 Mm-hmm.

David Sacks 44:14 ... that i- again, has positive net dollar retention. So one day, okay, one day, we won't have to keep investing so much in sales and marketing, we won't have to keep investing so much in R&D. We'll still keep investing to some degree, we'll make the product better, but it's gonna be a little bit more maintenance mode, we will get to maturity. So let's e-

Jason Calacanis 44:33 And then you can lay off a third of the staff and all of a sudden-

David Sacks 44:35 And then, and then all of a sudden the company's gonna be super profitable, and-

Jason Calacanis 44:38 Right.

David Sacks 44:38 ... the fact of the matter is, is that day never came because the markets never demanded it. Well now-

Jason Calacanis 44:43 And now the da- now that day is here.

David Sacks 44:44 No, no, no, hold on. Th- it never came because the markets kept demanding more growth. If you look at their long-term operating margins, you know, when they first bec- when they first came out public, they, it like had like a negative 30% margin. Two years later, they had a negative 50% margin, and over the last seven years, so that was 2015 up to now, they've crawled their way back to negative 13%. So at some point I think investors said, "Oh my gosh, this company has never made money. It needs to keep investing more in order to grow." And I think, David, to your point, maybe the decision that he didn't wanna make was to flip it to a cash cow.

Chamath Palihapitiya 45:22 I don't think that's true. I looked at, um, these guys have been generating cash. Their reported GAAP earnings are negative because of the stock-based comp expense, meaning that they're issuing shares to employees.

Jason Calacanis 45:31 Well there is a big topic to discuss here, the stock-based comp. Mm-hmm.

Chamath Palihapitiya 45:33 And I think that that's actually worth highlighting because this is an important one because people have been talking about this considerably lately. So this company's been making money every quarter, they generate cash. But in the last quarter they issued $60 million in stock to employees to compensate them for the work that they do. So that's 250 million roughly of dollars per year of stock-based comp, which is 2.5% of the total shares outstanding in the company are issued as employee comp every year. That number results in a dilutive effect to shareholders over time, even though the business is generating cash, your relative ownership as a shareholder in a business that's generating cash is going down by 2.5% every year because of all the new shares that are being issued to compensate employees for the work that they're doing. And I think that's part of the issue that a lot of folks kind of have taken for granted. This was well rooted in, um, I would say probably Google who became very generous very early on with issuing RSUs and stock in their publicly traded securities to employees as part of their compensation package. But Google has a 30, 40% EBITDA margin in terms of incremental contribution of new, new revenue. And, um, they can afford to take a, a point or two of dilution. Google, by the way, is actually not dilutive, they, they buy back shares with their extra cash, so, uh, as a shareholder you're, you, you actually benefit from this considerable cash generation. But a lot of, uh, software businesses and tech companies in general have had to rely on issuing shares to compensate employees for the work that they do, so even though the core fundamental of the business is generating cash and cash is going up every year, the business doesn't know how to get out of this cycle of how do you pay these engineers $400,000 a year without diluting shareholders by issuing all these new shares every year? And you'd have to do that more likely as a private company to figure out how to consolidate earnings, how to trim headcount and actually-

Jason Calacanis 47:27 Isn't that a-

Chamath Palihapitiya 47:27 ... get the thing to generate the cash it needs to generate.

David Sacks 47:29 But, but Friedberg, isn't that a real, like, you're pretending like it's some fake cost.

Chamath Palihapitiya 47:33 Yeah, it's not. It's, it's a real cost. It's a cost to shareholders, for sure.

David Sacks 47:36 But why, but why, why the asterisks?

Jason Calacanis 47:39 Well, no, there's a specific reason. Because the business itself operates-

Chamath Palihapitiya 47:43 The business isn't running out of cash. It's not burning cash.

Jason Calacanis 47:44 Yeah.

Chamath Palihapitiya 47:44 The business is growing its cash balance, but in order to compensate employees for that cash balance, they're diluting you, the shareholder, right?

David Sacks 47:52 I, look, when you own a share of a company, okay, let's just say there's 10-

Chamath Palihapitiya 47:55 Which by the way is, is another way of saying that the company is effectively issuing 2.5% new stock every year to fund its operations. I mean, that's another way to think about it.

David Sacks 48:03 Look, I'll, I'll give you the Warren Buffett school, you can tell me that it's stupid but it kind of makes sense, which is you take the number of shares you own, you divide it by the total number of shares outstanding. You look at the total profits and you say, "My look-through earnings equals that percentage times the total profits."

Chamath Palihapitiya 48:20 Yeah, and your percentage is going down every year with stock-based comp. That's the problem.

David Sacks 48:24 And so the que- and so the question is, it's also going down because you're buying real estate, you're hiring people, you're paying them more, like, it's going down for a whole host of reasons. That asterisks is an irrelevant asterisk in my opinion, like-

Chamath Palihapitiya 48:34 Yeah.

David Sacks 48:34 ... at the end of the day you spend money to grow. How you spend the money is not that important to me.

Chamath Palihapitiya 48:38 Let me say two, two quick things on the topic. One is, um, yeah, I totally agree, i- it's an expense.Yeah, on, on enterprise software, and Sax, you're, you're the, the, the, the master of the art, but, um, you know, as an observer, it seems to me that many of these companies, once you have an enterprise account, you benefit from being able to cross-sell new products into that account, and you can grow this net revenue retention number over time, and ultimately generate cash. Many of the big enterprise software companies that we've talked about, from Salesforce to Workday and others, have succeeded in doing that. A- Autodesk is another good example, and Carl Bass, I think, is on the board of Zendesk. They've done, um, they've done this successfully by bulking up their product categories, and they're, they're, they've done acquisitions, or they've done build-outs. And so over time, your incremental cost to, uh, to s- to, to sell a, a new product and generate, um, uh, uh, incremental gross profit goes down, and the business performs better with scale. This seems to be one of those businesses where ultimately they couldn't bulk up through acquisition, and they couldn't organically-

David Sacks 49:38 Well, they tried.

Chamath Palihapitiya 49:38 ... build new products, and they tried. And so the challenge is, they're kind of a, I don't wanna say a one-trick pony, but the portfolio of things that a business like this can sell into and ultimately increment gross profit is very limited. And that business becomes challenging to operate as a public company, 'cause you really do have to show that momentum as a, as a scaled enterprise software business that you're actually generating real cash over time.

David Sacks 49:59 Well, so-

Chamath Palihapitiya 49:59 The other thing I, I just wanna say on stock-based comp, and, and sorry, Sax. I'll come back to you in one sec. But Chamath, I, and, and you guys, I don't know if you realize this, but the standard in Silicon Valley today, um, when a company goes public in an IPO, is to have what's called an evergreen stock grant proposal. Um, and evergreen, um, basically means that every year the company's authorized, the board au- au- automatically authorizes the issuance of some percentage of new shares per year. This is typically in the range of 4%. And ISS and other, you know, kind of institutional shareholder advisory services actually vote against these shareholder proposals and push back against them. But most of the companies in Silicon Valley that go public automatically include evergreens as part of their, you know, kind of IPO prospectus-

Jason Calacanis 50:46 I mean, can we agree it's out of control?

Chamath Palihapitiya 50:48 ... which means that-

Jason Calacanis 50:48 Like, it's maybe gotten out of control?

Chamath Palihapitiya 50:49 Yeah, which means that every year, they can, they can dilute shareholders by 4% and use those shares-

Jason Calacanis 50:52 Independent of how the business operated that year.

Chamath Palihapitiya 50:54 Which is effectively the same as doing a 4% secondary cash offering every year, because it's the s- you're, you're issuing those shares into the public market, and the, instead of getting cash, you're paying your employees with them. And so it avoids you having to use your own cash balance to pay your employees, so you're effectively raising money every year, and you're allowed to raise up to 4% dilutive effect to shareholders to do that every year. And it's become a real topic, and it seems to me that a lot of the big portfolio managers of big institutional firms are starting to pay really close attention to this, quote-unquote, "standard" in Silicon Valley that stock-based comp expense has become so high, and evergreens have become kind of the standard as almost like an ordinary course of business. And it's become, um, you know, a, a really contentious topic, and I don't think it would be too surprising, uh, number one, to see cash salaries go up, and number two, as a result of that, to see salaries become rationalized in Silicon Valley, where engineers may start to get challenged on the standard 400K per year that everyone's become used to, um, you know, in terms of, you know, high-tier, uh, you know, Silicon Valley engineering teams

Jason Calacanis 51:56 A- and with remote work, maybe there is a compromise that could be had, but e- this compensation, you have to remember, has been outrageous in some cases, especially for senior management. And so it makes the core business look broken, but-

Chamath Palihapitiya 52:10 Right.

Jason Calacanis 52:10 ... what we actually have is maybe people who are on these boards are also in on this compensation, and it's just bad hygiene. And it's not related to the performance of the company, right?

Chamath Palihapitiya 52:19 Well, I, I don't think, I don't think the board people are, quote, "in on it." I think that's, it's just, it's, you have to pay an engineer 400K a year to compete effectively in Silicon Valley today. How are you gonna pay him 400K a year?

Jason Calacanis 52:26 Wa- I was talking more about the managements, the management's stock comp.

Chamath Palihapitiya 52:29 Uh-oh.

Jason Calacanis 52:30 The management's comp is different than the engineers, you would agree

David Sacks 52:32 (laughs)

Jason Calacanis 52:33 Like, there have been some enormous stock grants.

Chamath Palihapitiya 52:35 Management, yeah. I thought you were saying the board, yeah. Yeah, certainly.

David Sacks 52:36 If you wanna run the company as a high-growth startup w- employing these high-paid engineers and executives, including stock compensation, that is a certain kinda way of running the business. But again, if you're trying to run the business for profitability, that's a different way of running the business. And just to add a layer to what happened here, that Zendesk was under intense pressure from an activist investor called Jana, who was basically trying to replace the board of directors. They were running a proxy battle against them. So Jana has been pressuring them to replace the board, to, to make all these changes, the, to take the $17 billion offer, I guess, back in March. They didn't do it. Now, they did a lower offer at 10 billion. Why? I think because the market has clarified. We now, it's, it's clearer that we're in this regime change. What the market is valuing is, is free cash flow as opposed to profitless growth. And my guess is, again, without having talked to Mikkel, my guess is they probably just threw up their arms and said, "Listen, you know, like, it's not gonna be fun to run the company this way." But you also have to, you have to ask the question, why are these highly sophisticated private equity firms buying it for 10 billion? I think they're gonna make a lot of money.

Chamath Palihapitiya 53:47 Yeah.

David Sacks 53:47 And the way they're gonna make a lot of money is that-

Jason Calacanis 53:49 More than a billion, yeah.

David Sacks 53:50 ... they are gonna slash the hell out of the cost structure. They're gonna run it to be highly profitable. They'll probably bring the growth down from 30% a year to 20% or 15%, but the benefit, the offsetting benefit to reducing the growth a little bit will be they could probably generate three, four, 500 million of free cash flow on that business. If it's doing 1.3 billion, and they stop investing in R&D, and they stop, and they bring down the sales and marketing, that could be a, that could be a cash cow, like you said. So I think that's probably what's, what's going on here, um, is the, the-

54:22 I just want, I just want you guys to know-

54:23 Yeah.

54:23 ... not to burst this bubble, but p- when people talk about free cash flow, they tout it a lot, tech companies tout it a lot, because you're allowed to add back in stock-based comp as if it didn't exist. The problem is that stock-based comp is non-cash. So when, when your only source... So if you see a company that has negative EBITDA, negative everything, all of a sudden they're like, quote-unquote, "free cash flow positive," well, then-It's because they were able to add back in stock-based comp, but that money is not real. So when the only source of free cash is stock-based comp, that free cash flow doesn't reflect the company's true profitability. This is what I mean by people play these shell games with these numbers to allow, you know, "Oh, let's m- you know, value something based on EBITDA. Actually, no, because, you know, our stock-based comp is off the charts. Let's actually go to something else, you know, we'll do a non-GAAPUBITDA measure, you know, you know, adjusted EBITDA. And then, oh, actually, wait, sorry, look at free cash flow because you can add back in this gargantuan amount of stock-based comp." I mean, it's crazy. I'll just... Uh, the quote from Warren Buffett-

Jason Calacanis 55:26 Community EBITDA, WeWork. (laughs)

David Sacks 55:28 The, the, the, the quote from Warren Buffett summarizes the best. "If compensation isn't an expense, what is it?"

Jason Calacanis 55:36 Yeah.

David Sacks 55:36 "And if real and recurring expenses don't belong in the calculation of earnings, where in the world do they belong?"

Jason Calacanis 55:43 I think what we're seeing-

David Sacks 55:44 And he's right.

55:45 My point is, is not that comp isn't a, an expense, it is, but rather that it's an expense that you can control by reducing the amount of staff.

Jason Calacanis 55:53 No, I hear you.

David Sacks 55:53 My guess is... I think these private equity guys are gonna basically whack the cost structure of this, this business.

55:58 I'm just saying you can distort free cash flow as well-

Jason Calacanis 56:00 Yes.

David Sacks 56:00 ... because you can set back in stock-based comp. It's a joke.

Jason Calacanis 56:02 It's a little bit of a shell game going on.

David Sacks 56:04 It's like the dirty secret.

Chamath Palihapitiya 56:05 So let me ask you, uh, an, uh, like, uh, an important investing accounting question. Let's say that a business like, um, Zendesk is generating $100 million of free cash a year.

David Sacks 56:17 No, no, what does that mean?

Chamath Palihapitiya 56:18 Uh, well, hold on. So every year, their cash balance goes up by $100 million. They have a business, it generates $100 million of incremental cash every year, the cash balance goes up. So you as a shareholder own shares in a company that is creating $100 million of cap- of incremental capital per year. However, your shares that you own are going down because they're getting diluted every year by roughly 2.5, 3%. And that's, it's... 2.5% is Zendesk's actual number. So every year, you're getting diluted by 2.5%. Would you rather have a business that you are getting diluted by 2.5%, but it's incrementing its overall balance by $100 million? Or would you rather own shares in a company that's burning cash each year? And I think that's where this ended up, from a market perspective, getting rationalized is shareholders said, "I want to have the safety and security of cash generation, and I'm willing to take on the dilution for it." And that's how this became, you know, as standard as it is.

David Sacks 57:13 When I think about funding a new startup, uh, and I look at the competitive landscape, when I see that the competitors have all been acquired by private equity companies, I generally think, "Okay, there is room for innovation here," because I know that the first thing that PE firms are gonna do when they acquire a company is, like, zero out R&D, or just put the product on maintenance mode. There's no innovation that happens-

Chamath Palihapitiya 57:38 Yep.

David Sacks 57:38 ... with a product once the PE firms buy the, buy it, right?

Jason Calacanis 57:41 Totally.

David Sacks 57:41 So the reality is, I think-

Jason Calacanis 57:43 So those are good targets for startups who have to-

Chamath Palihapitiya 57:44 Well, they'll, they'll do acquisitions, right, Sax? I mean, they'll find smallholdings

Narrator 57:46 Yeah, they'll-

Chamath Palihapitiya 57:47 Yeah.

David Sacks 57:47 They'll do roll-ups, right?

Chamath Palihapitiya 57:49 Roll-ups, yeah.

David Sacks 57:49 Because it's, they will do financial innovation. They will innovate-

Chamath Palihapitiya 57:53 Right.

David Sacks 57:53 ... the, the structure of the business.

Chamath Palihapitiya 57:54 They'll cut all the, the wasteful spending and all the nonsense and-

Jason Calacanis 57:57 Lunches.

David Sacks 57:58 Yeah, exactly.

Chamath Palihapitiya 57:59 What did Chamath say once, like cut out all the KIND bars?

David Sacks 58:01 Yeah, the KIND bars are gone.

58:02 Yeah, and he exposed brick walls, like all this nonsense. It's so stupid.

58:05 (laughs)

Chamath Palihapitiya 58:05 Yeah, yeah. So who do you think is-

Jason Calacanis 58:06 The Vegas trip, yeah.

David Sacks 58:07 This stock-based compensation is gonna go away because they're gonna get rid of all the high-priced engineers, they're gonna get rid of the, a lot of the high-priced executives. They're gonna have probably, they're gonna have to keep customer support because all the-

Chamath Palihapitiya 58:17 They're gonna increase cash salaries, probably.

David Sacks 58:20 They'll bonus people. They'll just do bonuses-

Chamath Palihapitiya 58:22 Yeah.

David Sacks 58:22 ... for hitting targets instead of giving people as much equity in the business. And they'll run it like a, you know, private equity-type, type play. Um, so-

Chamath Palihapitiya 58:30 Why would you do this, Sax?

David Sacks 58:32 It's not fun, it's not interesting to me.

Chamath Palihapitiya 58:33 Right.

Jason Calacanis 58:35 Yeah, I mean, we're gonna see-

Chamath Palihapitiya 58:36 There's no innovation. It's not like you're building a new product, yeah.

David Sacks 58:38 There's no innovation.

58:38 I think, David, the other reason why it wouldn't be fun is like it's a, it's a level of financial engineering which is highly sophisticated. I think for some people, it is fun. I think for us, it's less fun because you're not necessarily building a company per se.

Jason Calacanis 58:48 Creating anything, not innovating.

Chamath Palihapitiya 58:49 You're not being a product person. You're, yeah.

David Sacks 58:51 But, but I would say that it is highly sophisticated and the folks that do it at these places, that these private equity firms are incredibly-

Chamath Palihapitiya 58:57 They're very good at it.

David Sacks 58:58 ... savvy at how they do it.

58:59 Yeah.

58:59 Um, and it's, it's all the twists and turns of how you, you know, lever this up and use debt and bla- and use a margin loan and pre-fund the com- I mean, uh, it's not the stuff that necessarily we want to be thinking about.

Chamath Palihapitiya 59:12 But Aados-

David Sacks 59:13 But that's, that's what you'd have to do as well.

59:14 I totally agree with that, and look, I'm, I'm happy they exist in the ecosystem because we need firms, we need more exits, right? And we know that right now in Washington, the, the regulatory regime is very difficult. It's very hard to get deals through. So at least you have private equity firms that are providing some exits, and we need, the ecosystem needs exits-

Jason Calacanis 59:36 And those exits, you're saying, Sax, don't trigger, like, comp- com- competitive concerns with Lina Khan and her group, right? Like-

David Sacks 59:42 Yeah, she's not gonna stop it.

Jason Calacanis 59:43 ... she's like, "Oh, some private equity firm took this private, okay, Salesforce-

David Sacks 59:45 Right.

Jason Calacanis 59:45 ... didn't buy it, so we don't need to get through regulators."

David Sacks 59:48 Right, right.

Jason Calacanis 59:48 You're gonna see a lot of-

David Sacks 59:49 We need exits in order to justify the risk capital that goes in at the earliest stages, which in most cases is gonna be a zero.

Jason Calacanis 59:57 And, and just to give you some other numbers out there, Manscaped (laughs) , uh, which is a company that sells razors for guys, uh, they had $315 million (laughs) in net loss in 2021 with $310 million in stock-based comp.

Chamath Palihapitiya 1:00:09 By the way, that number can also be distorted. Just to be clear, if you give a one-time big grant...

Jason Calacanis 1:00:14 Yes.

Chamath Palihapitiya 1:00:14 ... to a, a executive, like a CEO-

Jason Calacanis 1:00:16 Yep.

Chamath Palihapitiya 1:00:16 ... the, the way that the accounting works on stock-based comp, it's not the kind of thing you can have a very simple kind of descriptor on, but-

Jason Calacanis 1:00:23 Yeah.

Chamath Palihapitiya 1:00:23 ... you can have these very significant short-term costs associated with a big grant that could vest over a long period of time-

Jason Calacanis 1:00:29 Sure.

Chamath Palihapitiya 1:00:30 ... with, that, that has very high strike prices. I mean, when Elon got that massive grant at Tesla, the stock-based comp expense was significant, but-

Jason Calacanis 1:00:38 Yeah, but you know what? The interesting-

Chamath Palihapitiya 1:00:39 ... he had to earn his way into it.

Jason Calacanis 1:00:40 It was, that was... There were 20 targets or something crazy like that, and all of them were based, or a lot of them were based on the stock price and the delivery of cars. So that's one of the things that I think is broken.

Chamath Palihapitiya 1:00:49 It was based on market cap, yeah. Yeah.

Jason Calacanis 1:00:50 Yeah. So this, this is one of the things that's broken in Silicon Valley is that...... the, the comp in this stock-based comp is not tied to performance. It's like just giving people guaranteed salaries.

David Sacks 1:00:59 And in fact, I was gonna say, Jason-

Chamath Palihapitiya 1:01:00 Well, for, for junior people-

David Sacks 1:01:00 ... I could be wrong.

Chamath Palihapitiya 1:01:01 ... like, the, the, there is more sophistication, to be clear, in executive comp in public, uh, technology companies.

Jason Calacanis 1:01:06 I think that should trickle down to the junior people too.

Chamath Palihapitiya 1:01:08 Yeah.

Jason Calacanis 1:01:08 I think everybody should rise and fall with the company's performance. That's my personal feeling. I mean, this is the problem with entitlements, you know, and, and people being entitled. So sorry to be like a, a red pill here but (laughs) we should have like performance should be lauded and compensated for, not just showing up

Jason Calacanis 1:01:24 and hanging out. There's gonna be a bunch of companies in this position, so look for this as a trend. Peloton, 964 million last quarter in revenue lost, 757 million in the quarter. They have a $3.1 billion market cap. They've only got $879 million worth of cash. I'm just looking at these numbers, hopefully they're, they're tight. Um, and they have a billion foreign inventory. That company's gonna get taken out. Uh, BuzzFeed, I don't know why that even went public, they're down 84%. They had 91 million d- a media company, $91 million in Q1 revenue, they lost 45 million. Their market cap is down to 210 million, and they've only got 74 million in cash or so, with some, you know, maybe 100 millions in accounts receivable. So there's a bunch of companies right now that are public that are about to hit, in a couple of quarters, running out of cash going into a recession. Are we gonna see some big flame-outs do you think? And are, are you watching specific companies because the private equity folks must be salivating watching this.

David Sacks 1:02:21 Well, I mean, look, J- J- Jkal, you asked what the takeaway was around this.

Jason Calacanis 1:02:25 Yeah.

David Sacks 1:02:25 And I think the takeaway is there's been a regime change in the public markets. The way that investors look at these companies is changing. It's not about growth at all costs anymore. They're not just looking at revenues. It's also about margins and cash flow. And, you know, we talked about it on the last pod how I think a lot of founders understand intellectually that we're headed for a downturn, uh, if not a recession, but they weren't taking the medicine of basically reducing their burn. Well, this is an indication of what investors are valuing. If the only way for Zendesk to create value as a public company is to sell to a private equity firm who's gonna not-

Jason Calacanis 1:03:03 And cut half the staff.

David Sacks 1:03:03 ... is gonna cut half th- or, or some huge number of staff to run it for free cash flow, that's just an indication of the regime change. So, you know, we need founders to start internalizing this information so they can run their businesses more efficiently. You know, what investors want right now, they still want growth, but they want it with low burn. High burn operations are gonna get punished.

1:03:24 I've transitioned most of my public markets time to focus m- on debt. Um, and I've been looking at these-

Jason Calacanis 1:03:31 On debt?

David Sacks 1:03:31 ... companies because, yeah, because there's a lot of these really interesting tech companies with a lot of ill- because what David said, I think, is 100,000% right, what Sax just said. There is a massive, massive regime change here. And-

Jason Calacanis 1:03:45 Yeah, th- and shocking if you don't take the medicine.

David Sacks 1:03:48 And, and what, what's funny is like so many of these companies have been left for dead, but what is really juicy is the few companies that you think will survive, and specifically making sure you're protected in the capital structure, which means to own the debt because the debt is always senior to the equity. And there's some really, really interesting companies out there that are in that situation, and it's just like, it's a much better risk/reward in a moment where again, you know, we talked about this, but why would you give up your liquidity today? I don't know the answer. Why? Why? You, you-

Jason Calacanis 1:04:22 Let's go around the horn. Yeah, I just had one.

David Sacks 1:04:24 You've used this term, Jason, before, like skipping along the bottom. I just think it's like psychological wishful thinking as opposed to sort of like a rational summation of the actual. Jerome Powell just said, "I will tank the economy in order to beat inflation." He just said it in The Wall Street Journal.

Jason Calacanis 1:04:40 Uh, but people believe inflation might be turning over. Do you buy that or not?

David Sacks 1:04:44 No. As I've said, I think you're gonna see 8 and 9% inflation prints for at least the next three or four months minimum. I think that things could get, um, marginally better after that, but I think the thing we don't know, and again, it just touches, and I don't care what the fucking audience thinks, touches Russia and Ukraine, so sorry to bring up politics, but-

Jason Calacanis 1:05:05 No, we hav- we have- yeah, okay.

David Sacks 1:05:06 ... these things are inexorably intertwined, and if people want to go and venture and gamble in the stock market, you might as well understand this because I think, you know, many of the scenarios will trade because of what's gonna happen with Putin.

Jason Calacanis 1:05:20 Let me, let me ask the question here. How many quarters will this recession be if we had to pick a range, pick a two-quarter range? I'm thinking three to five. What, what do you think?

David Sacks 1:05:29 I have no idea.

Jason Calacanis 1:05:30 Okay. Friedberg, you got a... if, if this is the second-

Chamath Palihapitiya 1:05:34 What's the question?

Jason Calacanis 1:05:34 How many quarters, plus or minus two let's say, uh, is this recession gonna be? So five plus or minus two, four plus or minus two, plus or minus one? What, what are you thinking will be the bottom out point if, you know-

Chamath Palihapitiya 1:05:46 I don't like the term. I've told you guys I don't like the term, quote, recession as if it's some absolute negative thing. I mean, negative GDP growth coming off of inflated GDP doesn't feel to me as, uh, systemically challenging to the economy as, uh, you know, some other circumstance where, for example, there was a global financial crisis or, uh, 9/11 or, or some other kind of factor that, that, that drove things, uh, that, that really affected the core economy. We're certainly... we, we had m- we had something that, that affected the core economy in COVID, then we had massive stimulus. So I, I, I don't... I think there's this unfortunate general characterization of quote/unquote recession being an absolute negative, and I think that there's relative growth, and if you're gr- if your relative growth is negative off of an inflated number but over a-

Jason Calacanis 1:06:41 Okay, let me give you-

Chamath Palihapitiya 1:06:41 ... historic three-year-

Jason Calacanis 1:06:42 Yeah.

Chamath Palihapitiya 1:06:42 Let me just finish. But over-

Jason Calacanis 1:06:43 Yeah.

Chamath Palihapitiya 1:06:43 ... a historic two or three year period, you're still growing the economy considerably because jobs, uh, jobs are growing and pr- production is growing. Uh, it's not as negative as it's being made out to be. So I, I, I'm not gonna-

Jason Calacanis 1:06:55 Okay, I get you.

Chamath Palihapitiya 1:06:56 ... get into that evidence. Yeah.

Jason Calacanis 1:06:56 Let me, let me ask you this way then.... how many more quarters will we have of stocks and real estate and assets declining in value or being flat?

Chamath Palihapitiya 1:07:06 That's a financial markets question-

Jason Calacanis 1:07:07 Yes, that's what I'm asking.

Chamath Palihapitiya 1:07:08 ... which I think is a different one. And one thing I've realized is that financial markets in the short term, uh, you know, the, the old Warren Buffet quote or whomever it is that over the long term, equities are a weighing machine, in the short-term, they're a voting machine. As we've seen with crypto, it was a voting machine, that everyone voted on the, the hot thing du jour, and now everyone's voting against it. So I, I don't know-

Jason Calacanis 1:07:29 They're weighing it now, yeah. (laughs)

Chamath Palihapitiya 1:07:31 Well, yeah, I mean at some point-

Jason Calacanis 1:07:32 And there's nothing there.

Chamath Palihapitiya 1:07:32 ... they'll have to weigh it. You hold a cryptocurrency long enough, you'll find out how much fundamental productive value it's creating. And the same is true for owning businesses or other real assets. You'll find out over the long run how much productive value they're creating. So-

Jason Calacanis 1:07:46 So you don't wanna answer the question of when we hit a floor? Okay. Sax, when do you think we hit... Are we, are we hitting a floor now? Do we have a lot more to go down?

Chamath Palihapitiya 1:07:52 I'll tell you one point of view. I, I am looking at buying high-quality share businesses, buying shares of high-quality businesses right now.

Jason Calacanis 1:07:59 Okay.

Chamath Palihapitiya 1:07:59 I think that there are things that are, that are cheaply priced, that if I own them for a long enough period of time-

Jason Calacanis 1:08:03 Got it.

Chamath Palihapitiya 1:08:03 ... the underlying productive value of that business will return my capital to me. And so-

Jason Calacanis 1:08:08 Got it. You have one that you might wanna mention here that you're looking at?

Chamath Palihapitiya 1:08:11 I don't.

Jason Calacanis 1:08:12 'Cause you don't wanna share cards?

Chamath Palihapitiya 1:08:13 I shared some stock tips at the summit with our friend, uh, Sonny, who he's, his trades are up, but like I told him-

Jason Calacanis 1:08:19 Mm-hmm.

Chamath Palihapitiya 1:08:19 ... these are longer-term trades, so.

Jason Calacanis 1:08:20 Sax, what do you think in terms

Jason Calacanis 1:08:21 of... And then we'll go to some of the political stuff that affects markets after this.

David Sacks 1:08:24 Well, I mean, I think it's all related. So there's three things going on here right now economically, or three underlying causes. One is rate expectations have changed massively. Interest rates have gone up and rate expectations are going up even more, fueled by inflation. And until we see where we're at on inflation, whether that gets controlled, that issue is not going away. The second big issue is economic slowdown, the recession. So the first one was Wall Street, this is Main Street, and these two things are related because companies are slamming on the brakes because they're seeing that the capital availability is greatly getting reduced by this re-rating, this regime change in markets. So we're seeing an economic slowdown that threatens to turn into a recession, and consumer confidence is part of that, right? When your wages don't buy you as much because food and gas prices are through the roof, that reduces consumer confidence, and that also plays into that. So that's the second big issue, and I don't think we're gonna know about recession, it's gonna take, you know, potentially through the rest of the year before we figure out what's happening there. And then the third part of this is the overhang of this war in Europe, the Ukraine war, which is now threatening to become a forever war. There was a pretty stunning article in The Washington Post this week in which the administration officials were quoted as saying that they would effectively prefer, or countenance was their word, a global recession and famine over letting Russia keep the Donbas region. So they are committed now to basically prying Russia out of the Donbas even if it means global recession. Not to mention-

Jason Calacanis 1:10:03 Did they say specifically the Donbas or specifically standing up to Putin?

David Sacks 1:10:07 Well, no, that's-

Jason Calacanis 1:10:07 'Cause that's kind of minimizing the-

David Sacks 1:10:08 No, what we're talking about is, is the Donbas region.

Jason Calacanis 1:10:11 Yeah.

David Sacks 1:10:11 What's happened is, look, the Russians lost the first few weeks of the war in which they tried to strike... They, they basically went for a knockout blow to take over Kyiv, topple Zelenskyy. I think we accomplished something in preventing that. But since then, they have achieved their objective of taking over this eastern portion of the country, this Donbas region, in which, this is where most of the ethnic Russians live, and these Ukrainian separatists who are ethnically Russian, they've been fighting alongside the Russian troops, and the Russians have basically won that part of the war. And so the question is, what do we do now? And what you had is you had administration officials saying that they would not accept the status quo, that they are willing to fight on for years. You know, the same geniuses who gave us the forever wars of the Middle East are now giving us a forever war in Eastern Europe, and they are saying that they are willing to basically continue this fight even if it means global recession. Now, I don't think the American people ever voted for this, but this is what the administration is pursuing. And, you know, you gotta remember that there's always the risk that this war spins out of control, that we get a nuclear escalation. So I think that this is a huge overhang on markets, that's a- it's the third big problem that we have. So I don't see how we get out of this bear market until you get clarity and resolution of inflation and rates, number one, slowdown or recession, number two, and basically this war in Europe, number three.

1:11:39 It's... And it's reflexive because, uh, these next three months as I, as I kind of indicated last week, I think we're gonna see inflation, uh, prints that are really high in part because things like rents which haven't, you know, which are on a lag will get folded back in. So we're gonna be printing 8% and 9%. And then guess what, Jason? It's the fall. It starts to get colder. You know, uh, Russia's depriving Europe of nat