All-In with Chamath, Jason, Sacks & Friedberg - E114: Markets update: whipsaw macro picture, big tech, startup mass extinction event, VC reckoning

Episode Date: February 4, 2023

(0:00) Bestie intro! (1:15) Macro picture update: 0.25% raise, jobs rip up, wage growth continues to slow (17:52) Interest rates impact on mega-cap company creation (33:58) Mass extinction event coming to startups, reckoning for VCs, venture debt issues (1:02:33) Adani's potential fraud, role of short sellers Follow the besties: https://twitter.com/chamath https://linktr.ee/calacanis https://twitter.com/DavidSacks https://twitter.com/friedberg Follow the pod: https://twitter.com/theallinpod https://linktr.ee/allinpodcast Intro Music Credit: https://rb.gy/tppkzl https://twitter.com/yung_spielburg Intro Video Credit: https://twitter.com/TheZachEffect Referenced in the show: https://www.washingtonpost.com/business/2023/02/03/january-jobs-labor-market https://www.wsj.com/articles/fed-approves-quarter-point-rate-hike-signals-more-increaseslikely-11675278190 https://fred.stlouisfed.org/series/CIVPART https://www.ustreasuryyieldcurve.com https://www.amazon.com/Intelligent-Investor-Definitive-Investing-Essentials/dp/0060555661 https://chamathreads.substack.com/p/higher-rates-will-lead-to-the-next https://www.google.com/finance/quote/META:NASDAQ https://medium.com/@alt.cap/time-to-get-fit-an-open-letter-from-altimeter-to-mark-zuckerberg-and-the-meta-board-of-392d94e80a18 https://www.freightwaves.com/news/fedex-to-cut-global-officer-director-workforce-by-at-least-10 https://www.theverge.com/2023/1/27/23574322/zuckerberg-puts-metas-middle-managers-on-notice https://twitter.com/tomloverro/status/1620466827519496194 https://twitter.com/msuster/status/1620653106387386368 https://twitter.com/gradypb/status/1620937502248034304 https://www.axios.com/2023/02/01/david-cahn-leaves-coatue-for-sequoia-capital https://www.google.com/finance/quote/ADANIENT:NSE?window=1Y https://hindenburgresearch.com/adani https://www.bloomberg.com/news/articles/2023-01-30/most-adani-stocks-drop-as-rebuttal-draws-hindenburg-response https://www.sec.gov/rules/proposed/2022/34-94313.pdf https://www.theatlantic.com/magazine/archive/2023/03/wall-street-muddy-waters-activist-short-sellers-tesla-gamestop/672774

All right, everybody. Welcome to the All-in podcast. We're back. Thanks to Freeberg and Saks for moderating the show into the lowest ratings in its history. Hold on, hold on. Please give the keyboard warriors that are their bot armies some respite here. They tried their best. It just did. It's okay. I think the ratings the last episode must be a result of Google down-ranking us as a result of our honesty about not wanting to get more boosters. The fact you're on the Brigadountree. You call us somebody at Google, some lower level functionary to push a button,

push a button to shadow, I mean, visibility filter us. It's everything except the moderation skills of the two days. Don't waste the moderator turnig it into Fox Sunday. Camping. What? You're like your winner's ride. Rainman David's side. I'm going home.

And it said we open source into the fans. And they've just got very easy with them. Love you guys. We know you can walk. I'm going home. The reaction I got from our COVID vaccine discussion was, hey, pretty fair imbalance, like, not in a joking way, but actually, like,

yeah, the warning on YouTube was pretty benign actually. Yeah, so like, if you want COVID information, click here. Thank you. Okay, let's talk about the market data. The Fed raised 25 basis points of market. Obviously has ripped since then the jobs data. This morning was crazy. We added 517,000 jobs more than 2X December

and well above the estimates of 188,000 jobs. The Fed, I think, is starting to realize they can, obviously, impact inflation and slow down speculative assets, but they're having a very hard time with the labor market. Obviously, labor participation actually is growing. We've talked about that many times here. It's bumped up to 62.4%. We all know it peaked at like maybe 69% during the 2000 time period. Weijero though, continuing to slow. So that is some good news there. And obviously, risk on assets are ripping the last couple of days. Tramoth, which your take on where we are with the market and the feds action, which people are starting to believe will be another 25 basis point hike and then maybe staying high

for the rest of the year. Did you hear their comments? You think, Dovish, what should take on the market? I watched Powell's speech, and it was really amazing because in December, he was extremely hawkish, and he was basically like, listen, we're going to keep rates higher than you like and longer than you want. And that was pretty clear, and the markets reacted. And then not but 35, 40 days later, he essentially said we have two 25 basis point hikes left to go. And he's going to try to stick the landing essentially. And even though the rest of the language in his entire speech and the press conference, if you read it in the absence of his body language, so if you just read the transcript, would seem very hawkish as well? But the reality was he basically capitulated. And then the market

essentially said, okay, we're at the end of this thing. And we've talked about this before, but markets tend to bottom six to nine months before it's clear that you could have done this. And so we're a little bit off to the races in the short term. It's compounded by a couple of other factors. One is that at the end of last year, so many people were tax loss harvesting, which means if you had some gain somewhere else, you sold some things that were losing money so that you could net the two together. You saw a lot of stocks. Tesla was probably the poster child for this, trade all the way down to like $108 a share, and it's effectively doubled in the

last 30 days. Right? So everybody tax-ausses harvested, everybody degroased, nobody was really owning anything. And then when Powell basically said we're mostly done, there's been so much systematic buying right now that nobody's really well positioned. To me, this is very similar and eerily reminiscent of the end of 2018 and beginning of 2019. And if you guys remember, at the end of 2018, October, November, December, the market's just fell. And part of it was Powell's going to raise rates, inflation's getting out of control, etc., etc. And then we got all this data that said China may be entering a real period of malaise and Powell capitulated, again, trying to stick the landing.

And long story short, he didn't. That was a head fake and the market's just ripped higher. Then we went into the COVID pandemic and all of that stuff happened. So I think we're about to replay a little bit of that. At least in the next 30 to 90 days, the paint trade is to go up. So that's probably where we go. Here's the Fed fund rates chart from 2000 and into the 2008 recession.

And you see just, you know, to Jermott's point in 2019 that little step up to 2%, and then this dramatic step up that we've been on up to four and a half or so. SACS is this where the Fed pauses, you think they cut, and in what overall effect is this going to have on venture capital and the startup market, which is super important to us. I think we're in the Whipsaw economy here just a month ago. Sentiment was incredibly negative. On the show, we were predicting for the year that we were looking at the Fed funds rate going from 4.5% to say 5.5% to 50 point increases.

The belief was that we were going to have a recession later this year. I think that was pretty much consensus. And now, three weeks later, you had a situation in which we got a couple of really good inflation reports. So all of a sudden, the consensus changed to, we're not going to need to raise rates, you know, to 5.5%. Maybe we only get one or two more quarter point rates. And the market just ripped on the belief that inflation was in the rearview mirror, the problem had been licked and now we can just kind of move forward, and the Fed seemed to confirm that just yesterday

with a quarter point rate increase. And now today, we have this wild jobs report with over half a million new jobs. The expectation was only 100,000. And so now all of a sudden, people are wondering, well, wait a second, does this mean that labor costs are gonna go back up that the economy is overheating? And now the Fed's gonna have to raise more.

So I would say literally from week to week, we're being whipsawed between expectations of whether inflation has been conquered or not, whether the economy is gonna have a recession or not. And I think probably where we're sitting at this moment is you'd have to say that the risk of inflation returning are slightly higher, but the risk of a recession are slightly lower

because with this kind of job support, better chance of having a soft landing here. It's very hard, in other words, to have a recession, if people are employed, if people are employed, and we have 50 year, yeah, 3.4% yeah, exactly. tax to have a recession if people are employed, if people are employed. What's the scenario down there? Yeah, 54 percent. Yeah, exactly.

So, 50-year-old. Right. So I just think that we're in a highly volatile economy and it's very hard to predict the future. I'd say that, relative to where we were a month ago, you'd have to say that the odds of us having a soft waiting this year are quite a bit better than they were just a few weeks ago. All right, freeberg.

When we look at this employment picture, does seem people are going back to our seems maybe indicative of people blew through their savings. We talked about this. You've been harping on and on previous episodes about people doing personal debt by now pay later. Is a possible basis here that people yo-load for so long, post pandemic, Coachella, vacations, et cetera.

That maybe they whipped through their savings, it seems like we've burned off a trillion in savings for somebody like that and the debt's going up. So now people maybe need to go back to work and they're finally capitulating and taking jobs. Do you think that's what's actually happening here? I don't know if I was classifying that. I mean, there's obviously a lot of this stuff

is on the margin. The one challenge, Larry Summers has been harping on since last spring, all the way through the summer and the fall. And in multiple kind of interviews and publications, he's done, he's the ex-US Treasury Secretary, obviously brilliant economist, that the US needs to have a 5 to 6% jobless rate for five years in order for us to

really get to the inflation rate target of 2 to 3% or below 2%. And so, you know, the economists and the macro guys that are tracking their jobs report today are, I think the indication is we're not there yet. And that the implication of a tight job market is wages go up and wages go up. Inflation goes up and because companies need to charge more because they have to pay more to get talent. And this obviously continues to support the escalatory spiral that drives inflation. continues to support the escalatory spiral that drives inflation. So that's the, you know, kind of downside to the jobs report today that I think a lot of folks are watching. The Fed mentioned over and over again, deflation. So any impact there, Shemoth, you think we're going to see prices start to crater? What impact would that have on the market?

I think Saks is right. I think the marginal risk here is for this whip sign. So we have a period now which is disinflationary, but the problem is if the stock market keeps going up and all of a sudden we have less restrictive monetary conditions, then we're going to be back at the same place we were before, which is money sloshing around into all kinds of risky assets or more money. You know, there's still an enormous amount of money sitting on the sidelines that has to come into the market now if this thing keeps going higher. So we're in a delicate moment.

And if we re-ignite inflation because all of a sudden more companies have more liquidity that they can tap, right? More money they can raise, more money as a result that they can spend, because we don't have this first inflationary cycle under control, there could be a risk that we reignite inflation. And so then they have to capitulate, the Fed has to capitulate again

and start another hiking cycle. So I think it's a complicated moment. I think all of the smart money in Wall Street that I talked to up until this point, they forecasted like this period would be choppy. And the second half of the year would be really robust and like you needed to be super long and things were going to be incredible. And when I talk to them this week, they're like, oh God, we weren't positioned for this. We had no risk going into this. We're going to be forest buyers. There's a bunch of companies that are whispering that they want to go public now. Oh, really? The big banks have been calling around

trying to book build quietly for some IPOs. And so if they try to kind of crack this capital markets open, I think there's, again, the marginal risk will be that we do websites. When you say book build, you mean trying to see if you'll get some early takers to buy equity in an IPO, perhaps even in a company like Stripe, that's been sitting on the sideline. So not Stripe, they're in a complicated moment, but when they call it the book build, they basically say, hey, listen, XYZ company, quiet filed, look at the S1, what do you think? Where's the price?

Blah, blah, blah. And they're trying to get an indication of whether you'd want to be in the IPO book. So I think that there's a lot of those testing in the waters that are now starting again. Would there be an appetite in your mind for an IPO in the second quarter of like a striped-type company, but I don't know what the other candidates are, the lead candidates, but

Stripe is one people talk about most. The thing that we have to think about is like most of the market are not people, right? Most of the market are computers and algorithms and ETFs. It's an extremely formulaic buying model. You have components of an index, those represent certain percentages. You have to own those percentages to be relevant as that index. And so it's this reinforced buying loop, as well as a reinforced selling loop, right? So when things start moving, those folks have to just systematically move money in.

All the humans know that. So the humans tend to front run all the computers, and they basically are the ones that sell into these guys. And then that's what inflates these prices. Similarly on the way down, humans try to frontrun it by being short into that stuff. So we could see the capital markets open. Even if we don't, it's actually the worst scenario because now you have all this money going into a fewer number of names.

That sort of explains Facebook has doubled in 30, 60 days. Yeah, it was about Tesla. Tesla has doubled in 30, you know, 30, 60 days. A lot of the text stocks, like high beta stocks, that we are all, you know, helping to build. Those companies have just absolutely ripped 60 to 100%. These are not healthy and normal moves. And so the question is, what happens if inflation somehow all of a sudden, pokes itself back up right now, it doesn't look like it is. And Powell was clear and it's true. We're in a deflation. He said deflation 11 times during his, and he's very clear.

We're in a deflationary level. He's used a language. That's why the market rips. I mean, basically that was all part of a narrative where inflation is on its way out. We've licked that problem. And that's what the market was pricing in. And I think now the question is, in light of today's job support, is that actually true or not? And I'm sorry, disinflation, deflation, deflation, deflation. Yeah, disinflation. I think, you know, one way to look at this is, Jake, how you showed the chart of the Fed Funds Rate. Another chart is the yield curve.

We just pulled up the yield curve for a second. This is the yield on US Treasuries, on RT bills. One way to look at this is as a prediction market of where the market thinks interest rates are going, because the Fed sets the rate for the Fed's funds rate, which is the overnight rate of lending to banks, but they do not set the rate of three months, six months, bonds, 10-year bonds, and so on. The market does, because the market trades those bonds, and it imputes a yield that the market requires to want to hold those bonds.

What's interesting is that if you view the yield curve as a, again, as a prediction market, it tells you at any given time what the collective wisdom is of the market. Now, this thing is fluctuating, moving all the time. So that collective wisdom is changing. But where things are today, it's pretty interesting. It looks like what the market is saying is that within the next six months,

the rate peaks at 4.75%. So Nick, if you just want to hold the mouse on the 6 month dot, you'll see it's 4.76%. So basically, the market is predicting, we get maybe one more quarter point roughly, not much. And then if you go to the two year, it's at 4.09, so a little over 4%. So what the market is actually predicting is that over the next two years, we're actually going to get a 50 basis point decrease from the Fed. And then if you go to say the five year or the 10 year, we're at 3.5%.

So the market is basically saying that long-term rates are going to stabilize at 3.5%. So the market is basically saying that long-term rates are going to stabilize at 3.5%. We're not going back to the abnormal zero interest rate policy or reserve that they have for 10 years. 3.5% will be the long-term stable cost of money. But you can see that the market, the prediction market, thinks that the Fed has done enough to combat inflation because the Fed funds rate now basically is where the bond market thinks it should be. And in fact, the bond market thinks it's coming down over the next two years. But coming down to what would be three and a half in a world that we've lived in for largely over the 14 years of this bull run, the majority of that was at close to zero or zero.

Right, and that's why we're never going back to the bubble of 2021 where SaaS companies are trading at 100 times ARR. We're going to go back to an environment like a more normal one where valuations are more like the 2017 valuation something like that. What did it weigh? It's 3.5 percent is not a bad. It's still a great deal. It's still a great deal if you got your mortgage at that.

If you listen to Buffett's teacher, this guy Ben Graham, in Ben Graham's book, the way that he would look at a stock, and obviously look things have changed, but the way that he would look at a stock is he would look at that risk-free rate. He would double it. And then the inverse of that is the maximum price to earnings ratio that he would pay for a stock.

That's the trade-off. If you can get more than two times the risk-free rate ratio that he would pay for a stock. That's the trade off is if you can get more than two times the risk-free rate, then it's worth owning a company. What that means is that if you take three and a half percent as a terminal rate, the right PE is around 14 for the S&P 500. Right now, the S&P 500 trades at 22 times PE, which would mean that we are 50% over value. Now that, again, that's a Benjamin Graham model and I think the world has pretty cleanly moved away from it, but there's probably some rooting in that intellectual framework that's still valuable. And to your point, David, it just reinforces that, man, we need to start to learn a new regime

here because when rates are not zero, there is just a lot of access that you can't support because the alternative trade-offs for investors are plentiful, you know, and plowing money into a money-losing startup becomes less attractive. And to just give people some background, that's the intelligent investor was that book, I believe, and he was talking about value investing, which is, hey, what's the earning per share? What's the ratio? What's the ratio? What's the PE? And that's something that growth and momentum investing has been the opposite of.

And this is, and could be, I think you wrote a blog post about this, Chimath. Sure, of the regime change, if you look at the Googles, the Facebooks, the Apples, Amazon's is a little bit of an exception here. Those companies printed money. They had profits, they built up large cash reserves. If we look at the next cohort of companies, Airbnb's Coinbase's, Ubers, et cetera, they focused on the top line growth,

much like the Amazon, which was a very obscure approach, correct from off in the history of this. Nick, do you wanna just throw up this chart? We did a little analysis over here here and it was just basically looking back 60 years of company formation. We looked at all of the 100 most valuable public company startups and we indexed that to the 10 year interest rate. So what are we looking at here, Tramoth with this chart? So basically, we went back from 1960 onwards, so basically, you know, 63 years. And what this shows you is the 100 most valuable public technology companies, then the size of the circle here is

their market cap. And then it's overlaid on top of the 10-year interest rate, as well as gray bars for recessions. So what does this graphic meant to illustrate? Well, it just was for us to study, is there a correlation between the value of companies and what the interest rates were or what the economy was doing at the time? And to your point, Jason, the trend is pretty starkly made on this chart, which is that if you are a company that was founded in a period of austerity, you had the ability in general to build a much larger company, then that would just was founded

in a period of wealth and excess. Right? So when you look at when rates were sort of approaching zero or were zero, there was a lot of really successful companies. They're listed here in the in the light gray on the right. But none of those things really represent the success that these other companies had. That's the first interesting takeaway. The second interesting takeaway though from this has nothing to do with rates per se, but it is that when rates intersect with the emergence of huge technology trends. So in the case of the 1970s, it was the PC revolution. In the case of the late 1990s, it was the internet revolution. Those two things which required enormous progress in both physical infrastructures, so atoms, as well as software infrastructure

bits, when you put those two things together, those also created big companies. And so if you add that all up, the point is that whenever you see huge tectonic shifts in technology combined with periods of austerity, that's when the gargantuan dollars are made. So in the 1970s, companies like Microsoft and Apple from the get-go had to be profitable, right? And in the absence of one very important round of financing that Amazon was able to close, the next big lot of companies were founded again in rising rates where they just had to get profitable or find a way to be positive for cash flow or have positive working capital

faster than anybody else. profitable or find a way to be positive for cash flow or have positive working capital faster than anybody else. So these are like really interesting trends that I think just say that as rates creep back up and if we can intersect that with some improvements in technology over the next five to 10 years that we've all talked about it could be a real boon for startups and startup investing. It would mean people are a little more resilient, a little more hardcore to use a term, free bird, where do you thoughts on this analysis by social capital? It's interesting. I mean, I think there's probably two ways

you could interpret this. One is in an era of excess capital. All the capital gets competed away. And so you pay more salaries. You have, it's harder to get high quality talent, you make a lower margin, et cetera, et cetera. It's much more competitive on the ground. And then another one is just, obviously, kind of like evolutionary fitness when there's

less capital, investors are more selective. I think what might make this era a little bit different than the past is just the amount of term to drive powder sitting on the sidelines right now. So the total VC capital raised last year, I think, was a record high. That means there's a lot more cash that needs to be deployed in the next 12 to 36 months than has ever been deployed in the history of venture. If that holds true. ever been deployed in the history of venture, if that was true. So that may be kind of a counterbalancing effect here where it may take three years before that effect plays out, where there's more of a dearth to capital. It's certainly the case that institutional investors, endowments, pension funds, traditional

family office LPs, and venture funds are making far fewer commitments this year to new funds, as I think we all know, and that tightening will play out in the venture funds that'll get raised for this vintage, the next vintage, and so on. And so maybe that kind of evolutionary fitness concept starts to play out later. I also think there's also this know, we talked about this on our text screen, but the venture business of the last 15 years, everyone since 2008, everyone's been trained and all the younger people that have come up and are now partners and running the firms on an environment of momentum investing rather than fundamental investing. So there is also a question of how fit the investors are for a market space where valuations are flat or descending or the decision whether or not to invest is no longer driven by who else is investing and how much is the company growing and how much is their valuation going

up. But it's much more about the fundamental performance of the business. Does this match what you're seeing on the ground sacks? Are people being more dogmatic, pragmatic? Are the capital allocators really sharpening the knives and looking at these businesses a different way? Is it actually hit the streets? Yes, there's a record amount of money venture capital has raised over the last couple of years,

but it's going to be deployed much more slowly and carefully over the next say three or four years than it was over the previous few years. So divide that amount of money by three or four because the pace of deployment is going to go way down. And so, yeah, I think people are going to be more careful to take longer to make decisions. I think it's going to be much, much harder for new funds to get started. All of the hype around solo capillets and all these seed funds and micro VCs and all this kind of stuff, I think a lot of that's going to get washed away.

I think in hindsight, a lot of that was a product of the bubble. And yeah, I think you're going to be in for a period of some retrenchment in VC. And I think that's good. I mean, I think to the point of Chimau's study that, you know, that the counter-intuitive finding in his study was that great companies are created during times when we're not in a bubble and capital is sloshing around everywhere, but when you're in an environment of moderate capital availability. And I think the point is that we all have to be under some stress, right? That's what evolution requires is, you know, if an ecosystem or an organism is not under stress, they

have no pressure to evolve and become fitter and compete. I think that's what makes our industry and our ecosystem very adaptive over time is that it does face survival pressures. But over the last several years, all the survival pressures were taken away because anybody could raise money. And there was always another bridge available, there was always some extension, and there was no some convertible mechanism to be done.

There was no reckoning. A lot of these companies just seem to get another 12 months or runway, another five months or so. And some of the founders learned so many bad habits during that period of time and so much entitlement and access built up in the system during that time. And I think now we're seeing that a lot of that is working its way out.

I mean, just look at the Facebook results the other day. So Facebook, just... Just about Facebook as an example because here you have a company where the stock over the past year had been pounded, it was like down to 50%. And the market did not like its answers around the capital investments it was making. And then Brad Gerstner, our friend wrote that letter encouraging them to get much more efficient.

And then they did that. And they basically started doing some rifts and basically just getting much more efficient in what they're doing. And specifically taking out layers and layers of middle management. I mean, that was really the big thing. So they kind of took a page out of Elon's book in terms of what Elon had done at Twitter.

I mean, not nearly to that extent because I don't think they needed to, but they targeted this idea of we have too many layers in the company, too many middle-level managers, and the stock ripped just was it like up 20, 25%. Yeah, and a day, and a day. And a day.

And a day up to, I actually bought it based, the day they had the layoffs, I put in a buy-water, and it was closed at $94, and now it's at $193. And FedEx of all places is laying off 10% of its officers and directors. So the idea now is, hey, in the senior ranks, what is the inefficiency there? How do we get more doers, more people who actually are building or operating the companies to take the reins and get rid of this, as you're saying, middle management, this waste that companies have.

Let me tell you specifically, the problem that builds up in these companies is that everybody wants to be a manager. And so you can't just come at this problem by saying we're going to increase the number of reports that each manager has from five to 10. That doesn't work because let me tell you what happens is that every individual contributor who's a star thinks that their career advancement requires them to manage a team so what happens is you take that star i c and then you create a team around them so that person then hires five people to manage and those they stop working they just start managing well maybe you get like twenty% more production

out of that six person unit than you would have just out of the star. But you're spending five times more money. So it makes no sense. And the problem is it casts gates. So, you know, that IC becomes a manager, they hire five people, then those five people, one of them is a star and says,

well, I wanna be a manager. And all the organizational pressure is to keep building more and more teams and more and more layers. Here's the quote from Mark Zuckerberg to illustrate your point from a recent all hands meeting. I don't think you want a management structure. That's just managers, managers, managers, managers, managers, managers, managers, managing the people who are doing the work.

Yes, it's a problem of infinite delegation. Every like star builds a team around them to delegate the work, but then they hire a team to delegate the work to. And pretty soon, the most junior interns in the company are doing all the work and all the best people are just managing. So it's actually a huge problem. And I think that, I'd say that a lot of CEOs

don't quite understand the problem because they think that all they have to do is increase the number of reports that managers have. It's not. You also have to reduce the number of layers in the company. And just the ultimate example of this, just to put a point on it was at Twitter, what we saw is that when Elon went in to basically do a riff at Twitter, the first question he has in the engineering department is who's checking code? And they looked at the code repository, and it was 50% of the engineering department had not checked in code in months. And he wanted to the reason for that is because the engineers were told that if you want to be a

manager in this company, you don't code. Managers don't code. Only I see code. And no one wants to be an I see, no no one wants to be an I know an ambitious wants to be an I see they all want to get promoted so all guess what I see is this individual contributor yeah so the whole thing turned upside down because of this idea that again ambitious people want to be managers and managers don't do the real work yeah it's a cowboys who don't know how to ride horses it's like it's a dangerous precedent to set. What do you take away, Chimath, from what happened at Facebook when you look at it

and the pressure that was put on the ripping of the sock, even though they're down 2% year over year in terms of advertising revenue. There's a guy on my team sent me this chart. He did a pretty detailed technical analysis of Facebook. Nick, can you please put that image up there? So basically this shows this is really technical. This is the first time Facebook mentioned the word metaverse in Q2 of 21 on the earnings call they mentioned it 20 times. And the gray line here is a stock price. So as they kept mentioning it, the stock price

just, you know, react. But Q Q four of 22 was the first time that the word efficiency exceeded the word metaverse. And you saw and you saw the stock price rip up. So what's happened at Facebook is really interesting because I think it transitioned to what's generally called an X growth company, which means that people are now looking at a business that has essentially gotten to its peak size, and now what they're looking at is its ability to generate cash flow. The cash flow generation or cash flow yield of the business was like 3.5%. But they're making enormous cuts both in CapEx as well as headcount over time.

They're getting their expenses under control and all of that should drive up their cash-free cash for yield. And so I think why people got very excited is there are very few ex-growth stocks that you can own that can just compound and crunch ginormous amounts of money. And these guys are in an incredible position to do it, more than $100 plus billion of revenue. And if you get these costs under control and get efficient, get the employee base down to 30 or 40,000 over time, this is a thing that just spits out just ginormous amounts of cash.

So it's really exciting. So you're investing. And more on Buffett, that means the earnings per share go way up. Yeah, you know, like, like the Facebook PE is quite modest actually. Now I actually put back in stock based comp and its PE is about 11.

So still reasonable. If you go back to the, to the Ben Graham analysis, this is a company that perfectly meets that criteria of like, you can buy it at a PE That's basically two times a risk free rate and so I think it's an incredible stock now that you can own Because if they keep grinding out all of these kind of free cash flow gains men They'll just they'll just have enormous amounts of money. They already announced a $40 billion buyback You know the thing to keep in mind is Apple had a moment like this.

And when Apple went X growth, they did the brilliant thing, which is they said, we're going to borrow heavily and we're going to return cash. I may oppose in this in the group chat to you guys. By 2025, Apple will have exceeded $1 trillion of cash distributions. I mean, that is just nuts. Is that include buybacks in cash distribution? Buybacks in dividends. And so, Facebook now, you can credibly see a path where Facebook could chunk out hundreds

of billions of dollars of total shareholder value returned over the next four or five years. And so, you know, for value investors, it's somewhat of a kind of a no-brainer. I mean, nothing's a no-brainer, but really, really attractive value fundamentals right now. Well, I mean, you did see Warren Buffett buying Apple. I think it's his largest position. You're going to see him probably do the same with Facebook. There was an interesting mass extinction event tweet that went on that's related to all of this. Tom Leverio, a G.P.A. general partner at IVP, which is a venture firm. Tweeted the following thread, there is a

Mass Extinction Event coming for early and mid-stage companies, late 23 and 24. But make the 2008 financial crisis look quaint for startups below. I explain when, how, and why. And we'll start it off for some detailed advice. Basically, four and five, four in five early state startups, he claims have less than 12 months of runway, according to a Q4 survey of 450 founders by January Ventures. He sees late 23, 24 when this will all come home to Roost Mark Suster from upfront Ventures,

Friend of the Pod, reply with the following, precisely our internal analysis, 5,000 seed, 2.5 million raised or above, A and B companies, those are three different categories, funded in the last four years, we estimate 50% of the amount of business. Lost ratios in the last seven years have been artificial low due to excess capital as we just discussed. Previously with the never-ending bridge. We've talked about this before. If you look back over 40 years of venture capital, the average top quartile fund distributes 1.6 or 1.7X the capital they raise. Even though now we've gone through a period where people have shown these unbelievable

markups, right? TVPI is the total value of paid in capital. Distributions have not really budget that much. Distributions are still modest. They're below 2x. And so we have to go through what's called mean reversion, right? We have to go back to the historic statistical average, which means that a 50 to 60% mortality rate seems pretty reasonable. By the way, in the dot-com bubble, that's what we went through. You know, in 2001 to 2005, we had a 50% mortality rate seems pretty reasonable. By the way, in the dot com bubble, that's what we went through. In 2001 to 2005, we had a 50 percent mortality rate. At the seed stage, I mean, you kind of expect 70 percent to go out a series A, maybe a little bit less. Freeber, what are you seeing on the streets? You're investing in startups.

Yeah. Look, I think that there's, is there an opportunity, by the way, also in here? So what are you seeing? But is there an opportunity in this group of this cohort of companies which seem to be upside down and or in? I'll tell you a tsunami right now. This cohort of companies, I think generally is overburdened with feature orientation and short termism. More than you would see in an era of reduced capital, rather than excess capital. And what I mean by that is a lot of companies built a business or built a product that allowed them to show traction in the markets faster.

And typically those products that are easier kind of paths to market end up being features. They don't end up being platforms. So it's very hard to become a big business or to become a scaling business or to differentiate in a competitive market. That's a general, that's a very general statement. But I think, you know, when you miss out on the platform play, you start betting as an investor

on a lot of the derivative plays that look like the real big company, look like the platform. I mean, think about how many companies try to look like some iteration of Stripe or try to look like some iteration of Uber or try to look like some iteration of, you know, name your big kind of behemoth. And as a result, you get all these sort of feature-ish platform plays that have maybe a niche or some kind of, you know, narrow kind of market opportunity. They got funded. Those businesses obviously aren't going to have the same valuation multiple of the winners in the market. And now, and they burnt a lot of money opportunity, they got funded. Those businesses obviously aren't going to have the same valuation multiple of the winners in the market. And now, and they burnt a lot of money to demonstrate growth because so much of investing over the last 15 years has been momentum investing. And so they

try to grow, then they try to get a higher valuation, investors plow more money in. Now the problem is that so many of these series BCD&E companies have a true market value, they're not a valueless company, but the true market value of them is probably less than the total preference stack of the capital that's gone in. So they're worth less. Yeah, yeah. Let me just make sure I understand that. I'll just describe it. Yeah.

So when investors invest, they have preferred stock. So they have a right to get their money back. So they, let's say, a one X liquidation preference, they invest $100 million. The company is worth 300. So they own 25% of the company after they invest, but they have a right to that $100 million first before common shareholders get paid. The problem now is that a lot of those companies may be worth less than the 100. They're not worth 400 anymore, they're worth 100. And you can see this play out in the public markets with that data set. I shared it with you guys a few weeks ago. over two thirds of companies now that have gone public since 2020 are worth less than the capital that they have raised as in the venture market. So

if they were still private, they would be worth less than their preference stack. And that's where these companies start to unravel. Because now the investors have to totally recap the company. The founders don't want to have all of their common wiped out. Now they own nothing. And there ends up being a very ugly scenario that happens with the board at that point on how do we wind this thing down? How do we recap it? What's going to happen? And that's usually when everyone starts to run for the hills, the founders, one or more of the founders leave and sell. I have a question for you. So you mentioned this earlier, which I think was a really important point, but we didn't

really touch it. Do you think there's going to be a reckoning inside adventure firms about recalibrating general partners? 100%. I mean, look, and why? Sorry, just explain why. Yeah. So, I think what's happened is over the last 15 years to become a successful venture investor,

you've gotten into the hot deals. The deals were, and hot deals, the valuations are typically climbing up. When the valuations climb up, that's an indicator that the company is doing well and you should invest. That's been the model for operating in the last 15 years. But the truth is that maybe just because the valuations have gone up and more money has gone in doesn't necessarily mean that that's a great business or it's jammed points out that you ultimately get a positive net return on that investment down the

road. And that windows now closed. So the the the investors that have been trained. This is such a generalization. And I hate saying it because we have so many good smart friends that work in venture. But generally speaking, there are a lot of folks who have come up who have been trained on this momentum investing model. And it's like, it's like day trading, the stocks are going up. Let's all put money into the stock going up. Instead of having a more fundamental approach to is there real cash generation potential and scalability and platformability of this company.

And as a result, you're going to have to see, I think, the junior partners that have come up and done well in this market. Can I have a good idea? Well, they've done well on paper, but they haven't done well on distribution. So maybe that schemoth becomes the, well, so you decide who's a good venture capitalist, which of these companies actually returned capital at a peak market? Well, I think freeberg is really on to something. And he mentioned this before.

So I got curious about this. And I went into pitch book. And my team and I looked at all of the people, the humans in our business that have generated more than a billion dollars in distributions on a given deal. And there's 20 that have done that in our industry. Like there's people that have made hundreds of millions of dollars once or twice, but there's 20 people that have made more than a billion dollars more than once. Okay. And if you look at a single one came up through the ranks as a pure engineer or $1 or twice, but there's 20 people that have made more than $1 billion more than once.

If you look not a single one came up through the ranks as a pure engineer or product manager. Everybody, 201, is extremely commercial in their background and their operating experience. Very few percentages of them were actually founders. A huge percentage of them were trained in banks and other places. So, non-traditional quote unquote, roles for what this current crop of GPs look like. Because we went through a phase where if you were a VP of product or VP of design or VP of engineering at a well-known startup, that was the most obvious onboarding into a venture firm. But if you just look back at the data, that cohort of people has actually

never made money. Again, according to Pitchbook. That's fascinating. And that's a really fascinating counterintuitive takeaway, which is that, and by the way, what's so interesting about that is Pat Grady, I think, had a tweet. And it just sums it up so cleanly because he just hired somebody from Cotu. And the tweet was something through the effect of this guy is the most commercial guy we've ever seen, something like that. And the tweet was something through the effect of this guy is the most commercial guy we've ever seen, something like that. And I thought that was so interesting because that is exactly what our heuristical analysis of this data was as well. Commercial people in venture are the ones that make the money. So you look at a Fred Wilson, Michael Moritz,

Danny McGurly, Phil Gurley, they were investment analysts. I can share the list markets before they became venture investors or Mike Moritz who was a journalist him which is a journalist is just an analyst. It's another if you're a good journalist. It's another word for analyst. Yeah, it was really, really interesting looking at that list. So like, you know, there are people in there like Jim gets Alfred Lynn, Danny Rimer, Jan Hammer, Fenton. So if you look at all of these folks that are just tier one people, and we know all of them, the one common threat amongst all those folks is that unbelievably commercial. And so Jason, in a moment like this where you have to really hold the entrepreneurs' feet

to the fire or be their partner to make extremely hard decisions. You have to have the ability to be respected by them in those moments where you can force a very difficult decision. And then separately, if you have to basically force liquidity so that you prioritize your limited partners, how do you do that while still managing the relationship with the entrepreneur? How do you know that you just need to cut your losses and get out? These are very difficult trade-offs that I think folks haven't been trained in doing to David's point. So it'll be really interesting few years to see how these organizations...

I think this goes. This goes to Sachs's point about, hey, the ecosystem, if it's hard, if it's contancorous, if they're sand in the oyster, it could make the pearl. If you have a congenial relationship with your product manager VC and everybody's champagne and caviar and high-fiving, maybe that's not as good as having a bill, a Michael Moritz, and having a foil maybe who is putting pressure on the management team. Hey, we need to hit these numbers. Freeberg and then sex. Yeah. Look, I think one counter argument here, baby, that there is this friggin' title wave of

AI companies, and there is this incredible amount of lubricant in the dry powder that's sitting on the side of the market right now, that all these venture funds raved in the last two years, that is going to lubricate all these AI companies into every vertical and every market. So every company is wrapped up in an AI cloak, like a magic invisibility cloak. Every AI company has got an AI hat and a badge and a tattoo now, or every company is being rewritten as an AI company. And the money wants to find its way into AI and it wants to rewrite industry with every

industry with AI. So I think similar to what we saw with mobile and the social web, you know, going back 10 or 15 years, we're seeing kind of this AI wrapper and this AI technology enabler, rewrite the possibility of every vertical and the VC's have capital more capital than they had 15 years ago or 10 years ago or even seven years ago. So there is this counter narrative, which may be that

the game goes on, the band continues to march on, the current crop dies out, but there's immediately a new crop waiting right behind it, or what happens is the herd dies and everyone runs to the back of the herd and gets recapitalized, because I can tell you every startup I know

that's not going well, everyone's talking about leaving to go do an AI company. And eventually, for instance, I think you're ready to write money. I think you're right. I think you're right about that. I think the question is the actual person making the check, will they be more or less

likely? And at least what history would tell you is that we've hired an entire generation of people that, and this is clear, do not map to the people in our industry that have actually generated returns. So you're right, they may take this money and misallocate it into these companies that are just rebranding themselves, but that just goes in further proves that there is a type of person that hasn't been recruited into these venture firms yet. That was the first generation that made all the money. I think it's always been the case that there is some difference between the background of the VCs and the backgrounds of founders.

I mean, you guys mentioned Gurley and Moritz. Like we said, Moritz was a journalist who had written a book about Apple. He was a technical per se. And Gurley was an investment analyst on Wall Street before he then made the transition into VC. And as we both know, they're like legendary VCs. You know, I think that what you want to see in a VC, I think the background matters a little bit less than, you know, like how curious are they, how good are they about learning a new area, how good are they at being like a heat seeking missile?

I mean, basically just like zeroing in on like, what is the hot space and specifically, what is the best company within that space? And somehow figuring that out, being able to assess a founder, you know, that's like a very subjective thing. So I think there's lots of qualifications that you wanna see in a VC.

Now, at the same time, I do think that if AI is the next wave and the next sort of platform opportunity as we all think it is, I do think that places more of an emphasis on technical skills. And I was literally just having this conversation at craft that gee, maybe the next hire we should make at Kraft should be someone who's really deep technically so they can help go deeper on technical due diligence of AI companies.

They've never made money. What's that? They've never made money in the history of our business. Those people, that archetype of hire has never tundered on behalf of L.E.s or GPs. In biotech and life sciences, they have. But what kind of hire has never tundered on behalf of L.E.s or GPs. In biotech and life sciences, they have. Usually the best investors, usually P.A.s.s. Saying a technical hire who worked in the trenches at a company

is not as fit to get in the past, has not in the past, gotten DPI, whereas somebody who is more commercial. Able to analyze a business commercial. The ideal person is going to be able to get returns. Right, right. So look, I, the ideal person is going to be able to get returned. Right, right. So look, I think the ideal person would be someone who's a family-grade investor, but also has some technical background

and some technical chops. We also have a team approach at craft. If you have someone who's very technical, they can just diligence the technical aspects of the deal. Somebody else can be responsible for making an assessment of the founders. How we've solved this is we have a group of third party individuals that we work with that we keep on retainer that we compensate. And whenever we need to do deep technical diligence, we partner with them to do that work

with us. And what it allows us to do is get the best of their technical thinking without also putting them in a position of trying to adjudicate whether this company is good or not. What I'm trying to understand is what is this technical edge and can I understand the boundaries of that, but I still keep the investment decision to myself and my partners because otherwise the difficulty is in my experience, deeply, deeply technical people are extremely good at diligence, but generally are poor at making investment decisions because there's a part of their brain that flips on, which

is like, I could do it better, or I could do it this way, or I could do it that way. And I think that anchoring bias can be very dangerous. And you almost want to be a little dumb down from that depth of knowledge because you either find everything that is not worth doing and then you can miss a market or you miss the thing that is good enough because you're like, oh, well, I would have done x, y and z in a different way. So we kind of like use them, but we keep them at arm's length so that they never feel the pressure of having to actually decide on our behalf how the money should be spent.

Yeah, that's interesting. Yeah, the number one thing we're doing at this early stage is tracing our founders. I know this sounds crazy on accounting best practices and pricing best practices. And we literally have founders who have never made a plan. I'm talking about it at the seed stage, who don't know accounting. And so we are running for seed stage startups. And I'm kicking myself that we didn't do it two years ago or three years ago, but better late than never, on how to just maintain their books and understand operations.

And the operational lack of discipline in the market, I'm seeing Series A and Series B companies that literally don't understand their own accounting. And so when we start talking to their accountants, there is a huge gap between what the accountants think of this business and what the founders think of these businesses. And founders think they have more revenue than they have or less revenue. They really don't even know how to calculate their runway in an honest way.

And so there is back to your point, Tremoth, about on the venture side of the business, a lot of product focus, a lot of operational focus. There's not enough focus on just the bottom line. The reason that happened is what Friedberg said before, which is like somebody would build something. There was a little bit of momentum. You'd have to go and present these bonafides, these entrepreneurs to get into the deal. Venture firm's thought was the right bonafide to present his, oh, I built XYZ product

at this other company. Right. And they thought that that edge could get you into a deal. Maybe, but it could turn out that that was the wrong company to be in in the first place. And so you just missed an entire generation of value creation because it happened sort of off-piste, off the trail. Like, yeah.

You really do need to understand fundamentally, because we're talking about public markets here, the Facebook analogy, what is the ultimate earnings, what is the ultimate cash that is going to get thrown off this business? And that's what the whole industry needs to pivot to and just that needs to be the operating principle. Do you guys know how much money?

Facebook, Amazon, Google, and Microsoft raised combined total before they went public? That's very small. I Amazon, Google and Microsoft raised combined total before they went public. That's very small. I mean, Google is minuscule. Less than a quarter billion dollars. Unbelievable. Yeah. All the inefficiency is extraordinary. And then on top of this inefficiency, I don't know if you're seeing this, they were all profitable when they went public. On top of all this inefficiency is a dependence on venture debt. I don't know if you're seeing this, sacks, but the amount of focus on adding debt to unprofitable companies over the last five years

has been just extraordinary. I don't understand what... I've never understood the venture debt model or really how it works. I feel like it's a category that doesn't make any sense. Same more. Well, I mean... Explained to people what's happening.

I don't really understand how it makes sense for lenders or for founders, to be honest. I think the whole industry doesn't make any sense. For founders, I don't like it because the money has to be paid back, right? It's debt. So founders take in this venture debt thinking like it's an equity round, but without delusion or with some warrants. And they don't realize, wait a second, second, we gotta pay this back in a year, a year and a half out of the next round they do.

But that creates an overhang on the next round because the new VCs coming in, they want their money to go into the company, not paying off a bank. So it actually makes the next round less attractive. The other thing about it is that the lender is not getting an equity reward so they don't want to take equity risk.

They may be getting a nice, you know, coupon, I might be getting nine percent or something like that, which sounds high for debt, but they're not taking true equity risks in the company. So the last thing they want to do is be your last six months of runway, right? They want to be your first six months of runway and then get paid off

on the back end and I think a lot of founders think oh, I'll take this money and it'll extend my runway from 18 months to two years, but what will happen in that last six months is all of a sudden the bank will come to you and say no, no, no, no, like you have this or that material adverse condition, it's called a Macout. And there's all these like terms that founders don't understand because it's highly legal stick. Covenants. Covenants. And so all of a sudden, the founders find themselves with a lot less flexibility in that

last six months to a year. Either a covenant gets triggered that makes them pay back the money immediately, or their business flexibility goes way down because they're consulting with their bank about everything. All of this is coming home to roost right now. I think it's a terrible deal for founders and I think that even for the lenders, I mean, I guess I assume that these banks know their business better than I do, but I think that the reason I don't trust it as a category from a lender point of view, from an investor point of view, is that all the data about defaults over the last five to 10 years happened in this free-flowing zero-interest rate environment.

And so the startup mortality rates were artificially low because it's so easy to raise. So yeah, venture debt makes sense in an environment in which founders are generally able to raise the next round and then pay back the venture debt. But let's say that that tweet storm you mentioned Jason, can you bring that back on the screen? I actually think this tweet storm is basically correct is, you know, I've referred to on this show before that I think one of the things that built up during this bubble is latent start-up mortality. So many startups that should have died from not being able to raise next round live because they're able to raise money.

And what this tweet storm is predicting is that the second half of 2023 and then 24, you're going to have a huge crunch where all these companies have to go out and raise. They've been waiting. So they're all gonna get to the point where their cash is still low. They have to go out and raise, and now all of a sudden they're gonna be confronted

with a new market condition. I wonder how many of them have ventured debt as an overhang, and that was it. And those ones, yeah, and they're gonna find they have less runaway than they thought, because again, those banks, you know, they are going to try and collect the debt before the start runs out of money, not, you know, when it runs out of money. Can you two falling knives, you're basically.

Yeah, exactly. So look, I just wonder what would I, what I don't trust is whether the return models on venture debt that were created over the last five to 10 years will be a good predictor of what the returns will be in the next five to 10 years when a lot of the mortality that should have happened in the past now happens in the future. Well, I mean, then in sax project, if I'm wrong here, but I'm also starting to see really gnarly term sheets, people foreclosing on businesses, people offering like literally had a term sheet come in like we're going to forgive the last note and take this business

over for a dollar and everybody gets wiped out. The amount of bad feelings that you have to go through, even if there is a core business to FreeBurksport and Orlean or they raised a hundred million but there's a fifty million dollar business in here that people would love to invest in. Who wants to go through the hand-ringing, the negotiation, the toxicity of a recap? It's an extremely hard process to go through. Are you going through any recaps right now, SACs?

And what is the approach of the firm in terms of dealing with these kind of situations? Do you even wanna start that discussion up? Where's it too painful? Well, we're not one of the companies. I don't think for most of our companies we're at the recap a restructuring stage. I mean, I'm talking about the ones that aren't going well people still have a fair amount of cash in the bank and we've been beating the drums for literally a year. What about you opportunities and new opportunity comes to you It's one of these overhang companies that wants to restructure. Would you even engage that or is it just too hard?

I looked at seven at the end of last year and I tried to reprice three of them and every single one was able to get a convert done away from us. Yeah, so I mean, yeah, I mean, we tried to find a market clearing price for the equity but nobody wants it to David's point because there's too much money on the sideline and people are willing to give them a lifeline

that doesn't force them to come to hard terms with what the reality of the moment is. Yeah, I agree with that. We're not quite there yet. And I think the reason why that tweet you posted got some traction is it's saying, listen, the crunch is going to happen. Second half of 2023 and 2024. That's where you're going to see the down rounds. That's where you're gonna see the down rounds, that's where you're gonna see the restructuring, the recaps and all the rest of it. And look, I'm sure like every VC firm's gonna be a player in that.

But yeah, it's gonna be a lot of miserable work for. This is when you're gonna see. And we're gonna see people's true colors. When you have to recap a company, and that's when you can really start to see how crappy it was in 2003 to be here. when you have to recap a company, and this is when you can really start to see how crappy it was in 2003 to be here. Remember 2003?

Pantful. Oh my God. Oh my God. Yeah, lucky to raise 500K on a $3 million. Oh my God, like, 2004, like what a brutal year. Yeah, there's gonna be a lot of that. I think the next 18 months,

or let's say the next two years there's gonna be pretty rough be a lot of that. I think the next 18 months or Let's say the next years there's gonna be pretty rough for a lot of companies and it's just that they didn't cut enough I mean we've been beating on the drums for a year for companies to length of their runway and Some did to some extent but many didn't do enough and they're gonna get caught in this crunch. Can we just go to That chart that Brad put out. I think that what a lot of founders don't quite understand still is that things are just never going back to 2021. I think a lot of founders listening to the top of the show where we're talking about inflation is under control. They see the market rally, Facebook's up 25%.

They may be thinking, okay, we just have to weather the storm for six months or a year, and then everything's back to normal. And I think what's important to understand is that the market did bottom out about a month ago, and is up pretty nicely. If you see here, this is the SaaS index. It's the median enterprise value divided by next 12 months revenue, and it was really beaten down

about at the end of the year. At the end of last year, coming into this year, it was like four to five X multiples of next 12 months revenue for SaaS companies. That's all the way up to 6.1 now. So you're talking about 20 to 50 percent rally for a lot of companies, which is huge. We're still below the long term median, which is just under eight. But what people need to understand is that even if we revert all the way to the mean of eight, which I think at some point we will, that's still well below the bubble of 21 where they got to 16. So even if things continue to inflate, valuations will still never quite be where they were in 2021.

And if you think it's getting back to 12 or 16, it's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening.

It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. It's not happening. 30 to 35 times. Now those companies are maybe at 8 to 10 or 12.

I think the reliable way that we can look at this for the future is that we're never going to see these kinds of multiples again unless rates are zero and all kinds of tourist capital need to find a home to escape 0% returns in every other asset class. But if even the safest asset class now will give you 3.5% this is probably the new normal for quite a long time and we're going to be back in that early 2000s kind of mindset which takes a lot of hard work to build value around. We talked about the sort of whoopsaw economy. And there's a lot of mixed inflation data.

I think founders need to understand that there's a bifurcation. What's happening in the tech ecosystem is not necessarily what's happening in the overall economy. The tech ecosystem is clearly going through a reset and a recession. Job cuts are now the rule. Valuations are much lower. Whereas in the overall economy, we saw a job support today over 500,000 new jobs.

So the fact of the matter is that even if the overall economy avoids a recession, that doesn't mean that things are just gonna bounce back. Tax and also depression slash recession. Best cases recession. Well, check is a boom bus cycle. And we have phenomenal 10 years of boom. Now we're in a bust.

And so I would just like tell founders, look, it's good if we have a soft landing in the economy. I wouldn't assume that that's gonna happen. I still think there's a really good chance of recession later this year. But it almost doesn't matter for you. What matters is your business and the capital availability for startups, which is fundamentally different and will remain different than it was in 2021.

Freiburg, you were talking in the chat about a Donnie enterprises and Hindenburg doing this short research and publishing it. Stock has just absolutely gotten clobbered. They were trading at, gosh, 4100 was the 52 week high. And this thing has just cratered in the last five days. I mean, I think the, explain what's going on here. Well, I mean, the story that, the conversation I thought it would be interesting for us to have is the role that these short-seller research analysts play in driving efficient markets by identifying perhaps things that the market broadly is missing, particularly given that a few weeks ago, we were all kind of talking about the FTX debacle and how no one was doing

their diligence and no one was digging in and no one was kind of revealing publicly what was going on inside of that business that ultimately caused significant losses. The claims made by Hindenburg is that this company Adani, which is founded and run by a guy named Gautam Adani, he started the company like I think 30, 35 years ago. And he's built this thing into this, you know, the sprawling empire as people would say where he's owned ports, he owns mining companies, he owns energy transmission businesses,

he's got a whole green energy business. And he's taken a bunch of these companies and he's floated them publicly. So they're all kind of publicly traded. There's some degree of interrelatedness between all these businesses. It reminds me a lot of, I don't know if any of you guys remember Ike Batista out of Brazil. You guys remember this guy where he kind of built the sprawling empire, very kind of broadly diversified industrial conglomerate with lots of different kind of segments and used a lot

of leverage, a lot of debt to grow the business, and a lot of interrelated inter-party transactions. And ultimately, the whole thing came crashing down. And that the Sedani business, it's super technical and super complicated, all the accounting shenanigans that Hindenburg is claiming has been going on. And capital markets shenanigans that they're claiming have been going on with this business. But their report, which I think is like 400 pages this long has caused the response was 400 pages.

They were crazy. So long too. Yeah, and then the markets shrugged off the responsony, but out, didn't really care, and they kept kept selling the stocks off. So there's like seven or eight publicly traded companies, all of which are just getting decimated. Look, I don't have any strong opinion on this business.

I, you know, I kind of skim through the thing, but you know, it really made me question how such a big, call it accounting or capital markets fraud, if it really is that can go on. And how much of a role these sorts of players play in the market, whether you guys think that this is a good thing in the market to have these short seller reporters out there,

doing this analysis, publishing it. Jason, by the way, you called out Nicola, Nicola, the electric car company, as you know, Hindenburg put out that Nicola report, stock tanked, right? They claimed it was all fraud, et cetera, and then the thing got destroyed. And it was Trevor Melton got convicted, yeah. Right. And so, I mean, I guess do you guys think that these guys have a positive role net net in the market in kind of identifying and calling out this stuff? Because we all have friends that are on the wrong side of short sellers and they complain about it and it can be really difficult to grow and build a business when people.

Elon had these guys literally claiming he was running abroad for years and years and it was an intense amount of scrutiny because when the stock was less trafficked it, when we were in it in 2015 and 2016 and 17, that was the constant refrain. And Elon was constantly batting back folks like this who would make claims. And the way that these guys are allowed to operate is because they use the first amendment and say, we have the right to say this stuff. I think that shorting falls into two buckets. One is you use it as a hedging instrument. So when we talk about spread trades like long Google,

short Facebook, or long Facebook, short Google, you should be allowed to short. I think that's a very reasonable thing to do. I think the question is, if you were on the inside of a company and you say, X, Y, Z is happening, for example, Trevor Milton, and it causes this stock to go up and it turns out to be fraudulent. He's held accountable. The question is, should there be the same

responsibility for people on the outside, who if they have enough distribution, can say the exact opposite of XYZ is happening. In this case, XYZ is not happening, which then causes this talk to go down, because what the business model of these short sellers is, write a document, it looks very polished and very credible, put on some positions, then put the document out. If the stock goes down, you close it out. In my opinion, I think that short sellers are a really important part of a well-functioning market where the ability to short, but what

I would like to do is take an extra step, which is you should hold these folks accountable the same way you'd hold an insider accountable, which is almost to the effect of like when you put out the screed, if you make money from it, it should sit in escrow, and the SEC should actually adjudicate whether it's true or not. So in the case of Hindenburg and Nicola, they shorted the stock, they put out a report, it turned out they were right, all that money is completely well-earned. Now, what if this adonni thing turns out to be not true? Or true, nobody knows right now, except 50% of the market cap has already been wiped out. So that's where things I think are in a bit of a gray area.

The last thing I'll say is that if you look at them in the developing world, there's a very gray line between some of the leading entrepreneurs and these governments because these entrepreneurs are doing the work of some of these governments. Whether it's I keep a teeth in Brazil in one moment, right around natural resources, or Adani and Ambani in India, or a lot of the people that made a lot of money in China, or the people that are making money in developing markets, Turkey, Russia, etc. The government uses very talented entrepreneurs to go and concentrate capital to develop infrastructure

progress. We did that in America in the 1800s as well. That's where I think you have to also balance it because his response was basically like this is an attack on India. In a way, you can see where he's coming from, right? Because he's building ports and roads and bridges, and he's like, without the stuff, how is India supposed to even exist in the 21st century? That's a reasonable claim.

So I agree with you, Freeberg. I don't know whether the report is right or not, but this extra step of actually having the SEC actually tell us what the answer is. I think would be a very important improvement to how this kind of stuff works. The other improvement that the SEC has been proposing in rule 13F-2 is that people would need to disclose their short positions. This proposed rule would require institutional investment managers, I'm reading from the

SEC website managers, exercising investment discretion over short positions, meaning specific specified thresholds to report on the proposed form, SHO, information related to end of month short positions, and certain data that's in effect, and those short positions. That is an overrider. That should absolutely pass. By that commission, would aggregate the resulting data by security, thereby maintaining confidentially of the reporting managers and publicly deciding the data to all investors. This new data would supplement the

short sale data. I think this really is a whole lot of lending and stuff. This is less about like who's doing what and it's much more about are we kind of creating critical fail points in the system by seeing over leverage and over lending and certainly. Well, they should also be some rules about the spreading of fear, uncertainty, and doubt. That's a fun that happened with Tesla Q. I mean, paradoxically, thousands of people, but that's an example of people essentially lying in public to try to get the stock to move. And Tesla's not a fraud, that's a real company. But there was a real car of the year while this was going on. But there was a real cost to that company, right?

To employees that got spooked to partners that may have gotten spooked. The pressure, you know, we saw this, the pressure on Elon in those periods of time. And he was, he was like on the knife's edge where there was the potential where the company may not have been able to finance its cash flow needs because of those Tesla Q guys. And so it's not to say that the Tesla Q guys can't say it, but they should be forced at some level to prove it if you can create crazy stuff. I posted a link by the way for anybody that's interested in reading this. There's a person called Carson Block who's being investigated. Yes. Because he may have pushed the boundaries of how short sellers do this. It's a he may have pushed the boundaries of how short

sellers do this. It's a really fascinating read in the Atlantic for anybody who wants to read it. But this is sort of where the short selling thing can a little bit go awry. And the title of this is The Man Who Moves Markets. And it's quite a really interesting read if you're interested in in how all of this stuff works. All right that's the All-in podcast for February 3rd and 4th. For Sachs, Freedberg and Shamath, I'm Jake Howell, the World's greatest monitor and we'll see you next We open source it to the fans and they've just gone crazy with it. I'm going to be west. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap.

I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap.

I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap.

I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm going to be a queen of kinwap. I'm a disaster when we get to the end of this. We should all just get a room and just have one big hug or something, because it's like this sexual tension that we just need to release that house. What, you're the bee! What, you're a bee! You're a bee! What? We need to get mercy!

I'm going on, Leigh! I'm going on lead! I'm going on lead!