All-In with Chamath, Jason, Sacks & Friedberg - E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

Episode Date: May 13, 2022

0:00 Bestie catchup and Friedberg intros! 4:40 Breaking down current macro risks, Great Recession comparisons 31:55 How a historically large amount of dry powder is impacting VC firms as the market shifts, problems with mega funds 41:31 Tiger Global's historic loss and where they might have gone wrong; Sacks' gives his playbook for raising capital in a downturn 58:35 How startup employees can protect themselves in a down market, questions to ask and metrics to know while evaluating startups to work at 1:13:21 Psychological impact of investing after taking huge losses 1:29:00 Predictions on how the market shakes out 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://twitter.com/cullenroche/status/1524441227931774976 https://www.axios.com/2022/04/08/consumer-debt-soars-credit-cards https://www.bls.gov/news.release/realer.nr0.htm https://www.federalreserve.gov/releases/g19/current/default.htm https://www.longtermtrends.net/home-price-median-annual-income-ratio https://www.bloomberg.com/news/articles/2022-05-12/musk-seeks-to-scrap-tesla-margin-loan-with-new-twitter-funding https://twitter.com/Jason/status/1523780820112007168 https://fred.stlouisfed.org/series/CIVPART https://www.dol.gov/ui/data.pdf https://twitter.com/TheBenSchmark/status/1522669777478684672 https://twitter.com/AndrewE_Dunn/status/1523653942252826624 https://twitter.com/mattturck/status/1524773379416408064 https://twitter.com/jonsakoda/status/1522625236130144256 https://cloudedjudgement.substack.com https://techcrunch.com/2022/05/10/tiger-global-hit-by-17b-hedge-fund-losses-has-nearly-depleted-its-latest-vc-fund/ https://twitter.com/ZoeSchiffer/status/1523017143939309568 https://twitter.com/BurryArchive/status/1524504399070081025 https://www.usatoday.com/story/money/2022/05/04/dow-rallies-fed-ups-rates/9649150002/ https://twitter.com/Airbnb/status/1524379284260892674

When you coming to Miami, are you there ready? I'm here. I just got her. Oh cool. Tomorrow, I'll have a big week. I mean, you get a ride on someone else's plane. Minds been repossessed. You can give me a ride. I love life for at least another couple of minutes. I love my commercial. You know, I love my commercial. Every fan of all in and this weekend's star stops me and takes a selfie. I cannot tell you the love in Miami. I sat down to have a meal outside. Where you buy yourself or your as well. I myself, it's 11.30. I was like, Hey, everything's closed. There was this one little place that's open. I kid you not. I sit down. Two guys come over. We love the pod.

And I'm trying to eat my meal. And they're asking me questions. and they want to know where's Friedberg's introduction. And I'm like, it's so bad. Well, I showed them the video and they were in stitches. I was like, guys, there's only like five people have seen this video. And now it's you for two. So there's seven people, they were so over the moon. We should never have cut that. Well, we could play it now. It was good. Thank you. It was incredible. I say we just, we just throw to it right now. Is that a good plan? Maybe and here we go and three two This is like the nerd Olympics for freeberg. He's like nerd stretching. He's having a nerd Freak out right now. You know what I'm most excited about that. I don't have to listen to Jason's entrance

Oh my god. You're on like nerd. You're all that's like nerd. Adderall take it easy dungeon master by Jaron like nerd, that's like nerd, Adderall. Take it easy, Dungeon Master. I just got it. I just got it. It hasn't been so happy since he rolled a 30 on the 30 sided die. Jesus. Oh my God.

I've got a plus step in broad. What has that come from? Oh, from Dungeons, I've never played. Oh really? You were playing League of Legends, okay. Okay. Okay, I'm gonna just apologize to the audience. Okay, here we go.

No interruptions, please, thank you. In the voice of J.Kell, hold on. Na, na, na, na. Ah. Is there a frog in your throat? What's going on there? Oh, God. He's super loud and has nothing to say,

but we keep him around because he has a producer. We don't have to pay. One good investment in his 30 year career, but he wrote a book about it and tells all the VCs to kiss his rear. He's one of a kind, we'll always come to your rescue when you're in a bind. He calls himself Mr. Calicanus,

but we all just call him an anus. Jason Calicanus, everyone. Jason, welcome to the show. Great to be here, great to be here. Thanks for the kind intro. Good to have you. His words are in sindiary and divisive, but only if you identify as a gender fluid progressive. Otherwise, to you, he's a scholarly god fighting the great war against the

rise of the woke mob. Hey, pal, it's the 17th most important guy from PayPal. He's back with the same political speaking tracks. They want to only Mr. David Sacks. David, welcome to the show. Thank you. Thank you. Thank you. I think we need to work at some of your rhymes, but we might need to tighten that up, a workshop at you. Yeah.

Keep going. Maybe it gets better. He contradicts himself twice a week, but we're still in rapture because his mixed sweaters are so sleek. His monologues last most of the show, but he never talks anymore about IPO 2.0. As he'll tell you over and over, he drinks the world's greatest wine, but commenting

on other topics as a bit below his line. He's Silicon Valley's most renowned dictator, our friend, the verbal masterbater, Chimath Polly Hut potato. Chimath, welcome to the show. Great to have you here. Wow, that was brutal. God. Oh, I'm not done.

We're an increasingly notorious whack pack, litigated by David Sacks, MC, by an investor hack, and soon to be canceled because of the performance of Chimaphala's back. We are the All-in Pod, and you'll never get this 90 minutes back. I'm the Sultan of Science, with an IQ of 103. I'm taking the throne as this podcast, new MC. Thank you, everyone.

I'm gonna have to... Man, I don't wanna read the YouTube comments on this one. All right, we'll scrap it. No, mine was fine, but I think these other guys are a little bit shell shocked right now. I went a little hard. I actually wrote this for your birthday, and then I decided to throw it in. Okay, well.

I guess maybe we save it for your birthday. Yeah, you may want to do something funnier for my birthday. I'll be back next week with some actually funny intro material, apologies to the audience. We open source into the hands and they've just got very easy with it. All right, all right, listen, Stocks and Crypt crypto have plummeted Tiger Coinbase Shopify, Employee RSUs, meme stocks. It's all gotten everybody. The world's over. So where do we start? You guys want to start with crypto stocks? Where do we even begin? Should we talk about what happened when rates went to zero and how financial assets inflated?

And I think we talked about this during the pandemic, right when the pandemic was starting. Jamoth, I remember an early show we did where you and I talked about how it felt like we were going into like the roaring rapids, right? It like Magic Mountain or Disneyland. I kind of described it like that. Like it feels like you're going to a rushing river. And there was just all this capital flowing so fast, like overnight, there were, it would, like all of a sudden we went from this like COVID standstill to, oh my God, this rush of capital. And you could feel it, right?

All the businesses were all involved in started getting term sheets and doing deals and there was SPACs and transactions. It was an incredible rush of capital. And so when the central bank made interest rate zero, and then banks could lend out money at close to zero and still make money, and then people could lever up assets, and then those asset values inflated, and they could borrow more and keep investing in more and buying more, ultimately, we had bubble after bubble. We saw a lot of things that may not have necessarily been valued based on a historical set

of multiples or comparable or cash flow. But really, it was just about, hey, if I invest X dollars and someone else is willing to pay Y dollars for this asset tomorrow, I'm going to make money. Suddenly, the friggin vacuum came out, which was like, let's take all that money back. And so when interest rates got hiked, it was like, all that money's coming back out of the system. And it was like this wishing sound,

like the airlock got opened. And all the cash came back out. And as a result, the bubble is just all deflated. And it happened so quickly that it's, what was crazy to me was that for so long, everyone's been talking about how everything feels so overvalued. So everyone was just waiting for the moment when the wishing sound began, and then everyone laid off all the risk. And it happened so fast, and it still happened. People are still trying to unwind the things where they're in huge positions.

But, you know, I think it really is just, it really is this kind of incredible moment where you see all the money get pumped in and all gets rushed out just as fast. And I think we're all kind of like, you know, in awe at how quickly the response has been. So maybe some context is helpful. From 2018 up until the beginning or not really the beginning of this year, but probably Q4 of last year You could have calculated an incredibly tight correlation between the stock market and the Fed money printer So the Fed is in control of how they can introduce dollars into the economy. How

do they do that? They literally manifest money. They don't actually technically print it, but let's just assume for these purposes that they actually do print it. And they literally take that money and they enter the market and they buy things with it and they're giving you this newly created money that they just created out of thin air. From 2018 up until about Q4 of last year, there was a .92 correlation between that and the S&P 500 going up. What does that mean? So if you look at a negative one correlation, that means that if something goes up, this thing goes down, dollar for dollar, that would be perfectly

negatively correlated. If you look at something that has a zero correlation, that means it's just random. Whether one thing goes up and down has no influence on the other. But a 0.92% correlation effectively means that for every dollar, the fact created, the stock market was going up by that same dollar. And that is literally what we had up until November of 2021 Since the beginning of this year

Till about yesterday, so I think the number is still going up probably by at least by a trillion dollars. We have destroyed collectively as a society 35 trillion dollars in global market value 35 trillion dollars in global market value. Now, to give you a sense of that, that's 14% of all global wealth that has been destroyed in basically five months. And for reference, in 2008, when we went through, you know, a cataclysmic shock to the system that threatened the banking infrastructure of America and a potential contagion to the world, that destroyed 19% of the world's global wealth at that point. So we're approaching some really crazy, heady moments in time where in terms of the market correction and the value destruction.

The difference here is that the last time around, it was really about the handful of financial institutions and some very specific assets, right? Mortgage back securities, you know, some parts of the credit market and then a bunch of financial stocks. And that was largely it. This time around, as you just said, FreeBerke, it's literally everything that's getting smoked. There is not a place that you can effectively hide that has been safe. Crypto smoked.

The credit markets totally frozen. The equity markets, NASDAQ is in a bear market. The S&P is basically flirting with the bear market now. And I don't really see any end in sight. Meanwhile, we're waiting for CPI to down-tick. Inflation hasn't really done that. It looks like consumer price index, how much stuff cost? So that's taking a lot longer than we thought to roll over. Separately, jobless claims are now starting to tick up, which means that companies are beginning to affect layoffs

because they feel this pressure. So now you're going to see an unemployment rate that starts to go up. And then meanwhile, we're fighting a proxy war in the Ukraine against Russia to the tune of about, you know, $40 billion every sort of month or so when we open the paper and decide to read about it. So you put all these things together. It's not clear that there is the momentum to create a market bottom. Real estate, Jamal, if you look at it, was a major compression in 2008.

Real estate held up, this holding up seems to be holding up a little bit. I don't know how that long that's going to last with mortgages going up. So when you were talking about all the different categories, I was like, that's the one category that I guess hasn't fallen yet. Sax, what you're taking on the list? Yeah, I mean, look, we're in a stock market crash that I think over the last week sort of became a panic. I mean, I think we're in a stock market crash that I think over the last week sort of became a panic I mean, I think now there's panic selling going on that's not to say that it's all oversold

But certainly there are names now that are starting to become screaming buys But nobody has the capital to to buy I mean, it's easy to say You know in theory that you should be greedy when others are fearful and fearful when others are greedy The problem is that everyone's already fully deployed and then when the stock market crashes, they got no cash stuff to buy up new names. And that's one of the things that you've noticed in this downturn.

And I'd say especially with crypto, it's with all the other crypto downturns, there were always the crypto accounts saying, Hodel or by the dip or they had the laser eyes going, I don't see any of that right now. Like, you know, pure capitulation. Exactly. Yeah, exactly.

So this is just a route across the board. I agree. It's every asset class. I think home prices, that's coming, Jason, because like you said, mortgages are going up. Inventory is going up. So that's a leading indicator. You know, people can't afford the same mortgage they did before because rates are going up very fast.

So, you know, sellers are going to have to drop prices. And until they're willing to do that, the inventory's go up. That's a little bit of a difference. That happens in real estate as the sellers don't want to accept reality and they don't have to sell because they're living in it. As opposed to their crypto holdings, which they're not living in and they're not getting value from. And frankly, I think the consumer in general, that's the next shoot to drop here. Because right now,

it's been you had this sort of financial correction, you had this massive asset inflation, and now that the sort of the the years come out of the balloon, but the consumer has generally been holding up pretty well. Obviously, we had unemployment, you know, near 3% very low, although the labor participation wasn't great, but the consumer was doing fine. It was sort of holding up the economy. Now, I think you've got a bunch of different factors are going to really hurt the consumer

over the next several months. Like you said, interest rates going up means that home loans become more expensive, car loans, any other, you know, personal consumption loans go up. Credit card debt now has all of a sudden skyrocketed. So there's an article in Axios on this that the amount of consumer debt is surging and to this highest level of increase in over a decade. So consumers are trying to plastic to cover the sore and cost of everything. And then because of inflation, that wages in real terms fell 2.6% over

the past year. Because of inflation, when you said inflation. So if you're to look at wages in real terms, people are actually making less money. You give somebody a 10% raise, 8% inflation, it nets out to two. Well, no, you're giving them a 6% raise. Oh, I'm sorry. Yeah. Yeah. Or like, like a 5.6% raise or something like that against a percent inflation and net net, they're down 2.6%.

Got it. They're down to not up in purchasing power. Exactly. In spending power, sex's point is like, I mean, the number was 60 billion of new consumer credit last month, which is like something we haven't seen in a very long time as consumers try and bridge this gap to afford the things that they've gotten used to spending money on. To jump up like that just indicates that we may be in the beginning of a consumer credit bubble

now, which is scary. Right. This is the question is, what are the next shoes to drop? So you think about like what's happening in the market so far. It's mainly been multiple compression. Like earning season was pretty good. I mean, for some folks, yeah. For some folks. So the stocks that got hammer were generally the COVID stocks. It was the Pelotox, then that flex, Zoom. You know, you could like coinbase and Robin Hood with the day traders because that was people are laying off that stuff. So, but so basically the COVID stocks have been hammered, but the B2B stocks actually had really good results. And yet, the SaaS index is down like 80%. The average SaaS multiple, it was over 15

times last year on the public comps, and now it's down to 5.6. So the SaaS companies have been hammered despite having great earnings. So, well, we don't know, now they're B2B, they're a little bit insulated from the consumer, but what we don't know is what happens over the next six months if we go into a deeper session than do even the B2B companies start being impacted.

That would look like SaaS, just to be clear, people maybe start canceling their Netflix or they don't take that vacation. be company start being impacted. That would look like SACs just to be clear. People maybe start canceling their Netflix or they don't take that vacation. That's the consumer getting hit first. A business that's laying off 10 or 25% of their employees which are starting to see that contagion. They might also pull out their SaaS bill and say, here's 12 SaaS products we're playing for.

Let's consolidate down to eight. Right. I've got a SaaS startup that sells six and seven figure deals into enterprises. And they close their deal with Uber the day before Dara's memo came out saying we got to be really focused on cost cutting, what Wall Street wants now is free cash flow. We got to really sharpen our pencils. They were like, shoot, good thing we got this across the finish line. If it had been like two days later, it just would have been a much tougher process.

So first, you're right, the companies that get impacted are the ones with exposure to the consumer, but then those companies start sharpening their pencils and buying less. So the question is, how much are earnings now going to be impacted in the B2B space and what sort of recession do we have? I think recession now is just inevitable. To your most point, you can't have 14% of global wealth wiped out practically overnight and not have that translate into a big recession. Monetary velocity is going to slow dramatically.

The money circulating around is you can feel the brakes happen. You can feel the tightening. People will be more than they were six months ago. Guys, just to be clear, we actually haven't started to remove the money in the system. So the process of quantitative tightening, which is the Fed's mechanism of removing liquidity, is going to start now to the tune of about $90 billion a month, but to run off all the money that they printed will still take three years. So we have to take about $3 trillion of excess capital out of the economy.

And so if you add that $3 trillion as well, that's just going to disappear. To the $14 trillion, we've already, you know, or the 14%, the $35 trillion, sorry. You know, you're starting to touch numbers that are, you know, as bad as the GFC in terms of global wealth destruction. And again, you're referring to the great financial crisis when you say GFC. 2008. Unlike the GFC, this wealth destruction is touching a lot of normal everyday folks in very broad-based ways. And that wasn't necessarily the case.

There were a lot of people that unfortunately lost their home, but even that was still relatively contained to the hundreds of thousands. Here we're talking about tens of millions of people owning every kind of imaginable asset class who's seen wealth destruction somewhere between 25 to 90%. And that's very hard to freeberg. Yeah, but I just want to make the case. People keep using this term wealth destruction and it was only wealth that was accumulated in the last few quarters since we had COVID and we released all this capital and made interest rate to zero

and flooded the market with money. So everyone kind of gets the money and then they're like, hey, I'm worth a lot more. And then all of a sudden the free money's taken back and you're like, oh my gosh, I'm worth less. I've been destroyed. It's crazy. The reality is this was meant to stimulate the economy.

Money was released and and the idea, when you release capital from a central bank, is that that capital flows its way into productive assets, meaning businesses that can employ people, that can create products that people want to consume. And ultimately, it's very hard to manage that. When your only mechanism is to raise or lower interest rates and make capital available

or buy bonds. At the end of the day, a lot of that capital flowed into financial assets and inflated the value of those assets, the value of stocks, the value of crypto, the value of bonds that we own, the value of startups that we all own. And all of those assets, the value of the stock went up, but the capital didn't necessarily flow into creating new jobs, creating new businesses, and creating new products. I want to finish this one because I think it's really important.

At the end of the day, if that capital didn't really go into create value, and it comes back out, and all that happened was we had this kind of inflationary moment in terms of asset prices, and we didn't actually create new jobs and didn't actually stimulate the real productive economy. That's where we have a problem with stack with taxation and where we are inevitably going to run into a recession. And I think the biggest concern I have is that we're in a recession right now. This is a shock recession.

We're in a recession now. The biggest concern I have, as I mentioned earlier, is this consumer credit problem. A lot of consumers got used to the free money over the past two years. And people took that money and they went and bought new cars or they bought crypto or they bought something or another NFTs. And a lot of people got used to living a lifestyle that allowed them to spend in a way that they otherwise would not have been able to spend.

And then all of a sudden, the rug got pulled out. And now everyone's like, well, I want to keep living this lifestyle, I want to keep spending this money, I want to, I had all this stuff taken away from me, shoot, what am I going to do? And then they take on credit. And the credit markets haven't tightened enough yet on the consumer side that we may find ourselves

in a really ugly consumer credit bubble. Here's a crazy statistic for you guys. In the 2008 financial crisis, the median home price to median income in the United States was 5x. Today it's 7x. So people today own homes that are significantly more expensive relative to their income and earnings, than was the case during the financial crisis that caused a massive housing bubble. You're missing a bunch of important data points here.

The most important thing that happened was we changed the way that we are allowed to capitalize mortgages and the borrow rates. So that fundamentally is what drove that. Okay. So for example, you were not allowed, for example, to have a qualifying mortgage be over a million dollars. At the end of last year, we changed those rules. So if you exelt those effects that allow the FDIC and all of these, you know, Fannie Mae and Freddie Mac and all of this financial, gobbledygook acronym infrastructure that props up the US economy. If you factor in those rules,

I don't think it says, extreme as you're describing. What do you mean consumers have more debt per relative to the value of their home, sorry, debt relative to their income than they did during the 2008 financial crisis? That's a fact. Has nothing to do with this structure? Maybe the market works, but like,

what I'm saying is the market allows you to be that levered without actually getting foreclosed on, or you're allowed to get the borrow rates that allow you to do that. All I'm saying is, it's not like excess credit is being built up in the system abnormally by consumers. It's just that these products, again, are being structured in a way that gets people down.

And real estate is a very unique category because you have ibuyers taking stuff off the market, you have regulation not letting people build more. So I would be very reticent to extrapolate what's happening in real estate. I don't think we have like an issue in real estate to be completely honest with you. I think that we may have a looming credit crisis, but the practical issue today is I think asset wealth destruction in the financial markets whenever that happens. Generally tends to lead to what SAC said, which is belt tightening by companies. Focus on maximizing short-term free cash flow, which

unfortunately the way to cut that is by cutting up X. And the way that you cut up X is by unfortunately spending less on goods and services, which affects other companies and firing employees. And I think what you're gonna start to see are a bunch of those things where these companies make these short-term optimizations. Then how that unfortunately impacts the consumer is what Friedberg said, which is that if the consumer

was already living, you know, sort of at the knife's edge and using a lot of credit to basically allow them to live a lifestyle, that wasn't sustainable, whether that meant not having a job or whether that meant, you know, vacationing and staying in Airbnb's, all of that will come to an end. Now, you can say, what is the canary in the coal mine? And let me just give you one thing that hit the wire this morning, which will show you how bad the credit market is. So there was a article in Bloomberg that came out that said, instead of Elon taking margin loans to fund his acquisition of Twitter, there is an idea being floated by Morgan Stanley to use convertible debt. Now, I love this idea because I think it's an excellent mechanism. This

was the, you know, when Elon had convertible debt on Tesla, that was, you know, a one big escape velocity moment for me in my career in 2016. So I believe in these products. I believe that they work. But the reason I'm bringing this up is that the what it said is I'll just read this to you. The preferred equity may have a 20-year maturity and include a feature allowing interest to be paid in kind at a rate of 14% a year. If the single greatest investors cost of capital for debt in today's market is 14%. I think you have to really start to question what the credit markets really look like for market clearing prices. Because if that's

the price for a risk-bearing asset, run by the greatest entrepreneur of our generation. There's a bunch of stuff free, but to your point, that's pretty mispriced. I think one thing that's a silver lining here is we did build up 11 million job openings, labor participation is really low right now, even post pandemic. People, if you ask this question, I think, Chimoff, if like, how are people going to get out of to Freeberg's point, the lifestyle issue, like they want to live a slice up? There's a pretty easy solution. Go back to work.

Get a second job. Start working again. We peaked in the 90s with something around 67% labor force participation. And then we're now just right around 62. This is a large number of people who could go back to work. Now, you mentioned that slight tick up, ever so slight in unemployment

claims. We'll see if that goes up. But I think the potential way out here is that it's body, meaning like if you look now the last three or four, right, unemployment claims readings in a row have largely showed that it's floored. And it looks like in the last couple of readings that it's starting to tick up. But with 3% unemployment, we're kind of on a floor. You can't possibly have less unemployment. Unemployment's going up. I think employment has peaked. Unemployment's going up, and it's exactly what your mouth said. Look, all of us in our born means last several months, released this beginning of the year, have been warning founders that the environment is changing. Don't assume that we're always going to have a boom and the cash is always gonna be there.

However, nobody's taking the advice. Well, because there's been resistance because people don't wanna believe it. And then in addition, it's always like, well, how do you know it's not gonna bounce back, right? And now I think after what's happened really since April and really in the last week or two, I think no one's really saying that anymore.

Everyone understands that we're in a new environment and they just don't either have experience with how bad it's going to be or they don't, but everyone understands things have changed. So every company that's acting sensibly is freezing their hiring, putting a break on the growth, you know, slowing down their plans and that will absolutely translate into, you know, less job creation. Yeah, we've really pushed that exact plan. I used to sit down with our founders and in these board meetings, what we would talk

about is the base case and then we would always talk about a blue sky case and a really bold case, right? So three flavors of kind of like kind of go and do what you're doing, actually put a little bit more gas on it and you know, press the gas and then really go for it. I've stopped all of that. You know, these last five months have been me and my founders basically saying, okay, guys, what's the extreme bear case? What's the bear case? And then what's the base case? And what we are trying to figure out is how do we make sure that we can optimize for a contribution margin, for profitability,

for cash flow, and when that's not possible, how do we minimize burns so that we can extend our runways as long as possible and show technical validation so that we can raise money on reasonable terms, not even great terms. And if the boards of these private companies haven't been doing that for the last five or six months, and the burn hasn't dramatically changed, I think that they are, they've been a little derelict in their duty. It's a, it's a, you're not doing a very good job as a board member or investor if you haven't forced these conversations with your CEO.

And you shouldn't expect the CEO to bring this to you in many ways because it's very hard for them with the focus that they have every day to put this front of mind. But as SAC said, you have to do it as a director. If you're worth the salt at all, you have to do it. Well, and it's been quite the opposite. We saw it with fast.com. Co was the opposite, right? People were just not even considering it. It's just survival risk is on the table. You really have to act differently.

It's kind of like the difference between a poker tournament and a cash game. You know, like players behave very differently. In a poker tournament, the players are much more conservative. Why? Because once you're out, you're out. So if you lose the wrong hand, you're busted out of the tournament. Whereas in a cash game, you can just rebuy. Well, we've gone from

basically being in a cash game where people can just rebuy. Maybe they won't, you know, they can go out and raise more money. Maybe it's not the valuation they want. Maybe it's not as much they want. But, you know, in a boom, you can always just go raise more money. Now, if there's no more money available to keep funding your plan if it's not working, you really have to think about survival. and you have to be more conservative. You can't let yourself bust out of the tournament. By the way, I'll say two things on that. One, what you're describing is exactly the condition that is now led to the fact that roughly one-third of public biotech stocks are trading below cash.

So they're... What? Yeah, so their entity value. The biotech industry is a whole sin bio in particular, but really biotech. So they're, they're, yeah, so their entity value. The biotech industry is a whole syn bio in particular, but really biotech about a third of the companies now trade below their cash balance. I'll send you guys some, some links on this. Nick, I'll add it to the show notes afterwards.

And the reason is, yeah, 40% of them have less than 20 months of cash. 60% of them have less than two and a half years of worth of cash. And historically, biotech companies, they kind of run an R&D cycle to prove that their biotech product will work. And if it works, there'll be a pharma company that will swoop in and give them some money to go through the next phase of clinical trials, or they'll do a

secondary offering and raise more money to get through the next phase. But because the capital markets are gone now for them, or the assumption is, hey, there's not going to be any capital left, they're still burning whatever it is, 20, 30, 40, 80, 100 million dollars a quarter, they've only got a few hundred million dollars in the bank. And everyone's like, hey, look, the odds of you guys actually, even if your technology works, even if your product works, the odds of you being able to get the funding to get

through the next phase of a clinical trials is much lower. Therefore, the ascribe value of your business is negative. And we're seeing that across the board. I started working in Silicon Valley in 2001. That's when I graduated from Cal and I worked at an investment bank doing tech M&A. And that was right after the dot-com implosion. Most of what I worked on was public companies that were selling for less than cash. Today, we don't talk about that over the last 20 years because it just never seems to happen. Well, it's a phenomenal thing to happen, right?

I mean, you could basically, what that means is you could shut the company down and make a profit and still own the IP. So what happened in the dot-com area? Yes. We sold a bunch of companies. I was on the banking side representing the sellers, the private, representing the sellers,

the private, the public companies, because there was no business. They were just burning money, and there was no line of sight to making money, or line of sight to raising money. So the board said, you know what? We just got to get some of the stuff out, shut it down. And then, you know, hey, what's cheaper?

Shouting it down, what's gonna make us more money? Shouting it down and distributing the cash, or letting a private equity firm come in and shut it down for us. And in a lot of cases, they sold these public companies to private equity firms. Let's say the company's got 100 million cash, they sold it for 60 million. Private equity firm comes in and they're like, boom, boom, boom, everyone's fired, the thing shut down. And they liquidated it and they took, you know, made a 20 million

dollar spread on that thing. I will say on the flip side for private markets. And I think this is a really important maybe point for us to have a conversation about over the past decade. As you guys know, there have been a more venture money raised than at any time in history. The numbers have been going up every year. The number of funds total capital raised. But at the end of 2021, if you look at the total funds raised and the total capital deployed by venture funds, we have a $230 billion capital dry powder hangover. So there's a quarter trillion dollars of cash sitting in venture coffers that they can call and write and check into. So I think it provides a really interesting contrast that sets us up for a dynamic over the next few years on what's going to happen

in private markets because you're going to have the halves and the half knots. The halves are going to have a lot of friggin' money available to them, because these venture funds need to be deployed over the next few years. The half-nots are the ones that don't have proof points to a viable outcome in their business, but the halves are gonna have a lot of capital available to them. And they can check it. With one caveat. Which is...

So what do you guys think will happen, right? Well, there's two caveats. In the contrast of everyone saying, Hey, there's no capital available, there's no capital available, that's not true. There's more capital than has ever been available. So how does it get allocated? So the first thing is, to your mod's point, what valuation? And so there's going to need to be discipline and you're going to write the money will go to the winners.

Other thing to remember is, during the great financial crisis, for about a year, maybe even two, many venture firms did not want to call capital from LPs whose portfolios were crushed. LPs said, I know we're on the hook for this, but I would appreciate it if you don't make a ton of investments right now, because we don't want to clear our already demolished portfolios to then fund your venture fund. Those are commitments. It's not cash in the bank.

And those commitments only come from Harvard, Yale, CalPERS, Ford Foundation, whoever, Moral Oslo and Cladet, Kettering, if the GPs could ask the LPs for that in the last time this happened. And I don't know if we'll happen this time, but I think you remember it too, Trimoff. The LPs specifically said, hey, pump the brakes. Yeah, let me build on what you say. In 2000, the more extreme measure happened, which is that most of these venture investors returned the money and just canceled and tore up the LPA. Now, why would they do that? Why would you tear up commitments for a quarter trillion dollars?

It's because your portfolio is trash. Meaning, if you have made a bunch of horrible investments that you know are now totally upside down, you have a responsibility to manage those investments to a reasonable outcome, and ideally, even try to get some salvage value. And so, you know, it's very hard for you to look at an LP in the eye and all of a sudden say, you know what, I'm going to deploy this fresh capital, and I'm in a psychologically good state of mind to do that well. And I think that what history shows is that when you have these drawdowns, the money is made

by new entrance, or fresh capital, which doesn't have the legacy of a bad portfolio. The returns are not captured by the same people, and the reason is because they have the psychological baggage of a horrible portfolio or horrible marks. So for example, there was a tweet and I'll send this to you guys. This is from a guy named Matt Turk. He said to put the depth of the reset in context to justify a $1 billion value valuation, $1 billion valuation. A cloud unicorn today would need to plan on doing $178 million in revenue in the next 12 months if you apply the current median cloud software multiple of 5.6 times forward revenue.

Now let's put it in a different way. If you're a company that's worth $10 billion, that means that you have to come up with 1.78 billion dollars of annual recurring revenue for the market to give you a median multiple. How many SaaS companies in SaaS would, you'll know this, how many SaaS companies even get close to 2 billion of ARR? Probably a lot less than the number of SaaS companies that are worth $10 billion on paper. By the way, we should also talk about who is the bag holder in that transaction. It's the employees and we should explain why that is in a second.

But just to build on what Jason is saying and Freeper, what you're saying is, in moments like this, I would ignore all of the dry powder and all of that stuff. I think that there are a lot of venture investors today who've deployed way too quickly. And if they want to have any reputation over the next 10 years, we'll have to rehabilitate their portfolio. And try to return money. Let me just say one thing. I saw an analysis from one of the biggest venture firms in the valley over a 14 fund cycle. So they looked at data from 14 funds. And they showed that 40% of their capital was deployed in businesses that they were chasing valuation, meaning like the business

wasn't performing well. I mean, it's a bridge of the company or support it through a downround or some other sort of situation where at the time, it was let support our portfolio, 40% of their capital. On that 40%, they made like 50% losses. So they deployed money in a situation that was not kind of an accelerating successful, you know, up around kind of business, it was declining business. And in that support, they lost half their money. The other 60% they make like 3x, right?

So it kind of averages out that they make kind of, whatever it is, 2, 2 a half X on the whole portfolio But I think it really speaks to the condition that a lot of venture firms may make the mistake around doing over the next couple of years Which is I've got all of these businesses that are suffering through down rounds or need supportive capital And I know we can get there But that belief ultimately costs the LPs and costs to the fund more and it's why we saw such negative return cycles happen after the dot com crash. How about this? Since 1994, okay. Just guess how many funds private equity growth venture funds even existed that are greater than a billion dollars? So this is over, you know, 30

years saying, how many how many funds do you think even existed over a billion dollars. So this is over, you know, 30 years, say. How many funds do you think even existed over a billion dollars since 1994 to today? How many funds? Like how many funds have been raised that are over a billion? Individual funds are the brand names. Yeah, since 1994, how many do you think there are? 50.

1,276. Oh, you're including private equity and stuff. Oh, I was, yeah, there was a venture in it. Okay, sorry. Okay, so now, up those 1,'re including private equity and stuff. Oh, I was yeah, there was a venture. Yeah. Okay. Sorry. Okay. So now of those 1276 private equity funds or growth funds or crossover funds or got out your funds How many do you think have actually managed to return more than 2.3 times the money 2.3 times 10% 10% 5% 10% 22 of them like under 2% 100 2% Wow. So here's the point that I'm trying to make yeah investing is very hard Everybody looks like a genius

All of these funds come up with all of their Nonsense-sickal ways of showing IRRs and all of these fake gymnastics But the truth is in the data and what the data says is that in the last 30 years, the minute you get over your ski tips at a billion dollars, very few people know what they're doing, very few. It's hard. It's hard. It's hard. The most compressed as you get to bigger deals and you can't say just where the value is. Deny this numerical truth. Yeah. So again, I go back to, you know, the person that's always been talking about this and who again, maybe proven right yet again,

is Bill Gurley, you know, everybody would make fun. Why is Benchmark only raising $450 million? Why would they only raise $500 million? And they always were consistent because over the last 30 or 40 years over multiple cycles we have seen that this is the best way to optimize both for return, and for mental clarity, and for making our LPs happy. Every variable was optimized at around 550. And then you see five billion, six billion, ten billion dollar funds, funding, five billion, six billion,10 billion, $20 billion private companies.

And I think what we have to do is put two and two together and realize that it's going to be very difficult sledding from here for a lot of folks. And when the venture or crossover investor has this mental baggage that they're dealing with, they're not going to be able to provide fundamentally sound advice to the CEO. They're going to optimize for making that portfolio, turn to kidding, the bleeding and the portfolio. The CEOs will make a bunch of suboptimal decisions. It'll probably lead to a bunch of layoffs, bad technology decisions, things slow down, and the cycle is reflexive in that sense. And so, you know, we're going to go through a few years of sorting the chaos down rounds, liquidation for references, nonsense, sex, it will be.

Yeah. So look, I agree with that point that these mega funds are very hard to repay because they require you to have multiple winners, not just winners, but mega winners. So, you know, we've always kept our funds in that five to six hundred million dollar range where you really only need one winner per fund to basically return the fund. But let me, let me go back to this point about trying to find a winner. Can you explain the math of that? You typically own 15-20% of a winner, so just... Yes, I mean, even last by the time that it reaches that exit. Right, exactly. So, you know, if you own 10% of one deck of corn, that's a billion dollars,

and if it's a $500 million fund, you've doubled your fund. But if it's a $1 or $2,000,000 fund, you haven't even paid back the fund yet. So that's, I mean, this is a good one. And how hard is it to hit a deck of corn? Hard, it's hard, right? Hard, so, it really hard. I hit two. I hit two.

I've had two in a deck in. I've had two in the exact same time period, you know. Let me go back to this point about dry powder. I think it's actually important. So this would be a little bit more of a bright spot in a weird way. There's a stunning article in TechCrunch just two days ago that said that Tiger Global, which the hedge fund, as of the end of April, the hedge fund had lost about 45% and then May, the first weeks of May have been even worse.

Who knows what they're at now? But they had a separate venture vehicle. And their history of their venture vehicles is that they raised 3.75 for a fund in 2020, then 6.65 billion in 2021. And then just this year, they closed a $12.7 billion fund in March. And I think that fund was raised as early as September last year, but maybe there was

some money that still trickled in and they finally closed it in March. But basically, what this article said is that this $12.7 billion fund that they just raised is already nearly depleted. It's something like two thirds of the fund has already been deployed. So this idea that they've got like a lot of dry powder sitting on the sidelines, I don't think they do. And then meanwhile, you know, the other big crossover funds, D1, C02, they are completely risk off. I don't think they were ever as aggressive as tigers so they're not in as bad shape as tiger, but they're just basically sitting on the sidelines till this thing sorts itself out.

So basically all of this capital that flooded the venture markets, this growth capital that came in over the last couple of years is gone. I mean, that's basically driving up. Why do they go so fast, that's what was their thinking? Because you and I met with these folks. We saw them marking up our companies because you and I, you typically do a series A, that your sweet spot, I typically do see it into series A, you do A and to B. They were coming in and marking up our and the B and C rounds. What was their thinking?

What was their mistake here? I think the thinking was that we can create an index fund for pre-IPO tech companies, for sort of late-stage private tech companies. The only problem was, and by the way, they did a, if you could, I think they did a good job sort of productizing that solution. I mean, if you send them your numbers in a certain format and do a meeting, they were like a term sheet generator. I mean, they, it's a big odd term sheet and a couple of days. Wasn't that your original idea, Tremac? You had, you had a funding as a surface at one point. I did this thing called capital as a service. You would send us, you would send us,

but you would send us your data, or we would plug in to whatever you use, say, it was Stripe or Shopify, we would suck out the data, we would run it against a bunch of models, we would do a few simple regressions, and then we would just index you and then send you a trim sheet. So we did do that all around the world, but we did it on very small dollars. You know, we did it at $500,000 checks, $250K checks, it was called Capital as a Service, it's still a phenomenally good idea, but you would want to cure that business for probably 10 years.

I would want it to do that on 10 years on my own money, you know, 10, 15, 20, 30, 50 million bucks before I would even dare raise LP money around that idea because it's, I mean, at that point, it's the machines doing the work and you have to really be sure your models are right. Yeah, that's the question sort of what was wrong with it. I think that the thing that was wrong with it actually was just that the public comps were

all wrong, right? So they were modeling to the public valuation. These are how-pulled wrong, yeah. Well, no, it's, look, they're hedge-fung guys. So they're looking at the public valuations. They're looking at the last private rounds and they see a spread, a large spread, and they're like, we can arb this. So they go in with a massive amount of money, create a term sheet generator, and they

arb the spread. The problem is that all the public valuations we now know were inflated. I actually think they did a reasonably good job in creating a great approach for founders who want late-stage capital. If the valuations have been correct, I think it would have worked. Here's the problem. Right now, peloton and coinbase are both, their market caps are trading at lower than their last private market valuation. So let that sink in. If you did that last private round, you're under water big time in those names. I don't know a coinbase part. They weren't taking their signals from the public markets.

And this is the problem with the Fed and the administration and Congress basically flooding the zone with all this fake money is that it distorts all the signals in the economies. And then people start making investment decisions that don't work. And then you have this massive correction. How long have we been doing this, Jamath?

How long have we been overfeeding the market? It obviously happened under Biden and Trump. Does it go back to Obama or no? Yeah, it started in 2008, 2009 with the travel passive relief program, which is basically a fund, to create market liquidity, essentially. But what it also did on the heels of the great financial crisis was we introduced comfort around this idea of quantitative easing or having what's called the Fed put. You may hear that a lot. What does that mean? Which is that when market conditions get too stiff or rigid or inflexible, the Fed will generally step in with liquidity, typically into the credit market, never into the equity market. But what that does is that that also still flows into the equity market.

So everybody behaves like there's a downside price at which the Fed is guaranteed to act. And that really started to be a bailout. That really started to be in people's psychology after the great financial crisis. And then through the 2010s, we had several instances where we had that, where we had moments of sort of like market volatility. And all along the way, what we also had were academics that started to promote things like modern monetary theory, this idea that money printing was a good idea. And so we had this again, very reflexive loop where anointed experts did talk pieces and

thought pieces and books and then pseudo-intellectuals would pair it this stuff. And then the government infrastructure would behave like this was a reasonable thing to do when it built on itself for a decade. So we've been doing this for 13 or 14 years now. And now we're trying to undo it and put the genie back in the bottle and it's proving much, much harder than we thought because people have unfortunately got addicted to the crack. They're addicted to the drug. You're trying to take the oxy away and that's a, and people are going to go through with

strong, really, really, really bad withdrawal. Yeah. If you have a quarter trillion dollars of dry powder, let's assume no one gives their money back and they don't do stupid stuff like chase losing companies in their portfolio. And they allocated in a smart way to winning companies. Does that not mean that we end up seeing a significantly kind of outsized amount of capital going to a few highly successful businesses that will end up seeing

this kind of supercharging of a small set of businesses as opposed to this rise of the unicorn which is what we saw over the past call it, you know, eight, seven, eight years and that you have this big bifurcation in the market. The VC market starts to kind of say, hey, you're not making money, you don't have a line of sight to making money. You're off the table. But the top desial get overfunded and they become the next megacaps. No. It does not happen in this moment. Well, so if we look ahead two or three years, I'd...

Can I just tell you why? Let's take the perfect company, which is Stripe. Okay, so now $50 billion. Well, they've been fired into a mega cap, right? 50 billion dollars of horrible VCs who have made horrible decisions here to four, knocking on the callus and store saying, can you please take my $50 billion? Because I'm trying to be money good. Why do the callus and want to take on this headache? Why do they want to flutter, you know, mess set their cap table up with all these folks and then at what price? So if you're

sitting at the board of any really good well-run company, of course you'll take some bite-size, you know, amounts of very decisive capital in these moments if you think you can market, consolidate, or whatever. But I think the point that all of these companies are going through is largely the same. If the best companies aren't doing what we just talked about, I would be shocked as well. The best companies are thinking, let's batten down the hatches and let's not distract ourselves.

And so I'm not sure this is the moment where a really horrible VC who's at a terrible track record who've just blundered through $5 billion is going to be able to put in a billion dollars to strike. What do you think, Saks? Let me speak to the environment that I think is going to happen over the next few years and what founders will succeed. I think you're right, Freeberg, that the VC's are going to become much more discriminating

and there's going to be a much more polarized outcome here for companies. I had a tweet storm that Elon actually gave a nice boost to by saying he agreed with it, where I basically said, look, startups with high growth and moderate burn will get funded through this downturn. Starts with moderate growth and high burn will not get funded. So what's going to happen is that the sort of mediocre ones

are going to, we're going to get to a very polarized outcome very quickly where, you know, I think a lot of founders think that if their numbers are just okay and not great, then they'll be able to raise but at a lower evaluation or they'll be able to raise something but maybe not as much as they wanted. And what will happen is the middle case is kind of go away in an environment like this. And everyone just wants to fund the best companies. So certain things will become absolutely fatal for startups in this environment. One is obviously if they're just not growing, they're not going to raise. And good growth really starts in the early stages in terms of doubling year over year.

Second, negative or low gross margins are absolutely fatal. Nobody wants to fund businesses that may not even be real businesses. And I would say acceptable gross margins really start at 50%. A third, a CAC payback, people want to know that you can pay back your customer acquisition costs in a year or less. And then like I mentioned the burn, you know, a burn multiple of one is really ideal where you're burning not more than your your net new ARR, but certainly not more than two. I think burn multiples over two, where you're spending your burning $2 to add $1 of growth.

That's where I think companies are becoming unfundable. So I think founders are gonna have to pay a lot more attention to these disqualifiers. Yep. But I think that for companies who meet the criteria, who have good growth, low burn, good business fundamentals, they will be able to raise. And look, here's what's going to happen. The crossover investors are washed out of the system.

They're gone. I mean, Tigers are a deployed all of its capital. And I don't know when they're going to be back. So the so-called tourist money, the big investors who weren't in the system a few years ago, they're basically going to leave the system. However, there will be the big traditional venture funds, we'll have large funds, but they're going to deploy them much more slowly. These one-year-pasted deployments, they're going to stop.

They'll be back to three, exactly. So just think about that. Even if you had the same amount of money being raised and deployed, but it was happening over three years instead of one, that would be a two-thirds reduction in the availability of capital in the system. Which was not gonna go to. You're not putting that in.

It's not going to go to the best companies that I'm talking about. You're not gonna go to somebody who's gonna blow through it in nine months, who's playing every hand. Like you cannot play that way anymore. Exactly. So what we're telling our founders is number one,

you've got to lengthen your runway. Like the days of raising a new round every 12 months are over, you've got a plan on not raising for two to three years if you can help it. And then you really have to sharpen your pencil and work on these business fundamentals. And you know, one thing you need to do is you need to have a realistic conversation about,

am I really able to raise another round in this environment with the metrics I currently have? And if the answer is no, you need to cut your burn to give yourself the time to fix the business. And that fixing a business normally takes two to three years. So, you know, if you got less than two years or even two and a half years of burn, and you have one of those disqualifiers I talked about. You better like cut your burn quickly to give yourself the time to fix those disqualifiers. Yeah, I mean, I wish people, we've been talking about this for a year folks

and some founders just are not accepting the reality of the situation. And if you look at what happened, we have a generation that's never experienced a down market and these down markets happen so violently that they think like people are panicking. You know, somebody made a joke like Bill Gurley is called five of the last three recessions, you know, and it's like, well, I mean, we have scar tissue and it's that the the velocity of the downturn all those kids dunking on Gurley

well, I guess who's going to have the last laugh. I think precisely I texted girly last night He said the last long 30 I literally DMed him last night. It's listen the water's great right now I am doing deals back at six to twelve million dollars in the seed space With you know 200 K and revenue and real founders and discipline Start investing again. It's great now because the deals are now taking, I don't know if you're experiencing this, but the deals went from taking two, three days. Now they're back up to four to six weeks. And we're having very thoughtful discussions. We're meeting a third time with founders. We're talking about their go-to market strategy. We're getting to talk to three or four customers. I had founders who said, you can't be in this deal if you want to talk to my customers. And that

wasn't one founder. Multiple founders said, if you want to talk to my customers. And that wasn't one founder. Multiple founders said, if you want to talk to our customers, then you don't get an allocation. And I said, okay, the thing to keep in mind, I want to the deal. But that was how dysfunctional this was, Jama. The thing to keep in mind is that all these late stage companies are mispriced. It doesn't matter whether you're the bottom desol or the top desol. You are massively mispriced. And there needs to be some correction between 30 and 70% on valuation. 33% how do you solve it? I'm a point of view on that actually because so look,

there's a major difference, I think, between evaluation, multiple collapse in the public markets for supplier market. It's gone down. Look, the SaaS valuation multiples have gone down 70, 80%. There's no disputing that. If I write down it, look, it used to be the public markets were trading at 15 times ARR for the median SaaS company announced 5.6. So yeah, we're talking about 2, third, 70, 80% reductions. If it happened in the public stocks, it deserves to happen in the private stocks too. Thomas absolutely right about that, and a lot of people aren't recognizing that fact. However, here's the difference. The median SaaS company is growing maybe 15 to 20%.

When you've lost 80% of your value, and you're only growing 15 to 20%, it's going to take you a decade to grow back into your old valuation. However, good private company is not all of them, but the great ones. They're still growing 3x here over year. So if you're able to grow 3x here over year and you do it to your Zoro, you're 9x where you were, even if the AR are multiple claps 80%. You can still get an up-round. It's not going to be the 9x up-round. It might be the 2x up-round. I know how that's mathematically true, but listen, if you're a hundred million dollar AR

business, let's just say you were able to raise at 10 or 11 billion. Yes, you're mathematically bright, but you know, 100 million times nine is 900 million, but I think it's important to first say how many actual software companies are there that generate a billion dollars of AR? Do you remember are there that generate a billion dollars of ARR? Do you remember when Salesforce first passed a billion dollars of ARR, we thought, my gosh, and then they said, we're gonna get to that billion. So this is exceptionally rare, and I think that it behooves

people to understand that law of large numbers aren't often violated. And so, before you go and do that simple math and convince yourself that it's possible, maybe you should actually, I'm not saying that to you, Zach, I'm saying that to the founder or to the boards, maybe you guys should actually just go in and have somebody run a screen and say, how many actual companies exist that have actually managed to generate more than a billion dollars of ARR, especially in a moment where people are cutting back on spend. How does that happen? Yeah, look, I agree. Getting from a hundred to a billion is really hard. You know, if you're

getting a ten billion dollar company supposed to do because in this math, they have to get to two billion dollars of ARR to be worth ten billion. I do think a lot of. How do you do that? How do you do that? A hundred percent of the random SaaS company that you and I have never heard of. How do they generate two billion of ARR? I can tell you the handful of companies that generate $2 billion of AR. There are some incredible companies today that don't even yet, you know? Like, look at an incredible company like Unity.

Incredible, the backbone of all, you know, gaming and, you know, the move to 3D. This year, if they crush, they'll do $1.3 billion. Incredible business. It's an incredible business. It just went down 35%. It just went down 35%. It's trading at four times revenue, guys.

Right. Some of these things are hard to believe. Like, Open Door has 2.3 billion in cash and a $3.7 billion market cap. That enterprise value 1.4. And I think they also have a couple of billion in real estate. Coinbase, $6 billion cash, $12 billion market cap. So I guess in this part in the discussion, even with all these headwinds, can we give

the protective mechanisms for employees? Because I, again, I just... Yes, okay, good point. Let's do it. When you start a company and you're a founder, you're taking the most risk, you're the person with the idea, you should be justly rewarded for that. The way that that happens economically in a company is you get founder shares. The basis of those founder shares are effectively zero. And you're able to do a bunch of structuring when you first start a company that gives

founders specifically some incredible tax advantages. You can do an 83B election, which is effectively you buying the stock, starting the clock on long-term capital gains, et cetera, et cetera. Then, you have stock that you give to employees, they're one of two kinds, non-qualified stock options and incentivized stock options, NSOs and ISOs.

And those have different tax treatments, but again, you know, when you're a very early employee, you get a mixture of these things, also hugely accretive. It has a very low basis, your building value. But here's what people don't understand. When a venture investor, like myself or Jason, explained basis by the way for people

for the basis cost basis your price of your stock is effectively zero. You know like a penny for it or something. Yeah, like like the my stock at Facebook caused like half a penny. Got it. You know, whatever it goes public. It's $15.20 you get the spread. Got it.

You get the spread. And you pay long-term capital gains on that if you've been able to not in context. Yeah. Yeah. And and and shifted to long-term capital gains on that if you've been able to not in context. Yeah. Yeah. And and and shift it to long-term capital gains. Okay. So now, SACs or Jason or myself come and invest in your company.

What happens? We actually don't get equity. We don't get common stock. We actually get a synthetic form of debt called a preferred share. Okay. And typically the way that it works is when we invest in a company, and this is how the entire venture ecosystem works,

we actually create what's called a preference stack, which means we get an instrument that is senior to the common equity now. What does that mean? Well, it means that if your business goes out of business, we get our money back first. We also get an interest rate and we're able to convert all of that at some point, the magical moment when a company goes public into common stock and we give up our preferred

rights and we now have the same instrument as everybody else when a company goes public. That's the typical mechanism. Why does that exist, by the way, the preferred shares, maybe explaining the why? Why do VCs need that protection? To be honest, I don't know why it started, but it's a historical artifact of the 1960s and 1970s. I think I know why it started. Okay, so this got lawyer because let's say

you start a company and just to use some round numbers, a investor wants to give you $10 million to start the company and for to use some round numbers, a investor wants to give you 10 million dollars to start the company and for 10% of the company, a hundred million dollar valuation. If you didn't have preferred shares, then the founders could basically, on the day after the money comes in, they could say, hey, we want to liquidate the company, we'd say we don't want to do this anymore. And they own 90% of the company and they could basically then distribute out the 10 million to all the shareholders and they would keep 9 and 1 million would go back to the investor. So that's why lawyers came with this idea of seniority so that, okay, if

you disband the company with the investor's money still in there, it goes back first to the people who put it in the money. That was the idea. And the second piece was, if the company gets sold for less than the cash put into it, at least the people put the cash and get their money out first. If it sells for 10 million, you get your 10 million back. Or if 11, you get 1 million after that. So let's just say Jason does the first million. So there now there's a million to prefer.

Then Saks does the series A and he puts in 10. Now there's 11 million to prefer, even if it's at a much higher valuation. And then I come in and I give 100 at an even higher valuation. So now there's 111 million dollars of preferred shares. Now if the company goes through all kinds of complications and mess and let's just say we have to sell it to somebody else for 200 million dollars. Well guess what happens? The first 111 of it comes back to myself, Jason and David. Plus, interest. So this is why venture investors have an incentive to pay and set these crazy valuations because they don't really care what the valuation is as much as they care how

much of all this preference is building. And do I rationally believe that the liquidation value of the company is at least that much money. So if I think that three-brook's companies were at least $111 million, I'll do it and I add my hundred. Now why is this important for employees? Before you join a startup, especially in this moment, I think it's very important for you to understand how much money have they raised, how much is this preference stack that exists? And do you believe that the company is going to be worth much more than that? Because that's

the only way that you're going to actually participate in the equity. And we know now what the public market say. So if you go back to that tweet, you know, if it's a 10 or an 11 billion dollar company, okay, well, you need to generate $2 billion of revenue. And if you're at 100 million, that means you have to 20X the revenue for the valuation to be worthwhile, for you to believe that this valuation is real. So this is just a little guide for employees. I just think it's very important that you guys start to do the math and start to figure this

out. Ask the hard questions. How many shares are outstanding? How many preferred shares? What's the overhang? What's my strike price? It's a preference stack. How much is a total pref stack?

How much revenue are we generating now? You should go and do the work to figure out what the public market comps are. Those are widely available. Hopefully, somebody quit that should just create a website that helps you do this. But all of these things are going to be very important for you. Otherwise, what will happen is if you join a company in this moment, had a fake valuation and the valuation gets reset, you can effectively assume your options are worth zero. So if that was an important part of how you made the decision to join that company, you're being somewhat misled in a moment like this.

And you need to have your own rational sense of what that company's worth. Conversely, I think boards and CEOs have a real responsibility now to do the hard work of resetting this and explaining it to their employees if they want to retain them. Because in a moment like this, if you have a valuation reset, you don't allow people to understand it and you don't figure out a way to allow them to participate in some incremental way, I think it's going to be very problematic for employee retention. You're good. In those contexts, look, there's a couple of things that I always support.

If you need to reprice the options, you can reprice the options and give employees the benefit of a new foreign INA. The company doesn't set the option price, that's set by an external foreign INA audit. But if that foreign INA goes down, because of these factors we're talking about, you can basically the board can vote to reprise everyone's options, so at least they get the benefit of the lower.

Explain what a foreign INA is, just broad strokes. It's basically, when stock options are issued, the law requires that the strike price of the option be the fair market price. And because of some accounting shenanigans, a while back that got companies in trouble, it is now the case that companies don't set, don't determine their own fair market price.

They go out and they get some external auditor to do a 49A audit and then the 48A, that gives you the fair market price. And specifically, it's a fair market price, the common stock, because what investors are buying is the preferred. Because of the dynamic that Shemoth is talking about where the preferred gets paid back first, the common stock is worth less per share, because it's got this overhang on the market. Yeah, it's a fraction, a fifth, a tenth,

something in that range is typically. So if the shares worth a dollar preferred, the fair market value of the common could be $0.5, $0.10, $0.50, depends on if the company's gonna run out of money, how many months of runway they have, are they profitable? And so it is a fair thing to do, and you have to know that.

And in a down market like this, if you had massive compression, boards need to look at that, founders need to look at and say, it listen, if the SaaS multiples come down so much, well, our fair market value should come down that much. The fair market value might be worth 50% less, 75% less correct sex. Yeah, I mean, so the way it works is that when a company IPOs, you get rid of all the

different classes of stock. You know, basically they prefer converts to common in an IPO. One class of shares, yeah. Maybe you have like the dual stocks that the founder can maintain control, but from an economic perspective, you basically collapse into common stock. So when you IPO, common and prefer to the same. And so economically, they're converging to one to one as the company gets more and more mature and heads towards an exit. The earlier that you are, the riskier the company is, the more that the PREF stack matters,

the more overhanging that creates. But the benefit to employees is it creates a larger discount on their strike price on the 498. So that is the offsetting benefit. If the 498 goes down because the market's changed, then the board can vote to apply a new 498 to the employees. That's a beneficial thing to do for everybody. So that's something, you know, I've always supported. The other thing is that if you're in a turnaround situation where you're actually worried that the PREF stack is larger than the value of the company. In

other words, more money is gone into the company than the company may be worth it exit. Then what you need to do, because then there's nothing for the employees. There's no incentive anymore. What you need to do is create a, basically, an employee participation, you create a corridor where you say, okay, 30% of any acquisition price for this company is going to go to the employees. You create a, a management or employee carve out. Really, it should be an employee carve out, not just management, but all the employees of the company should benefit, uh, from an acquisition. And sometimes you'll see boards be either unrealistic or stingy, they'll be kind of pennywise and pound foolish.

They won't create the incentive for the employees to get that sort of overcapitalized company across the finish line. And you know, it can be pretty frustrating to see when that happens. It's a good time for employees to understand this. This is a giant reset that's occurring. I think there is some good news here.

I think we have a lot more people who are gonna go back to work because they need to. And that'll be good for monetary velocity, fill these jobs, 11 million jobs. I don't know if we've ever had this, I think it's a record, the number of jobs we've had and we're bouncing along record low unemployment.

Those two things could be what saves us, could save us during this recession. And something distinctly unique about this recession is job openings and low unemployment. We've never had a recession like this. So that's fascinating of itself. But for employees and for companies, the new discipline might be there's not going to be four or five offers for every tech employee. If people are going to cut 10 to 25 percent, this is the contagion moment.

And I think maybe just talking about layoff contagion in tech and how that works. Because Facebook's on a hiring freeze. And you're starting to see the series BC companies all do 10 to 25% layoffs. Uber, Darah said, we're going to look at hiring as a luxury. That's probably not going to happen. The only person who said they were going to hire into this was Google. Sundar today said maybe as many as 12,000 people over the next couple of years, a couple of thousand a year.

And Apple, stunningly, I don't know if you're watching this, they have told people were one day a week now, two days a week and two weeks. And then by the end of this month, May, there'll be three days a week in the office mandatory. The head of machine learning said, yeah, that doesn't work for my team. And they said, okay. And they said, okay, we don't have to do it. And they said, no, okay, we accept your resignation.

So I think even the mighty Apple with unlimited cash reserves is saying, you know what? If we have to shed some people who don't want to come back to the office, that's like a de facto layoff. So maybe talking about this contagion because if you're a company that doesn't layoff people, you're going to look pretty weird in this market to your investors. And they're going to be wondering why aren't you laying people off? Go ahead, free burn.

I feel like an old guy now been working in Silicon Valley for 20 years, 20, 21 years. And I remember like in 01, there was kind of this period of time when there was a bunch of layoffs and a bunch of companies reduced headcount. And, you know, there were other industries and people stayed employed. And then in the years that followed, like, Web2 happened and people kind of came back. But what was interesting is, like, the tech industry, which at the time was Silicon Valley, but is now fairly kind of, you know, well dispersed, attracted a lot of people from other industries, right? It used to be cool to get a job in financial services or investment banking out of college.

And then all of a sudden working at a startup was the cool thing. And there are a lot of people that move from New York in the last couple of years to SF, leading up to the most recent crash after the pandemic. And so, you know, look, there's an ebb and a flow in and out of this industry. I do think that this capital overhang, however,

this quarter trillion dollars of dry powder that's sitting in VC coffers is going to be significantly stimulatory in a very good way. I think it will create real jobs and and and enable real progress. It's not just about the companies that are on the break of profitability or the companies that are profitable, trying to juice profits. If you take a step back, Jake, how you said something earlier that I thought was kind of a really important statement, which is like you're doing deals, right? You're making investments in startups. And I'm more excited than I've been in years.

This is my time. This is what I'm looking for. It's time to go. And so I talked earlier about how the capital stimulants that came out from the Fed and the bond buying they were doing and so on led to an inflation and a bunch of assets. And that capital ultimately didn't find its way into productive assets. But it's not about all of that capital finding its way into productive assets.

If enough of it finds its way into productive assets, productive assets meaning businesses that create something of value for customers and make money doing so. And as a result, can grow and create new jobs and create new areas of the economy. If that happens enough times over, there is enough growth in the economy and enough new jobs that are created that really rationalizes all of the money that was friggin wasted on speculative nonsense over the past few years. And I think the fact that we've got a quarter trillion dollar sitting in VC coffers more than we've ever had, that's a quarter trillion dollars ready to fund the next generation

of technology businesses that can build new jobs and create new areas of the economy, new areas of growth that we've never seen before. And that's what's happened in the past. How do you think a person, let's just say you're playing poker and you just get punched in the face, seven rounds in a row, you're stuck three buy-ins. How does that person make that good next decision? Now, I will tell you three stories from my last week because my last week has been filled with these experiences. Sorry, go ahead. So, let me just talk about the business of investing and the psychology of investing. So look at probably who has been the most incredible performer this year is Ken Griffin and Citadel.

And right underneath him is this guy is the Englander at a who runs a place called Millennium and then you know a close third would probably be Stevie Cohen at SAC. Now how do these guys run their business? They have hundreds and hundreds of teams investing in all kinds of different things. And what they've figured out over time is how to dial up and dial down the volume of who's performing. And what they have realized is that when you go through a pattern of losing money, it is very difficult for you to then making incrementally good decisions. And so

they have a dynamic system that allows them to move capital away from those folks who are psychologically not in a great place to do it, to move capital towards other folks who are. As a result, they are always winning. And I just want you to react to that because I think there's one thing that we can say, oh, ventures a special thing. It's not like anything else. I personally don't think so, operating across the entire life cycle. And I think that there's something to be said. And I saw it in 2000. Folks who have lost a lot of money make incrementally poor decisions. I think why Jason is firing a little bit of a hot hand was he mostly let his companies get marked up and he was mostly frustrated the last couple of years in valuations.

Early stage valuations lack of discipline to his operating effectively in slate. But I don't think it's a binary condition, Tomoth. I think generally what you're saying is right. I'll tell you the reaction I'm seeing in the market. Well, I'm asking to add to you a thing. And on top of that, there are only seven or eight people who've actually made money in this entire market. Yeah.

Who the hell is this? Early stage investors had done well. Early stage investors have done. We've returned our first fund. That was nice. I'm in the black stacks. You, girly, I mean, what about all the other thousands of people that raises this tribute?

People don't distribute shares. We've talked about this a couple of times, Timoff, like it's so hard to make money. And when you have a chance to distribute, I feel really good. I wanted that some of these companies, you know, I have a Bloomberg at my desk. And one thing that I look at every now and then

is the ownership table of some of these high-flying stocks. And you'll see some incredible things, which is these folks have held on. And they are holding billions of dollars now of paper losses that they have to go back to their LPs and say, our conversation. Mr. Smith's foundation, I know that you wanted to fund cancer research. I had nine billion dollars of, and now it's two. Oops.

So, look, I think what you're saying generally is right. People are psychologically tainted when they take a big hit in the face. Everyone has this experience. My observation over the past two weeks, I have seen a lot of PMs and public PMs, portfolio managers, as well as private VCs all react to me in the same way when opportunities have kind of been discussed, which is I'm sitting on my hands. I mean, there's a PM I saw this week of a... Yeah, anyway, I would say I've never seen him jarard. Like I've never seen him just shocked. Like we were talking about something that was so obviously up his alley, such a great fit

for him, but he is just not doing anything. And there's a word about careerists now. So I mean, I had a crossover investor tell me that, look, I think that things are oversold right now. This is an attractive time to buy. But they won't take an act. I had a crossover investor tell me that, look, I think that things are oversold right now. This isn't attractive time to buy. But they won't take an act. Right, because if I'm right that they're oversold and it goes up great, I make a little

bit of money, but if I'm wrong, I'm not just losing money. You're missing a road. I'm risking my career. I'm kind of just falling nice. Yeah, so why would I do that? I'm just going to sit in the way. I'm the opposite right now. Yeah.

Guys, the same is true in VC. So I had several VC's this week who kind of shared the same point of view, which is at our partnership meetings. I don't know what you guys are doing sax at your fund, but they're like at our partnership meetings. We just cannot align on whether or not we're paying the right valuation. And so we're at a standstill. We're just waiting to see when the quote market settles out. And then we'll make decisions because I don't want to be the guy in the VC context catching knives. But look, that's a near-term psychological phenomenon. I think the reaction,

Chimap, is everyone sitting on their hands. But over time, it's not, I just told you the data from the last 30 years, only 22 out of 1,300 funds have returned more than 2.3 times, a billion dollars. It's not near-term. That's not the point I was, I was trying to make earlier, which was there's times a billion dollars. It's not near term. That's not the point I was trying to make earlier, which was there's a quarter trillion dollars. So the macro point about the fact that there is gonna be funding available, it doesn't matter if these guys are gonna make money or not, or they're gonna make shitty investments or not.

There is gonna be a stimulatory fact. All you need is one of the next trillion dollar mega caps to emerge from the quarter trillion that's sitting. And for the entire industry, it looks fantastic. And for that business to transform the landscape of some part of the economy. VCs have not had any new jobs to be created. I think it's pretty self-sacred.

But we've never, by the way, we've never seen that in history. We've never had this much dry powder sitting on the sidelines. And this is where the free money should go. It should go to creating new companies that create new jobs. And it is. It's found its way there. The trillions of dollars that have fueled crazy asset bubbles left and right. Some amount of it made its way into funding the creation of new companies that are going to create jobs. And that is the good thing of what's happened over the last couple of years, despite the asset implosion of all these bubbly things that have happened. Amazing. Shemalt, I wanted to answer your question. What do you do if you get punched in the face seven

times? You're running bad in a poker game. If you look at Phil Helmuth or other people who go through their variants, I think, take a break. Well, you take a break, go for a walk around the pool. And you get different games. One thing I like to think about is, hey, I'm going to play a better, play better cards to start your hand and maybe play in position. And in the analogy here, playing better cards, backing better founders and better products and then playing in position,

knowing we're in the lifecycle of a company value is created and that goes to valuation. So I'm laser focused right now on just world class teams that are running their business as well and that I can in early, and if there are founders out there, like who are trying to figure this out, and they're not getting funding, I think, looking, I think you said this last week, so maybe two weeks ago. Hey, listen, your last valuation last year is a great valuation this year, and if you had people who wanted to invest last year, who couldn't get in, going back to your $30 million valuation last year and topping off $3 million with the people

who couldn't get in and you told them, you know, I'll come back to you when it's $90 million. Go see if they still want to put that bet in. And then for the VCs who are out there in the early stage, you know, making bets on sub-$15 million or sub-$12 million companies in the seed round. If they're focused on customers and product, you know, you got a couple of hundred K and revenue, it's, I think it's a good bet. And I'm going to increase our investing in those type of companies, under 20 million, under 15 million, focused teams who understand that the climate has changed. If you're not taking the medicine, you have to, Saks's excellent tweet storm, you're a de-cute from

funding. I think it's very important that people understand what Sax said. If you do not accept the reality, a VC who has lived through one, two, or three of these cycles is going to disqualify you, and they're not telling you why they're disqualifying you. It's just not a fit. Couldn't get my partners around it. You know, let's keep in touch. Let me know how it can be helpful.

The other thing is that an entire generation of investors have been coddling entrepreneurs. And in moments like this, sometimes you need to actually have hard conversations. And if that's the case, I don't know how you tell that entrepreneur, listen, you need to be actually five days a week in the office. You need to do a 25% riff. You need to stop all the extraneous spend. Forget the exposed brick walls and the kind bars. you need to do a 25% riff, you need to stop all the extraneous spend, forget the exposed brick walls and the kind bars. We need to get down to just ones and zeros. That's also an entire generation of capital, capital allocators who don't know how to do this job in a moment like this. They've never had those conversations. They've never had those conversations.

There's a build on Friedrich's point. The idea that you would be at a standstill about price in a moment like this, to me, is shocking. If I was an LP in that venture fund, I would write it to zero. There should be no intellectual standstill whatsoever in a moment like this. Right. Yeah, I agree.

We're still investing. We're talking about the prices are. Yeah, we're still investing. It's just that lower evaluations. There should be no sand still. Exactly. This is the time to invest, right? I mean, yeah, I want to say something sort of positive, because a lot of founders watch the show.

It's like, look, what Jason said, if you need to accept reality and if you don't, you're going to have a bucket of very cold water dumped on your head when you got in fundraiser and realize that you're not going to make it. And then all of a sudden, you're going to be packing up shop very quickly. So you got to get, you got to get a reality check and understand. But look, great companies are built during downturns. You know, PayPal is built during the Dockhomb crash. My company Yammer was built during the Great Recession. Google Uber. Totally. I mean, the list goes on and on. So downturns are great times to build companies because they're war for talent subsides.

There's so much easier to recruit people. There's a lot fewer competitors getting funded. So, there's way less noise in the ecosystem. The only thing that gets harder is fundraising. So, you need to make sure that your money lasts. You do the right things. You focus on business fundamentals. You don't de-cue yourself.

David. And if you do that, you'll be fine., you don't de-cue yourself. David. And if you do that, you'll be fine. You just brought up something incredible. I remember we raised money from Microsoft at a $15.3 billion valuation. The great financial crisis took hold and marked to his credit, reset the valuation. We were already profitable, so we didn't necessarily need to raise that money, but I think we raised the billion dollars at like a nine billion dollar valuation. So we took a, you know, 33,

40% haircut, a down-route, Facebook had a down-route. We patterned our balance sheet and we said, we are now going to go and crush. And to your point, we were really able to compete much more effectively coming out of the GFC against Google for talent and against everybody else in that moment. And so if this is what people like Zucker willing to do, you have to really hold people's feet to the fire for founders who are not him. What is the fast doc co-founder willing to do? You know, like shut it down. Like literally, some founders, I find this very disturbing, but there are some founders who are so unwilling to make the cuts or take the medicine that they would rather run the fucking car into the wall

than hit the brakes, like hit the fucking brakes, save your company, live to fight another day. If you have six months of runway, get to 12 and then try to live to fight another. They're all in companies, raise your prices. You're totally right. Every single company that hits the wall and goes out of business that didn't do a round of layoffs

12 months before was asleep at the wheel. I sleep at the wheel. They were just not happening. They were texting and driving. Yeah, where was the round of layoffs a year before they ran out of money that at least gave them more runway? They didn't even do it.

They just assumed they could go. David, if you think about it, your series, your seed round was hard. Getting into a white comedy was hard. Your series your series your seed round was hard getting into white Combinator was hard your series a Okay, it was it was hard you had to do 25 meetings, but you got a term sheet your series be you got five people off of your term Sheets your series D C and D where people begging you to take their money and saying name a price So what does that founder think the next round of funding is gonna be each round became less work and higher evaluations. And you know what, a generation also, not all founders, but there's a group

of founders who became better at selling VCs on investing in their company than selling customers on buying their product. You have to take the same focus you had of selling people on buying shares in your company and put that into your product, the actual service, and raise your prices. So many people are charging so little for their SaaS product or software, and they're like, I can't make this business work. And we say to them, if you double the triple your price,

would you lose what percentage of customers would you lose? And they say, we lose like 10%. And I'm like, did you just, you have a million in revenue, two million, 10% off, two million, you've got 1.8. Would you rather make 800,000 more and be break even right now? And there are some odds. Sometimes founders just have this amazing moment where like, oh, yeah, I guess we could charge more and if we lost some customers, that wouldn't be the end of the world and we'd be profitable. I think this speaks to the fact that, you know, it takes a very specific skill to be

a very good founder. You need a level of intellectual curiosity. You need some moments to listen, but at some moments to know just when to do what you feel is right. But it takes a lot of skill to be an investor. And I think we've glossed over how hard that business is as well, because the reality is if Michael Moritz were to tell you that, you do it. You'd be hard pressed to not to not say yes. Of course. Early told you to do that, you would do it, because these are sort of the big names in our industry. But the reality is the fact that it's not happening also speaks to the fact that there's probably, there shouldn't be a quarter trillion dollars of funds that are probably stranded in the hands of

really inexperienced allocators who are going to light it on fire for the most part. And they're not going to have the courage to sort of lead these. That's what happens. All you need is one. Everybody should think about what, I don't know how you phrase it to founder sacks, but I say to them, when I invest in their companies, listen, when everything's getting really hard and you have a conversation, that is the hardest conversation that's making the most nervous, that's making you stare at the ceiling and grind your fucking teeth to your gums.

I want you to just call me. I can tell you, like, you know, I'm not speaking out of turn here, but Travis called me once or twice on a Saturday and said, hey, we're struggling with X. What do you think? Travis knows how to run a business a thousand times better than me, but being a sounding board and giving your founders permission to come to you when things are fucked up is critically important as an investor and being able to have it intellectually honest to your point, your mouth, discussion about the hardest issues is really what the job is in my mind.

What is going to send this company off the rails? What is the big fear you have? And let's just put it on the table and let's, as Travis would say, let's have a jam session. Let's jam on that until we solve the problem. So if you're suffering out there, you're scared. It's got to be an investor in your group who will have a candid discussion. If I had to give a punch list of things, if I was a founder right now, here, here the things that I would do is I would sit down and really look at your growth and your burn and have an honest conversation with your co-founder or with one or two of your trusted

board members and really say what is the real valuation of this business today and what could it actually be. And if there's a big gap between that and where you've lost raised money, the right thing to do is to think about in one bucket resetting the valuation in a second bucket making your employees whole and in a third bucket managing your earn so that you extend your runway. I think if you could do those three things and take the hard medicine now, you will be much better off for it. You'll be appreciated by your employees and you'll have shown some real metal

in a real crucible moment to use a Sequoia phrase. How do you guys think the market's going to settle out? Do you have any predictions on the bottom? I will tell you a statistic. I think Michael Burry put this out yesterday. He did not. He deletes his tweets every day. Very interesting character, by the way. But he pointed out how from top to bottom, during the kind of 02 era, 01, 2000 era, and then during the 2009 era, kind of those big drawdowns in the market.

He looked at companies like Microsoft, JPMorgan, I forgot which others, but highlighted that, on average, it took six times, their total shares outstanding, for them to go from top to bottom, meaning that the shares ultimately turned over 6x, the total deluded shares out. And so far in those stocks, we've only seen half of the total shares outstanding turnover since peak. And he's been making this case for kind of a few days and a few weeks now, which is like, the dead cat bounce day, where the market's

going to be tanking for quite a while. And these days that are going to be big updates, everyone's trying to call the bottom. He's like, no, this is the dead cat bounce moment. And he's like, if you look at kind of the structural rotation that's necessary for these markets to ultimately find their bottom, you know, we've got several multiple still to go with respect to volume that needs to trade before you find what the true market bottom is. So you know, it was a really interesting kind of insight, this kind of statistical insight that he pulled together and put on Twitter. I wanted to see if you guys kind of think that that might be the right way to think about

it and how you react to these conversations around where is the bottom going to be. Can I just pull up this one chart because it kind of speaks to this? So, this is CPI inflation versus the Fed Funds rate. So if you look at this, it goes all the way back to 1954. I shared it with you guys in the chat. The two have moved more or less in lockstep with each other, which makes sense because the Fed raises the Fed Funds rate in order to combat inflation. So Fed Funds and inflation sort of move in lockstep.

If you look at what's happened over the past year, these two things have moved violently Out of sync with each other. You have inflation now going all the way up to 8% Meanwhile the Fed funds rates only down to like 1% even with all the rate hikes and the talk of rate hikes that we've had We're only at a 1% You know Fed funds rate Now the expectation is it's gonna go higher the We're only at a 1% Fed funds rate. Now the expectation is it's going to go higher. The 10-year table is over 3%.

But the point is the Fed isn't a really tough spot here because it feels like we're going into recession, which would normally mean you cut rates, but then you've got inflation demanding that we jack up rates far more. And I think this is the problem. And this is what's going to be very tough about our current situation, is if we go into a session over the next six months, what does the Fed do about that? I mean, they don't really have much dry powder here.

In previous recessions, like the GFC and O8, I mean, interest rates were around 5%, so when they saw us from to zero, they had some serious, you know, that was some serious relief. Here you're at 1%, what do you do? You drop that to zero. And then meanwhile, inflation's still rampaging at 5%. This is what's so hard about it. Then look at this other chart, which is, this came from a blog, a blog post called, The Most Reckless Fed Ever.

So in this, most reckless Fed ever, they basically just took the Fed funds rate and subtracted inflation to get the real Fed funds rate. So the Fed funds rate, net of inflation. And what you could see here is that starting around 2018-19, the real Fed funds rate started going negative and then very, very negative to the point now where it's basically a negative 7%. So, you know, why is that? Because the Fed waited way too long to basically take away the punch bowl and start reacting

to inflation. You had Powell say a year ago that inflation was transitory and then they didn't react to it until the end of the year. They should have stopped the QE right then and there and then gradually started raising rates. Instead of these violent moves that we've had this year that are plunging the economy into recession that have caused the stock market crash. Now, what did Powell just say a week or two ago? He said he doesn't see a risk recession on the horizon. It's like, what are you smoking? I mean, this is just like his inflation

is transferring comedy a year ago. You're wondering, like, do we have better data than the Fed chair does? Because from where we're sitting, we're seeing a stock market crash, a panic and a recession, and he doesn't even see it. It's like, denial is not just a river in Egypt. This is crazy. Look, I mean, we call it a crash,

but you know, some people might just say that investors are violently reacting to the shifting tides on capital availability. But I will tell you, I'll say this one more time, because I think it's so important, and it's my kind of prediction of the week. I really think we're gonna run into

a consumer credit bubble here. I do not think that consumers are gonna slow down their spending or change their lifestyle as quickly as investors are changing their investing style. We have seen investors in public markets and private markets take massive corrective hits this week and last week and they're changing their behavior and some of the stories we share today. But consumers are taking on more credit.

They're opening credit cards, they're taking out bigger loans. Prices are going up 10% year over year for them. And so the concern is if we actually do hit a recession and we don't see real wage growth and the consumer credit bubble continues to grow, we're going to face a credit crisis in call it nine to nine months to a year, we're all going to wake up and be like, wait a second, how are consumers going to be able to afford all this credit? Very simple. And you bridge that whole.

And of the great resignation, that whole concept of like fun employed and I'm going to flip NFTs and I'm not going to go to work. That's out the window. But I'm going to be enjoying it. If you're going to enjoy that, there are more shoes to drop here and I think consumer is one of them and maybe there's systemic risks in the system that haven't been flushed out yet. And meanwhile, you've got a Fed share in denial about what's happening and you got a

President of the United States who's more focused on what's happening in Ukraine than what's happening and you got a president state, so there's more focus on what's happening in Ukraine and what's happening in the United States. We have Tweedledee and Tweedledum on this case. Biden and Powell are gonna go down as the worst president and Fetchon of all time. No, it is like the anti-Ragan vulgar combination. I mean, they've caused this problem. Well, first of all, I don't know if I agree,

it's a longer conversation. I got to run. Yeah. We all want to blame someone. I'm fed a little bit of money too. We all want to blame someone. The reality is there was a massive leveraging that happened going into 2008. And we got to work it out. We thought we were delivering and I don't think we've been delivering since 2008.

And all of a sudden, the chickens come home to roost or whatever the term is. And we're all sort of waking up to the fact that wait a second This is what the system with 10 trillion We got to work in the last two hours. That's the cause. It's not and more recently consumers and also 14 years ago It's not for 14 years ago There's already measures for years. austerity measures and the long cycle here, but yeah, go if you look back through, roughly if you look at like the average mean P for the S&P 500, it can go down to as low as 3000. It could. But I think the reality is there's a Fed put somewhere

in between here because, you know, if we see the credit markets really seize up, which we would, if the equity markets continue to retrench, the Fed will be forced to step in with liquidity and we back to where we were before. So, you So, I actually think we're probably close to a near-bottom ish here, 3,800 ish in the S&P 500. You're actually starting to see some of these early green shoots of a market bottom. What are those? It's when the most heavily shorted stocks start to rip up, you know, sort of the game-stop, game-stop, like rallies, sort of the game stop, game stop like rallies.

And you're seeing that actually today. So it's a, it's a really interesting day when the market is roughly flat, slightly down, but some of these companies, you know, block percent square, five, six percent, or not as up to 25 percent. Even lifts went up 5 percent. So I, this is the bad. There was definitely some panic selling yesterday. There was so much panic selling yesterday that the market's bouncing up five percent. So this is the bad. There was definitely some panic selling yesterday. I think it's bouncing around the bottom. Yeah. There was so much panic selling yesterday that the

market's bouncing up from that. Look, the market is a leading indicator, not a lagging indicator. And so it's it adjusts first. And then the real economy adjusts after that. And the risk right now is the stock market is telling us something about where the real economy is headed. And the problem is that the Fed and the central government don't really have the tools to fight the recession, because interest rates are already so low. And Biden already spent all the money. I mean, they broke the glass in case of emergency last year. They spent that last $2 trillion of emergency relief.

When Larry Summers told him, they didn't need to do it. Remember that? Larry Summers told him it would lead to inflation. I know no one wants to listen Larry Summers. He's would lead to inflation. Nobody, I know, no one wants to listen to Larry Summers. He's like one of those guys. You never would have this guy. It's correct. But Larry Summers was correct. The administration did not listen to him. Larry, who I know very well and otherwise who I love is like girly as well. He's generally

right in the end. And so I would just kind of, you know, he was right. I mean, we do need to get back to the Clinton, you know, moderate, like balance the budget, stop spending some austerity measures. Like we can only work our way out of this. And I think what we're going to learn from this is the concept of free money and printing money is not sustainable. And the concept of Americans not going to work is not going to make the economy that Americans want to live in.

I know this sounds fucking crazy, but if you want to spend money and you want to enjoy life, you've got to work. You can't, we can't have this kind of labor participation and we can't have people flipping NFTs for a living. That's not work. Yeah, you're right, Jason. You're right about that. I saw this thing where there's a new product implementation

on Airbnb that allows you to kind of like, search by campgrounds or search by castles or search bug. It's my vibe, it's vibe search. And search by a vibe. It's a perfect encapsulation of this moment where there are folks who have all of this flexibility they've never enjoyed before, that their mindset, especially if you're like a social striver like you can signal

That you're different from everybody else by living on a slight style But that works in a in a world where there's lots of free money and when that free money gets taken away I'm not sure that you're renting castles to spend a week here in a week there Well, I mean, we all want to talk about you be I I think it's a very virtual signaling thing to do And it's a very like world positive thing to do to do. All this is going to be so much money that we can just drop it from the heavens. And everybody's going to get a private jet. Everybody's going to get to flip their NFTs. And your board apes are going to become worth a million dollars. Your Bitcoin is going to be a million dollars each. This does not reality,

folks. Value is created when you make stuff in the world. When you write code, when you build companies, when you go to work. Yeah. But it's gonna take a long time. I mean, at some point maybe we'll have some energy source and robots building everything for us, but we gotta wrap here. We'll see everybody at the All in Summit. There'll be a bunch of stuff dropping. Just a couple of programming notes.

Please, please, please. There are no more take us up. Do not try and crash the party. There's gonna be security there. Everybody with a badge. We're gonna be checking the badge, just Jamoth. Everybody's got a photo on their badge. Please don't bring a plus one and please, please, please, please do not try to crash. Thank you. Love you. Love you. Talk to you soon. Everybody I will see you next time on the All in Podcast. Bye bye. Man David's act We open source it to the fans and they've just gone crazy

I'm Besties My dog can give it a wish to drive away. So sex. We're at all. Oh man, my hamlet has your meat. We should all just get a room and just have one big hug or two. Because they're all just like this sexual tension that we just need to release that house. What, you're the big, what, you're the beer of beef.

Be, what? We need to get mercy. I'm going all it!