All-In with Chamath, Jason, Sacks & Friedberg - E81: All-In Summit: Bill Gurley & Brad Gerstner on markets, downturns & investment cycles

Episode Date: May 23, 2022

This conversation was recorded LIVE at the All-In Summit in Miami and included slides. To watch on YouTube, check out our All-In Summit playlist: https://bit.ly/aisytplaylist 0:00 Bill Gurley & Brad Gerstner break down the state and historical significance of 2022's market downturn 12:27 How VCs will handle capital commitments from LPs, underwriting startups in the new reality 24:14 Bull run mistakes, why VCs don't underwrite lower valuations, handling distributions 33:52 Gurley's take on WeCrashed & Super Pumped TV series, how sophisticated investors got "gaslit" by the market, influx of capital creating consumer-surplus businesses 47:54 Brad predicts the market for next year, Bill gives post-Benchmark plans 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

BG Squares is our BG Squared panel everybody knows friends of the pod Bragg Gerstner and Bill Gurley give it up for I'm going to be the only one. Bill, you predicted five of the last three recessions. A broken clock is still right twice a day. I mean, here we are again. You've sounded the alarm bell, and of course you're right. And you've seen this movie before for all of us younger capital allocators who are experiencing it for the second or third time, but you've experienced it a couple more

times. How is this one measure up to great recession, dot-com bust, 87, and the many ones we've seen in between? You know, one thing that I think is super important to put this into context. Now, I'll try and tell this quick. I had a meeting once with Howard Marks, who I'd wanted to meet for a long period of time. He's a famous bond investor that does a lot of writing.

And for 15 minutes, he asked me questions about the venture industry, a lot of writing. And for 15 minutes he asked me questions about the venture industry, a lot of structural questions. And I told him by answers best I could. And he said, man, that's a really shitty industry. And I said, well, why do you say that? What do you mean? He says, you know, cyclical collapse is built into the structure. And so we have funds that are taken committed to that have 10 to 15 year lives. So you have low barriers to entry, but you have very high barriers to exit. And so he felt that it was just systematically set up

to rise and crash, rise and crash. And one thing that I realized coming out of that is that it doesn't happen like a sign curve, which is what we all imagine when we think of a cyclical business. It's more like a sock tooth. It risks on is a very slow process. And it's reflexive.

So it grows and grows and grows and grows. And then, risk off tends to be very abrupt. And we've seen that here, right? This cycle, risk on was from 09, that's also. Two, five months ago. That's really well said. And risk off is five months.

And the thing that it's really tough about that is, it requires a mental adjustment very quickly, like because it didn't gradually change it, abruptly changed, and so cap charts might have systematic issues that are stuck because too much lick prep relative to the new reality. Valuations have shifted, cost capital is radically different.

You may have, on the way up is risk, got people took more risks. You tried crazier things. You're willing to take, take, make investments in businesses you might not have to cost capital as a lot. Your name is stadium for five years as a crypto company. You might do that. And then, but then all the sunnets, it's gone. And now the commitment to naming the stadium is greater than the market gap. Well, I assume you're firm. I'm not being too frappity x, but... Well, just as an example, it might be a disproportionate value of your market gap.

Yeah, so anyway, it's tough. And in this particular case, because that's what you ask. So it turns out, oh, nine wasn't that bad. If we have an oh, nine, that'll be pretty good. Things got turned around pretty quickly. Oh, one was very abrupt and we didn't, you know, really start to see the liquidity again and till, with a few exceptions, Elon mentioned PayPal,

but like, oh, five, oh, six. You know, it was a long walk in the desert. I mean, a lot of great companies were started, but a lot of founders gave up at that time, right? Yeah, and look, I mean, I think to the, if you're an early stage investor, or if you're an early stage founder that's just getting going,

or even an early stage company, because if you haven't scaled out yet, this probably hasn't affected you, it could be wonderful. Like, your access to talent's going to be a lot easier. scaled out yet this probably hasn't affected you. It could be wonderful. Like your access to talent is gonna be a lot easier. People are gonna be more pragmatic and rational, but it's usually a long window on the other side.

The other challenge you have here is in 20, you know, we basically had a mini pullback in March of 2020, but then the Fed hit so hard that things just blasted off again. And now, and now you guys have talked about this, with that tools not in the toolbox anymore. Brad? So one of the things I was talking to somebody last night

and this audience is amazing, it's talking to somebody last night and they said, you know, so how does it work? You just get together and talk and I said, you know, what I love about this group is there are hundreds of hours of like data and research that we're constantly challenged with. We all know where we are. We know what just happened. And I think grounding ourselves in just a few facts to try to figure out what the next six months are going to be because we have founders here trying to run their businesses. Can I raise capital? Are

we bouncing straight back from where we were? So very quickly, this chart just tells us, you know, the iron law of investing is interest rates. A 1% change in rates leads to a 15 or 20% change in a multiple. And so the reason multiples have collapsed here for all these businesses is because expectations as to inflation and rates has changed dramatically. I hear a lot of talk about 1999-2000. So if it's all about rates, let's just look at those two things. We plotted them here together. This is 19 to 22 on the bottom. It shows what rates did. We took them to zero.

The Fed is now saying our neutral rate is 2 to 3 percent. People are hyperventilating. Look at where we were in 2000. Look at what the cost of capital was in 2000. Right. Right. And so this, this, this, this, the delta there. Right. We went from just above five up to six and a half. Right. So we're talking about going from two and a half back to two and a half or three. But the big question is, are we going back to two and a half or three, or are they behind the curve, lost in the weeds, and we're gonna have to go to four

to five to kill inflation? Well, everybody was saying inflation, you know, inflation is here to stay forever. Remember, when we report on Core CPI, it's what happened last month. It is not a forward looking indicator. So we peaked in Core CPI. Consumer price index, explain what it is.

Consumer price, there's the basket of goods and services that we all go out and spend money on. So the Fed is focused on the demand side of the equation. They know they hopped us up on a bunch of red bull and cocaine to survive the pandemic. And now... And we were talking about last night for facts, but we got it. You still haven't said a word all day looking at you. Okay, buddy.

I hate it, man. You are so gassed. We're going to get through a fact. We're going to get through it together. Okay? You are so rich. So, this chart, this chart, we deconstructed 20 bank models to say, what are the components of CPI, how do they differ?

The red lines where Goldman thinks we're going, the green line is UBS, I just told you, the Fed thinks we'll exit the year at four, we just decelerated significantly. And when they look at May in June, it's gonna be down yet further. And here's, it's going to be down yet further. And here's why it's going to be down. When the Fed stimulated the economy, all the prices we pay for everything went haywire.

Okay, the price fair use car was 20,000 bucks for 10 years. And then just coincidentally, they give us a bunch of red bull, and the price goes to $29,000. For two months in a row, we've had sequential decline. You tell me, is the price of the used car this time next year higher than 29 or lower than 29? It's going to be lower because we're destroying demand by raising interest rates. Same for home prices.

So what's plotted here is the home affordability index. Somebody who can afford to pay $1,200 a month in December could afford a $350,000 home today can afford a $240,000 home. You tell me are the number of new home searches on Zillow going up or down. Go run your Google Trends. They're going down because people's ability to buy homes is going down. And then finally airline tickets, same deal, right? And so when you put that all together, you say, okay, sequentially, month over month, forward looking, this stuff starting to tip over. If you look at what consumer confidence is, it's the lowest in 10 years, right? Consumer confidence is a leading indicator of slowing down. So again, everybody on television is telling us about what just happened.

It's like the nightly news, big red arrows, inflation going up. This is what's going to happen and what we all care about is what's going to happen. We destroyed 15 trillion, you said this on POD 80. We destroyed 15 trillion of household net this on POD 80, we destroyed 15 trillion of household net worth in the last five months. So the expected path of household net worth would have taken us from 110 trillion to 125 trillion over the course of the last two years. That was the trend we were on.

Instead we got all hopped up and went from 110 to 142, but now we're all the way back to 127. That's what I call on-path on trend. So the Fed is done exactly what it wanted to do. It ruined all the spacks. It ruined everything. It took all the ju- sorry, sorry, sorry, I didn't want to. Okay. So it took the juice out of the system just to see. That and consumer confidence tells me forward looking inflation is rolling. Finally, Bernanke says this morning or over the weekend, he said, ignore what you, everybody else is saying, follow the tips. No, we've been saying this since May of last year.

So this is the break even. This is the bond market. When that goes positive, that means the bond market is saying that inflation is rolling over because this is the 10 year less inflation. And so now we have anecdotal information about cars, about houses, about England. We have our common sense.

We know that those prices are not sustainable and we have the bond market telling us the same thing. That's why I don't think you should believe the hyperinflation narrative got it any thoughts on NFTs Here's the thing about my board ape what will happen to that? I know and when you're going through this and you search under the logic of it You realize what a mirage we were in that certain assets that had no underlying value You know they weren't cars here wanting tickets or homes were also being exacerbated during all of this. And I think that was probably one of the things that made this less fun in this cycle. Bill, you're

a fundamental investor, you really think about consumers, you think about the total address of a market, you give a lot of thoughts to that. What was the last couple of years like when you were saying three or four years ago, hey, this is kind of disconnecting from reality? You know, back when I had that conversation with Howard, I started doing some more research, so I went back and I talked to some of our fund of funds that have data over a very long period of time. And I mean, it sounds ridiculous, but what I realized was that the IRR numbers and the ROI numbers on the venture capital category

were heavily dependent on performance in the hottest part of the cycle. And so in the tip of that sawtooth. And that's when we came up with this phrase, that the best way to protect yourself against the downside is to enjoy every last bit of the upside. So while you get anxious about the rollover, you actually can't afford as a venture capital firm, and maybe this contributes to the clouds as fast as it does,

you can't afford not to play the game. Because it's too hard to predict when it's going to change. Bill, there's $250 billion of committed capital unallocated into companies. What happens in the cycle over the next five years, if there is this expectation that we're not going to be in the good part of the risk on part of the curve, that capital needs to be deployed at this point in the cycle. And do we end up having these like crazy bifurcations in the market

where high quality companies get 10x evaluation of the mean and all the money plows into a few companies that are kind of out of the world. I'll give you some quick thoughts. And I know Brad has some too, because we were talking about this this morning. First of all, I've never felt as a venture investor that I have to invest money.

And if you remember, most of it's committed, but not drawn down. And so you're going to have to go ask for it. If you deployed two-thirds of your fund into crypto assets with no board seat in the past 12 months. Are you gonna call Harvard and Penn and say, hey, I need some more right now. I don't think you're gonna make that call.

How it know? You're saying they'd let the capital sit there and never call it? Well, here, you guys were talking about this on one of the recent pods, and O1, a lot of people actually returned the commitment. And it was actually an act of greed not not an act It came across like they were being nice, but they were getting out I caught the burnt waffle theory

They were killing the fun and getting out of the overhang and starting fresh just like I guess it was Melbourne that attempted to do It was a version of it. It's like a recap in a way. Yeah, well They just want to get started without the overhang of the lookback. They deployed 200, 300 million. I think one thing, Bill, not to interrupt. You know, the assumption of the question was, will they be forced to deploy capital into a really bad vintage, right?

I actually think the upcoming vintage is going to start getting real. It's going to be a good vintage. I think that was Bill's point. I think we both feel that way. I think the vintage of the last 18 months will be lousy. So the capital deployed over the last 18 months won't have a lot of return. All of our LPs know that.

I just just sitting with an LP, you know, one of my investors at lunch today. Imagine this. They have 50 investments like benchmark and altimeter, right? All of them are going down and now you're gonna call them up and say I want all this money Right now to go invest in a bunch of stuff that still may not yet have corrected enough These are partnerships. Partnership means a partnership with me and my partners, all of the people who gave me the money. We're not going to put our partners in a headlock

and drag their money into the market and put it into things that we don't think accurately reflect the new world order. If you go back to that first chart, you can underwrite to the five-year average, the 10-year average, where we've been. I think we're going back to trend. But you cannot underwrite to where we were last year. Disabuse yourself. One of the bill tweeted this last week, it's spot on. The biggest mistake we will all make

is to anchor ourselves to prices that we saw in the world over the last 18 months. Pretend you never saw them. You anchor ourselves to prices that we saw in the world over the last 18 months. Pretend you never saw them. Not in venture, not in the stock market, because that is a delusional place to think we're getting back there. We're not unless we have another pandemic or a nuclear war and rates go to zero and then we have bigger problems.

So reunderrate and underrate to the five-year average, denovo for all your businesses. That's how you survive through this and ultimately come out winning today. And the other point I would make, David, is that the new reality is apparent to all of us because of public comps. So, like, you just have a new world order. And so, it's very hard. I don't think, I mean, there might be someone so sloppy

that they just keep investing headstrong, but I think most of them look at where things are and the type of business that you're investing in and they feel like they wanna make a return. I think you're using the right word. It is borderline, it's, well, it's definitely unprofessional and it's borderline idiotic for anybody with organized capital right now to be ripping money in because you don't know what the terminal valuation

of a business is. Like at the end of the day, investing is like a line. It starts here with guys like Jason and it ends here with guys like me and Brad say. And in the middle are these guys that are helping along the way and it's all hot potato. But by the time the hot potato gets to us, there is a price, and that price has alternatives, meaning if you come to me and say, this thing is worth $10, and I say, actually, no, it's worth two, because that other thing, which is better than you, is actually worth five. And that's what's happened in the Scott Tarkins.

And when you get the potato, you put it on the scale. There is a terminal end point to valuation, right? At the end of the day, there's a buyer of last resort and that is the public market investor. And he and she has said, no moss. That's what this chart says, no moss. You don't tell me that your thing is worth 50 times, 80 times, 90 times, it's worth

5.6 times. I saw something this morning from Morgan Stanley that said, if, however, you're a massive grower, 50% plus grower. There's 30 companies in the SaaS index that grow, but only 30 in the entire world that grow above 50%. You know what that multiple is? Just take a wild guess. 8.5, I mean, we're not talking 50 times,

we're talking 5.6 or 8.6. So all of a sudden, the band is this. I understand this to be clear. This is, so those games to your point are over. I mean, growing by 50% a year, for those of you guys have that built businesses, that do it, that is still very hard. You know, that's massive compounding.

So the game is over. And the idea that there's a quarter trillion, I think that that's a fallacy. What do you think ultimately gets deployed in the quarter trillion? Just pick it over. 15, what do you say? Over the next three years.

Of the quarter trillion, I think you're probably counting 50% of that is private equity or more, maybe 70% of traditional private equity. Leverage buy out firms are going to have a field day. Field day. I mean, so Toma Bravo and all these guys, they will spend all of that. So, you tell me what percentage of that? Over 300 billion of VC.

How much goes in? 20 billion goes in, 20 billion goes in in that three years? 25 or 30%, depends on price adjust. I wish we had the numbers from a one because you had similar things where the rates are for good. Because that's friggin' tiny, right?

I mean, if you're saying 25 billion over three years, that's like eight billion of total VC dollar that's deployed a year. Which, you know, to your trend line, thank you. That's tiny. Yeah, but let's line, they can be more wonderful than that. But let's be, let's be, let's be candid. Well, what number of people at these companies

is necessary to run them? We're looking at a Twitter with 8,000, you're looking at a Google, and even some of the startups, they got fat. I think, and they had huge salaries. And there's no essential, right away, like we just talked about a whole CapEx cycle and a need for hardware and a need for capital equipment. There's a whole semi-conductor space, there's no essential, right away, we just talked about a whole capex cycle and a need for hardware and a need for capital equipment.

There's a whole semi-conductor space. There's biotech. I mean, a huge segment of that venture market chasing is not software. It's very capital intensive businesses, which by the way are really critical in this economic cycle. People have been living high on the hog.

Let's be honest. But like I like, for example, our investing focus, we've moved in the last 18 months to focus a lot on these things, lithium mines. I mean, the stuff that we're doing seems insane. If you had asked me, would you be sweating a mine in India, you know, and sending our CFO and a partner to go and make sure the mine exists? I never would have thought that it's possible, but the reason is because of this chart, because

those trade-offs on dollars make so much more sense. To put money into an over-bloated software business comes with a lot of baggage, valuation baggage, team baggage, technical cruft. All of these things have to get balanced. If you get a really cheap deal, you do it. Super interesting, Bill. You're like the software guru. I mean, like, do you feel the same way? I mean, yeah, we'll call it, yeah.

Yeah. Actually, I want to make a quick comment on, especially with this slide on SaaS multiples. So obviously, it's a price to revenue multiple slide. And price to revenue is like this really crude evaluation tool. So I could crude if you could possibly have. I published a blog post once where I took all the internet

stocks and later, beginning to end on the price-to-revenue multiple. And it was just a massive diversion. There was no such thing. And so what really values companies? You know, it's typically discounted cash flows. And so now all of a sudden, the buy sides asking SaaS companies about net dollar retention, about long-term operating margin, about whether their free cash flow is greater or less

than their net income, about SBC as a percentage of free cash flow. Stock-based comp. Yeah, and all the sudden, everyone's brought out the microscope on how they're evaluating this company's and these crude tools that maybe the only, like they're entrepreneurs who probably think the only way you measure

that. That's right, by the way. You're the companies that, in your example, where all of a sudden run away with it and get all the money, think about the problem they have. Their growth is going to slow. Nobody grows at 500% when you're at a billion dollars. You're lucky to grow at 25%, 30%. So when your growth is slowing, and your evaluation is outsized, like You're lucky to grow a 25%, 30%. Right. Okay.

So when your growth is slowing and your evaluation is outsized like you're going to get to $5 billion, how do they attract more capital? This is why this whole game is very complicated right now. There was also something that took hold over the course of the last two years, specifically with respect to software, that this was an easy business. She just sent us your data. I pop out a term. She, it's formulaic as though all software companies

are created equal. And you guys asked a question last week on the pod. How many software companies are actually over a billion dollars in revenue? How many are over two billion? Well, we actually went and counted. Oh good. Right?

And public software companies over two billion in revenue, we got to 21. Okay. There are only 21 that are worth more than 25 billion dollars in all the public markets of all the millions of software companies that have been started. But what happened last year was you could be making dog walking software. Okay? And somebody looked at your multiple and slapped a hundred X on it and said you were worth that, as though that was the equivalent of building a database that would disrupt the entire database market. So the thing that is returning to markets

is something that we all do for a living called dispersion. Some shit's gonna be really great and the rest is going to be below the mean. And if you look at software, the history of software, right, is that there are very, very few companies that ever get to a billion dollars in revenue. And so if you were slapping a hundred XARR revenue,

or multiple, on a company doing 50 million in revenue, it's highly likely that they will never see that price again. Whatever you paid for that asset, because the delusion and the deceleration in their growth rate will absolutely eviscerate in return you have as an investor. And so when you're looking at this back to your point, not only are we looking at revenue multiples, but we're also looking at something like snowflake

and saying, now they're doing 15% free cash flow and expanding those multiple, all that stuff is critical. Gurley, do you think it's weird that VCs don't try to underwrite lower valuations? Like the incentive is always to up your valuation. Even if the company's performing plan, you don't generally do these like market-driven value. It's like, oh, you're worth 500 million last round,

we'll give you a billion dollars this round. And are we gonna see more VCs do down around? I just think that, well. In companies that there is. There's no VC club where they get together and discuss our market and behave. But, you're looking at it. There's two of us.

The price fixing. Keep in mind, as that risk on goes slowly up and up and up. And especially in Silicon Valley, we've had a systematic shift of power from the investor to the founder over a very long period of time. People are friendly because they want D-flow. So nobody does it. Nobody. Well, let's talk about that. So interesting.

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

I think it's three or four. Going into the fort. Wow. It might be going into the fort. Wow. I mean, well, I've been saying it actually. Oh, that's right.

It's in the fourth decade. No. You know, when you look at governance, what is the mistake we've made over this last bull run? Well, once again, what it should it be? I think, well, I think it's I mean, what's the right partnership? I think what it should be is that the market gets to decide. So if, you know, if someone wants,

if someone can raise, you know, a hundred million with no board seat, no rights, and they want that, I think they should be able to do that. Like, right, but what's in the best interest of our industry of all shareholders, the employees, the employees? I'm not talking about this. It's just super complicated.

We put money behind Rich Barton. It's that both of us did. And he had super boning. But he also, I think, is very honorable about his duty to shareholders. There's a track record there. Yeah, and it never was an issue in the entire history of the company. And so, you know, but, you know,

if there's a first time founder that's doing that, like, you know, who knows what the motivation is. And, but once again, it's a market, it's a free market. And I think that there are certain people, are founders that decide, hey, you bring something to the table that I want and I understand there's a government's requirement to it and we'll opt into that.

And, you know, willing buyer meets willing selling. Gurley, what do you guys, Brett? What is your attitude when you guys actually have a win? You do the job, company goes public, and you have the chance to distribute to your LPs. There's been a movement in Silicon Valley where some firms have said, you know what guys, I'm going to hold this forever, I'm going to create permanent capital structures, evergreen funds. If you foundation, want a distribution from me, just tell me and I'll give you money magically,

somehow, et cetera, et cetera. What do you guys think about that versus just distributing and walking away, booking the win? If you want to hold the stock, you just hold it in your own private. Let me just start by saying that investing is really fucking hard. And there's a lot of ways you can lose, you know. And when you guys started the podcast, I was listening to one of the episodes today, and it really hit me in the song that you put together.

David says, let your renters write. And- I remember that up there. I remember that up there. So from the from the brief history of the podcast you've gone from talking about that as a strategy to this question that you've posed to me which is on the opposite is my defense. He's alive. He's alive. We. He's a weird one. He's a weird one. He's a weird one. He's a weird one. He's a weird one. He's a weird one.

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He's a weird one. He's a weird one. He's a weird one. He's a weird one. He's a weird one. He's a weird one. In fairness, we had that conversation, as I recall, the context was that way back when, like for example, when I had Facebook and Facebook on public, the urge was just to sell it all. And so, I think where we landed on that was, don't sell 100%, keep 20%, keep 50%. But that was you personally. It was a smuck insurance, basically. Yeah, but that was for you personally as an investment.

What about you as a fund manager? Yeah, I think for me as a fund manager. So I think we did a pretty good job of the last six months distributing out some gains, some realizations. We actually pay back our whole first fund. But in our second fund, we had about 120 million of a firm stock and we were sitting on it

because we believe in the company and still do and we're still sitting on it and that was that was like a hundred million dollar mistake. So I think you know my first chance my honestly my ad you from now on is probably going to be distributed. So my first chance to actually return any real money to our LPs was when Slack did our direct listing and it it was like, you know, there are three or four of us on the board. Me, Andrew Brotchhead, Excel, John O'Farell from Andreson, two independents in Stewart. And they had gone through a couple direct listings before, bring in our bankers. And they go through this whole rig and marole.

And I remember being so amped up in the whole thing and I thought oh I believe in this company I believe in all of this blah blah blah long story short the point is I held the stock I didn't distribute it the pandemic hit I then distributed in sheer panic and we left a lot of money on the table that I could have just booked the win for the LPs and then from that that point, I said, never again. I'll hold it for myself, but the minute that I get a distribution, if I'm in the business of managing money for other people, it's out the door when it's liquid. And I'm not going to take a, I'll be happy to take a point of view for my own shares.

But kind of felt so, I felt so stupid. I took a 50% loss trying to be here. Well, I mean, and then also we have the issue of selling in secondary when those opportunities arise. And we all just watched the, we crashed documentary, which one of your partners plays a role in, I don't know, obviously it's probably 5% reality. But benchmark did make a pretty amazing trade

in selling we work sharesares early and booking an enormous win, correct Bill? Correct. Okay, so just an alternative. Wait, what's the answer to the question? Yes, secondary options. So the to, the most important thing is tell your partners what you're going to do. Yeah. And then do it. Because you're making a deal up front. So for us, the deal was, if we invest in something in our venture fund, and it's realized

it goes public, if we see venture-like returns, which we define, and they with them, as two to three X, over a three-year time horizon, we will hold. If we don't, we distributed. Last year, we distributed over $6 billion, which was more than all the venture we raised in our first five funds. Why?

Not because I didn't like Unity, or I didn't like snowflake. Everybody knows how we feel about these businesses, but because we realized that according to the deal we had made with our partners, the framework was triggered. And the second thing I would argue is because people are talking about permanent funds now and all this, that I'm not sure that's the deal people made. For me, if you're an investor or a limited partner in our fund and you want to hold on to it, then also invest in my hedge fund because there we haven't sold a share of snowflake. But that is a different liquidity profile than to put it into bill.

Let's put work on the side. Just in general, and the firm to do a secondary arises. What's the right thing here? That's rare. I mean, for an angel, I think it's very different, but it's rare for a venture firm to meet a secondary that has the firepower to absorb the type, that was Mossa. I mean, that's very unique situation. We typically distribute over three to six quarters following the lock-up release unless there's some success. Just systematically. Yeah. Yeah. Dollar-class average of six. Yeah. There were a few exceptions. We took open table

public in 09 at a very low value, knowingly at a low valuation, and I held that until we sold it to booking. But because I felt the network effect was there and it was gonna keep compounding and that kind of thing. And look, I mean, clearly, you know, with Bezos' done or Zuckerberg, like if you think you're sitting on one of those and you, I mean, you have to ask yourself. Well, those are two.

Yeah. I know, I know, but if you think you are, like, you know, maybe the the Coleson brothers are another one If it's gonna play out the way those did you're gonna want to hold it, but they're very rare Have you and your partners watched both week crashed and the dropout? I can't speak for all I've watched both though you watch both You watch both. What was your background? Peter.

I think that, well, I don't know about Acre, because I only, I don't know. The, we, Super Pump was not Acre just because they made up a lot of scenes. Like Drummond wasn't very active at all, but he's in a lot of the scene. So a lot of them were made up. I think Lido did a better job of showing you

who Adam and Newman is and really got into the character. Incredible as well. Yeah, so good, that's an accurate. Yeah. And accurate to your mean having met. Yeah, and equally on the other side, I think that Travis, you know him well, is way more nuanced.

He's one of the grittiest, hardest working investors. I mean, founders I've ever worked with. He's super intelligent. He can be really charming. And those dimensions weren't explored in the characters. What do I think is unfortunate? I remember you telling me, this was, I don't know, in the height of we work, you said,

Jamat, this is the single greatest salesman I've ever met in my life. You told me, you said, you told me also, the first time you mentioned. You said the first time Adam human came in you and your partners He left the room and you guys booked each other you guys were like we just have to invest in this guy because he can I said when he comes in we should never invest in real estate. We have to do this deal. Yeah Well, what what let's ask Brad a question. Oh I watched the first Jane and I were watching

me crash, watched the first two episodes. And the only thing I could think of Bill was, what's Adam Newman's next company and where do I send the check? Because I think he earned it. I don't know. He's got something brewing. I have a question for Brad. So let's, I wanted to go back.

Good morning. You know, I've been up here for like eight hours today, Jake. I don't know how much more you want me to do I'm like, it's awesome. I've been up here for like 10 hours. I'm like done after an hour and a half anyway, Brad So let's go back to the 100 times ARR, multiple of the people who are paying last year because these investors, you know, with the benefit of 2020 hindsight, they may look kind of sheepish, but we know these investors and the pace car setting, the valuations for the whole industry, you know, is these big giant hedge funds. We all know knew I'm talking about. They're super sophisticated people. I mean, you know, they're been very successful

investors for a long period of time. You know, what's the, the word used when we talked about it, privately was, was gaslight, gaslighted that, you know, the market was sort of gaslighting all of us into thinking that the public comps for these companies were much higher than they were. Is that why is that behind the psychology of why these very sophisticated investors made these big mistakes or how do you explain it? Yeah well I think there's a massive amount of research that's been done that Buffett and Marks and many others have quoted, that your ability to calculate risk goes down when you see a bunch of other people doing that thing, right?

Because your body, your mind's telling you, well, I won't die because I'm just doing what those other hundred people are. That's why there's herd mentality, that's why the lemming effect, confirmation bias. Confirmation bias. And so it's not that, I mean, you didn't name them, but Tiger, right?

We know them, they're great investors, et cetera. But you had to understand they were playing a different game, right? And so when people who were building portfolios of 20 names were trying to play the same game as a firm building a portfolio of 400 names, it was like trying to follow Softbank in 2017. So I mean, listen, we all thought Masha Softbank was going to be a wipeout in Vision 1. It wasn't, right? Now, I know he just had a huge recent mark. We'll see where it ultimately settles out.

So, I mean, I think from my perspective, you know, like Bill said, you get forced onto the field. There's a certain amount you have to do to stay in the game to have the conversation. But listen, as far back as last April, we were sitting around the table on Thursday, there's a true place saying, this can't continue, right? And then in the fall, it was Bezos' selling,

Musk's selling, like all the signals were going off, right? And so I think you have to know the game that you're playing. If you're a seed investor, an early stage investor, it doesn't matter what everybody else is doing. You have an obligation to play a differentiated game. And what I would say today is, if somebody calls me up tomorrow and says, hey, Tiger's doing this deal at 75 times ARR,

do you want to do it? They would have to pry the dollar out of my fucking hand with a crowbar. I'm not risking my money or my partner's money doing something that we're not underwriting, you know, to, no, I'm willing to underwrite David to that five-year average. I think what you have in the market now is a huge opportunity because people are in a fetal position under their desk scared that the world is forever changed because the CEO is a big bank, go on CNBC and start hyperventilating about deglobalization and hyperinflation and all this stuff.

And not one of them is actually build a model and deconstructed the components of CPI. I think that much more likely explanation is that the trends that existed for 20 years still exist. They were interrupted temporarily by us saving ourselves from a catastrophe with COVID. The transient thing that everybody has come to make fun of, right? Transient can be a year, two years, three years. We will look back at this graph.

And that inflation will roll over, and I suspect that those trends will continue. So I'm willing to underwrite to that. But if you told me you thought inflation was going to be 5% for the next decade and the 10 year was going to 7%. I would say short every tech company in the market, short everything in the market and don't invest a dollar in venture until you have line a site and the market has reprised it That's what the market is wrestling with right now. We have some people who are saying you know Markets of horror uncertainty and you have peak uncertainty. We have a war. We have that this is the hardest forecasting job

My career. I'll shut up you have fil filibustering. But you know, like that is, you know, I think that is that ultimately the question. If you're a founder, your investor, what are you willing to underwrite, too? Yeah. I'm Bell. What are your thoughts in terms of early stage? And as you said,

Yeah, exactly what I was thinking. Like he said, he said, don't take it that way. Like if we love to invest in two people in a PowerPoint. Like if that investment can happen today, and all it doesn't matter, it doesn't matter if the inflation pops or interest rates go up, it won't affect them. It doesn't even matter if it works.

It might help back. Yes, because you're hiring people at half price. Right. And there's less competition. I mean, my biggest problem of the past six years was hyper competition. You're finding a CFO? No, just not just talent. I'm talking about like over and lifting like hundreds of billions of dollars of money raised in the private market and shot onto the playing field out of a cannon. That's brutal. And that's not happening if inflation's going up.

It doesn't allow the market to really start out the winners and losers properly. Because the companies that should contract, get propped up for a little bit longer, there's some talented people in those companies that don't then end up in the right home. You know, I said this last week, the most transformational moment in our company's history

at Facebook's history was during the GFC because of the fact that there weren't any other alternatives to go and work. But by the way, I found, and I shared this with my partner the other day, I found through my career, which wasn't four decades, but okay. Over three.

The window after the correction is the calmest where there's least anxiety for me at least. Like, everything slows down. People talk rationally, people aren't doing silly things. It makes like a welcome of beach. There's a lot more communication that seems rational and pragmatic. And you can also maybe get to know a founder, understand the business over three, four, five weeks and make a decision as opposed to three, four, five hours and they tell you,

hey, term sheets. Well, people think more unit, like think about unit economics in a more reasonable way and you're not, you know. I mean, this is, this is why, I mean, the two of you invested in Uber, I know, because we've had this conversation, Bill. Well, he mentions it pretty. You're too humble to take credit. Ah!

I do get it for $25 million. But, you know, Bill's talked about, you know, benchmarks legendary for investing in eBay, and it was winner take all. All. Winner take all. Yeah. And I suspect that when you invested in Uber,

you saw similar network effects. You said, Oh my God. And even bigger market. This is going to be winner take off. Unfortunately, what you didn't plan on was Masha raiding Saudi Arabia, getting $100 billion of free money, and then blowing it of a can and into the market so lifting everybody else could do diseconomic things and literally for seven years. The entire profit margin of Uber was competed away by stupidity. You tweeted last week and I noticed it because Jason and I may have a little something on the line here, you know, with respect to Uber.

For the first time you tweeted after their quarterly earnings, maybe we're starting to see network effects show up at Uber because if you listen to the lift call, it was a train red. A decade, what that money did was it made those businesses what we call the consumer surplus Meaning what is a consumer surplus business? It's when all you win Nobody else wins the employees don't win the shareholders don't win the investors don't win Consumers win you're getting subsidized rides. You're getting subsidized food delivery You're getting some subsidized form of content and there are these

Consumer surplus businesses that are bound right now that still exist, which are propped up by dollars that aren't being, that they're not being allocated because they're competitive, that's just because they had to. They're making a negative unit economic to drive growth. I mean, lips said on their call that they were going to continue subsidizing.

In fact, they're going to increase their coupons. I said, how I can question these guys. So, I will allow the plaintiff to get subsidizing. In fact, they're going to increase their coupons. I said, how are you? I was like, I'm a question to you guys. So, I will allow the plane to fall off to his announcement. Yes, sorry Bill, I just want to ask you, the negative Uniteconomics and Drive Growth trend was a big one for the last eight years. And it certainly seemed to have played out at Uber,

but a lot of other delivery companies. Do you think that as a strategy assuming capital availability, negative Uniteconomics to drive growth, and then once you have the network, and once you that as a strategy assuming capital availability, negative unit economics to drive growth, and then once you have the network, and once you grab the market, you make money, is a reasonable strategy? It all depends on whether you can rein it back in or not. And I think DoorDash did an incredible job.

I think Jeff Bezos did an incredible job back in 01. I think if 50 entrepreneurs try that trick 49 are going to argue. By the way, that's the best. I think that's such a key takeaway. Well, there's another part about it. You can only pull it off as well as if in that moment you have an effective monopoly, which Bezos effectively did, and Tony did in those markets where he was operating. Nobody else was competing in Palo Alto, California.

And you know- Well, they weren't competing the way he was, for sure. I have a question for the two of you guys. What do you guys think about something like Instacart in a moment like this? So $40 billion valuation maybe gets reset to $24. Who knows? They file to go public. They file to go public, confidentially. Are you guys investors? I'm not. I'm not. I'm not.

So, candidly, what's going on here? I mean, I think it's a provocative question because you have a business that's raised a ton of capital that was born of the era that we're talking about that probably did things that were unnatural. If they weren't negative, you know, economics, they were close. And they talked about it because they would say publicly we're going to roll in advertising and then that's going to bring us.

I got in trouble once. I was, it's just on Bloomberg so I think you can find this clip. But I was talking Emily Chang and she said something to the effect of, what did you just see this latest sequoia round? And I said, and I made this joke, it was a complete joke, it's not true. I was like, yeah, I went to Instacart, I bought one mango, had it delivered for free, then I bought a second mango,

I sent an email to Doug Leoni, thanks for the second mango. What a douche. I bought four grapes, and I said, I couldn't see them or surplus. I mean, you get four grapes whenever you want. It's hard to judge a company from the outside because you can't look at the financials but from the product experiences evolved over a very long period of time. It's actually pretty good.

I suspect there's an asset value there and whether that can match up with what someone can afford to pay it. But I think we got it. But I think it's a good wrap. OK. Bill, just the final question here. Wait, wait, wait, wait, wait, why do you get that stuff? Well, we want to know where the market goes this year. What's the secret? As soon as we're with the market, we're here. All right, Brad, where's the market going to be

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

and we bounce back up to the five year average. All right, back now for you Bill, final question. I don't get that one. No, not that one. Too easy. You can't answer it if you like, but I got a more important one. 6.385% higher. Okay. I know you're not going to answer like, but I got a more important one. 6.385% higher. Okay.

I know you're not going to answer it, so I got a better one for you. You're not in the next benchmark fund. Essentially that means retirement of the spurs. Now the market's down. You seem like you're a little bit bored. Are you going to get back into early stage investing? Yes or no. I know you're a little bit bored. Are you going to get back into early stage investing? Yes or no? And are you missing it?

I think, I don't know what that was. I think I might get intrigued with doing angel stuff the way Bayzos did. I don't think I want to practice the art taking board seats. I'm still on 10 that I'm serving beautifully. And I've played that game, you know. Maybe similar to what David said about operating a business. I've played that game.

They got a good idea, you vibe, you put in a 500 K-Chem. Yeah, I'd be open to that. Do you want to tell? And I'm very excited about public stocks here, actually. Really? Yeah. Continue excited about what? Public stocks.

Yeah, like the valuations are crazy. They're getting super interesting. Such crazy stuff. Super interesting. You want to do your Bill Gurley invitation? Continue that way. Public stuff like the valuations are great crazy super in such crazy super interesting. Yeah, you want to do your bill girly invitation? I've got a here that's a poker at the poker table. J.K.A.L. is a great question. Do you have to stay out here for this? Yes, I've been I've been investing for the better part of three or four decades, four and ten boards I do toly served on. I remember time I showed the ball in the kings,

my socks I don't mean with the nine, ten suited, and that's just my look right now, so maybe I'll just look at the public market card. I'll just have, be liquid, I'll be liquid. Ladies and gentlemen, BG Squared! BG Squared, babies! Well, let your winners ride. Brain man, David Sack, I'm going home.

And I said we open source it to the fans and they've just gone crazy with it. I'm the U.S. I'm the queen of kilowatt! I'm going home, I'm the queen! What? What are you? I'm the queen of f**k! Besties are gone!

I'm going thrift! This is my dog taking it away! It's your driveway! It's your sex! Oh man! The cashier will meet me at once! We should all just get a room and just have one big hug you are because they're all just like it's like sexual I'm going to leave!