Odd Lots - Jason Calacanis On the Expensive Lesson Coming to Silicon Valley

Episode Date: July 21, 2022

For years, venture capital firms have been pouring money into start-ups, trying to get a piece of the next Amazon or Apple. Valuations for new tech companies soared, and many of them took to crypto to explore new forms of raising money. That included issuing tokens to venture capital funds who sometimes then flipped them to retail investors. Now, Silicon Valley seems to be crashing back down to Earth. And an industry that's all about sourcing more and more money at higher valuations, is having to contend with down rounds. Meanwhile, many of the tokens sold by start-ups have lost value during the crypto crash. On this episode we speak with long-time angel investor and co-host of the 'All-In' podcast Jason Calacanis, who was early into companies like Uber, Calm and Robinhood. He predicts that Silicon Valley is about to learn a very expensive lesson.See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, we've been talking a lot about tech, startups, VC, but you know, this space is so big and it's so opaque because we don't really know what's going on with VC funger performance.

We don't really know what's going on with startup earnings or most likely startup losses that I feel like it can never hurt to get more. perspective. Yeah, we've had this conversation before. You know, it's easy enough for a publicly listed stock. You just look at a line on a screen and you get some sense of how things are going, much, much harder in venture capital world. And then just to add to that, you also have this really interesting culture and dynamic around VC and angel investing, where it seems like everyone is incentivized to pour more money into stuff and to get the valuations up. And then the question is, what happens when that dynamic starts to go away or at least becomes a little bit more challenged,

which is what has happened over the past few months. Right. All kinds of interesting dynamics. Publicly listed companies like Amazon or Facebook, they might come on struggling times, but I don't think anyone really doubts the viability of the business. With startups, of course, some of these companies may just not have business models that work. They may be a long way from anything resembling profitability and might have to make tough decisions about growth versus survival, all kinds of sort of tricky questions arise in the private tech world that you just don't see when we're talking about public stocks. Exactly. So let's talk about it more. I want to jump right in. We have a big guest today. We are going to be speaking with Jason Kalakanis.

He is a popular podcaster on the All In podcast. He is an author. He's an angel investor who has done over 350 deals over 11 years, very outspoken. One of the most important. Former journalist, too. Former journalist, former blogger specifically, over many years. And he's going to talk to us about the state of the world. Jason, thank you so much for coming on Oddlots. Oh, big fan of the show. Thanks for having me.

You know, I DM'd you, you know, a while back about having you on. And then I looked in our DM history. We haven't really talked that much. But I saw it in like in 2009. You're like, hey, I'm going to be in New York and meeting some people for Dimson. Do you want to come? And I don't think I responded or I definitely didn't go. But I should have, because you've had like a pretty great like 13 years or 10 years since then.

So I should have been a friend of all the time. It's such a humble brag. I was too busy to respond to the big angel investor that DM me to grab lunch. I blew it because you've, you know, I'm here, but you've grown up. So you had a good, you've had a good run. This is my credo as an angel investor. Actually, I have 20 or so people in my investment company launch and the syndicate.com. and the first thing I teach new investors is never underestimate anyone because we will see people from a random assortment of beginnings and weird products and terrible ideas and all of a sudden they changed the world. And so, you know, if you look at the first version of like Uber the app, Travis hated it. It was like really ugly and, you know, he was just beside himself at how janky it was.

What was Uber worth when you invested in it? I think that round was $4.5 million. Yeah, $5 million. Something like that. And Calm.com was worth $5 million when we invested. Density was around $4 million. Density.I.O. That's another unicorn we invested in.

And that cohort when I started angel investing was right after the great financial crisis, 2009, 2010. What happened was I was running a company called Mahalo.com, which is now called Inside.com. It's still running, doing millions of dollars a year in revenue. And Sequoia, Rulov Botha, who was the latest partner there. He had just started as a partner there working with Michael Moritz and Doug Leone. And they said, you know, you introduced us to all these really cool companies. Would you be a scout for us?

And I said, how would that work? And they said, well, we'll give you money and then we'll split the returns 50-50. And I said, well, don't you get like 20% and 2% like management fees? I said, oh, we get more than that. We got like 30% worth Sequoia. You know, we're pretty good at this. But this is going to be small potato. So we're just going to ask you and Sam Altman and, you know, this other person to

be Scouts for us. And Sam famously did Stripe as an investment in the Scouts program. And I did Uber and Thumbtack and a couple of others. And three of the first seven deals I did became unicorns. So you mentioned Credo at the very beginning. And before we had this conversation, I was looking on your Twitter account and you tweeted something that intrigued me. You referred to a basic technique that you've learned in the dot com era, trust the founder but believe the product and customers. What did you mean by that and how is it relevant now? That's a great question. So You know, when you're a journalist, which is where I started in the 90s when I was coming to dot-com era, people were really well media trained. They were spinning, you know, really crazy yarns. And I was just trying to figure out, like, is Scott Kernett from About.com the real deal? And is, you know, this woman from My Village, the real deal? Or are they, you know, charlatans and, you know, is this double-click thing that Kevin O'Connor is doing? Is it real? You know, that was kind of the job of a journalist, ask questions. And then maybe when we actually use the products and when we actually

talk to customers or we talk to employees, we actually then got the ground truth. And so it was that skill set I learned as a journalist doing Silicon Alley Reporter, my second magazine, when I was in my 20s in New York in the 90s, which was awesome. New York in the 90s was fantastic. And so when I went into angel investing.

We had a very similar conversation on all thoughts just recently about clubbing. We had the globe.com CEO. Did you know him? Oh, Stephen Pat or not? Yeah, we had better know on the show recently. Yeah. I got some good stories about those guys. I covered them. I'll tell you that story in a second. But anyway, you have to look at the reality of what a startup is. A startup is a group of people, a founder plus whoever they can recruit,

building a product that then has some contact with customers. And when evaluating startups, it's important to meet great founders and hear what they have to say. I would argue it's more important to use the product and talk to the customers. And that has been, something that in crypto as one example, or the dot-com era as another example, or in a boom market that people forget. And so, you know, trust but verify is a really good management philosophy, and this is my philosophy of startups, which is, yeah, sure, talk to the founder, but don't forget to talk to the customers and don't forget to use the product. Can I ask a question about now that you've seen several cycles of booms and busts and participated in them? And if my memory is correct,

and tell me if I'm wrong. My memory is that your tech magazine in the late 90s, either you held on to it too long, you didn't sell at the top, and so you had a chance to make a sane amounts of money, but you held on too long and then it went to zero. And then you did another media thing in the early 2000s, Weblogs Inc, which kind of competed with Gawker.

And I kind of felt like Miami thought was at the time you sold too early or that you overcorrected from the magazine experience because you're like, well, I just got to get some. Yeah. Is that correct? And sort of like, what did you learn about climbing booms and busts from those experiences? Yeah.

As many folks who have gotten rich said, you know, like, how did you get rich? Selling too soon is like a really good credo as well. You learn these heuristics over time. And so Alan Meckler had offered me $20 million for Silicon Island Reporter, you know, before the bus. I didn't take it. I was just a poor kid from Brooklyn. But, you know, Silicon Reporter was at $11 million in revenue.

I had 75 employees. and I built it off my credit cards. So I was kind of on a rush, and I had done New York, you know, to the nines, like, you know, it was on Charlie Rose, had a 10,000 word New Yorker profile. I mean, I had checked every box in terms of, you know, filling my oats as a, you know, the next media mogul. You know, I felt pretty good about things. And then the dot-com bust happened, and I wound up selling the assets of Silicon Air Reporter to Dow Jones and got two years of salary. They fired me a week after I sold it to them and paid out my two-year contract because they didn't want me there because I was too much of too much trouble. And then I started Weblogs Inc. And when I started

Weblogs Inc, the goal was to create 100 blogs and put ads on them. And the idea of putting ads on blogs was, you know, antithetical to the concept. And people like Dave Weiner and other folks were like, hey, you can't have ads on blogs. And I was like, I think we could on a web blog have ads. And Nick Denton and I started going at it, competing against each other. And AOL offered me $30 million for an 18-month the old company. And I was like, well, that's 10 million more than I was going to get for Silicon Air Reporter. And I only had one investor, Mark Cuban. And I was like, yeah, I'm going to secure the bag. And that's how I got my first chip. And it was one of the greatest trades I ever did. Now,

Denton wound up selling for $150 million, but then gave it all to Peter T.L. Colgan and Peter T.L. And I would guess via Peter Tills. I'm going to guess that Nick and I did about the same on exits for that, except he spent 10 years of his life on it and two years on a trial and I did it for 18 months. So there's also the value of time. What was the transition like from journalists to angel investor? Because I imagine journalism probably gives you a decent set of skill sets to do diligence on a company and do your research and, you know, go out and meet and talk to people. But on the other hand, I imagine there's quite a bit of maybe culture clash between really cynical journalists. I was just going to say, we're also cynical.

Yeah, and like optimistic, changing the world, Silicon Valley types, or at least that's how I imagine it. That is actually the perfect summary. And I was just talking to Molly Wood about that today because she just did this transition. So I would say if you're a good journalist, like, you know, really good journalist who knows how to answer questions, knows how to understand a story, triangulate the truth by talking to multiple sources. I think you start on second base. I think you're basically 40, 50 percent of the way there. And if you have a network, you might be 60 percent of the way there. you had a brand, it might be 60% of the way there. So the only thing you have to learn, you're exactly correct. As journalists, we're telling stories. And yeah, we want to be cynical. We want to really assume that what's being told to us is some percentage of the truth, but Roshaman style, like the Kurosawa film, there's usually three versions of the truth,

yours mine, and the actual truth. Or there could be even more versions in a story that's super complicated, like say Theranos or whatever. So you start triangulating the truth. And And that goes back to, you know, the tweet that you quoted earlier, which is, hey, for me, there's really three things here. There's the team, there's the product, there's customers. Now, they could also be competitors in there. So you start triangulating around those things. You do have to switch from, and it happens organically because when you start working with founders

and backing them, you then put yourself in a position of power. You put yourself in a position to be the person who is not telling their story, but enabling their story. And then you move from this sort of cynical approach to this optimistic approach. Now, the fact is, half of the founders you'll meet will be some version of incompetent, not ready, you know, delusional, or, you know, in some small percentage of cases, you know, frauds, crooks, charlatans. And then the top half will be earnest, qualified, and, you know, ready to change the world.

And so your job is to figure out which group you're betting on and making sure that you invest in the right group and you're not going to get it right every time. But you do have to come to it with a radical optimism. And so you are basically making a long list of things that can go wrong in a business and then a short list of things that can go right. And then if you're really trying to go for an outlier success like a meditation app or, you know, a cab company, which were my two biggest hits to date, you're going to have to say, okay, I'm going to rip up the list of what could go wrong and just assume the founder will figure out ways to navigate that with their team and then look at what could go right.

And if you figure out what can go right, then you could hit 100x, a thousand X, a 2,000 X investment. And that power law is what venture is about. You mentioned power law distribution. And this is something that has come up a number of times when we've been talking about VC lately. This idea that the model basically rests on, you know, you throw money at a bunch of companies and you're really hoping that one of them will hit it out of the park. And I guess my question is, given the current dynamics, you know, it seems like some of the froth is going out of the market. Is that sustainable?

Like should you always be aiming for the biggest company? Or could it make sense in VC land to maybe aim for not unicorns, but like nice looking horses with medium growth trajectories that do well but aren't necessarily superstars? Yeah. It's just not possible to make the single and double concept work. Single and doubles is what public market investors do or late stage investors do. And all the fraud is out of the market. And we've now cut into the, we're now pouring out the Copacino. So it's really been quite a contraction now. It's, it is unbelievable how hard this has fallen for certain companies and how far it's corrected. And that's the best time to invest. So

absolutely, I'm, I'm not happy about a downturn, obviously, but I am extraordinarily optimistic about the returns we'll see on the companies we invest in over the next three years. This is going to be the best possible time to put money to work, and I'm redoubling my efforts, trying to invest in twice as many companies in the coming years because valuations have come back down to reality. And I'd say two out of three companies I wanted to invest in over the last two or three years. If I didn't invest, the number one reason I didn't invest was because of valuation. The math didn't make sense to invest in a company that has no product in market

at a $50 to $100 million valuation, or if it's crypto, it might be $100 to a billion valuation, which just defies logic. And I grew up with mentors like Michael Moritz, Doug Leone, Bill Gurley, you know, George Zachary, people who had been in the game for a long time. And then my contemporaries and I, Chimap, David Sachs, et cetera, who grew up investing together over the last decade.

We all looked at revenue and customers and tried to build models and the last two years, people threw that out the window, and it just didn't make sense to a lot of us. So I spent the last two years raising money for my existing portfolio and selling positions in existing companies largely. I mean, still investing in the earliest stages. But now it's yum, yum time.

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I have a thousand questions. But since you mentioned Chamath, I'm going to ask a question that's kind of about him, but it's actually much more about a lot of investors these days. And I think you've even talked about it on one of the all-in episodes. But we're in a moment where thanks to crypto, and I guess thanks to SPACs as well in the case of Chimoth, a lot of VCs are invested in publicly liquid assets. Cryptocurrencies is the most common. But of course, Chimoth for much of 2020 and 2021 brought all these SPACs, would talk about them.

They've all done basically terribly. In many cases, VCs, throughout history, VCs were invested. in companies that public retail just didn't have access to for several years. Now many of them are invested in cryptocurrencies that the public can trade. Do you think this is a problem that so many investors, historically VC-type investors, are basically either tacitly or explicitly pumping their bags on social media for retail? Good question. Yeah, it's a great question. It's really two different groups. So I'd say SPACs and crypto are very different. And I'll explain why. So let me start with crypto, because that's where the problem is.

So crypto has created an entire shadow, in my mind, illegal stack that is skirting securities regulations. I believe the overwhelming majority of tokens are securities. But they're being dumped onto retail investors. And this is being done explicitly by venture firms, I won't mention any names, who are buying into companies early, getting into tokens, and then those tokens are being listed on exchanges, and the public can buy into them. The public is buying into them a common enterprise in order to get a financial gain. They have no interest in using those tokens for any utility. These are not Chucky Cheese tokens. They're not United Miles.

We all know what's going on here. And to then liquidate your position in the second or third year of the crypto company. I'm not going to mention any specific companies here or firms, but you don't need to be a genius to just look at the activity out there. This is going to blow up in the faces of the venture community. Regulators are very permissive in our country. Our country generally, our legal system is your innocent until proving guilty. But I think there's a lot of guilty parties that flipped securities and called them tokens. And I think the, The SEC Justice Department is in the first inning of taking action against these companies. And sure, it would be better if they had given us clear guidelines.

But having been in the room for these discussions over the past five years, people suspended disbelief. They shopped for attorneys who told them what they wanted to believe about tokens and the how we test. I said, I'm no lawyer. Don't take advice from me. I'm just a kid from Brooklyn. This was actually the ultimate irony, which was that if you went to a regulator and asked permission, they would often tell you no. But if you just went ahead and launched it after doing your own legal study, they usually wouldn't say anything. Yeah.

So people knew Tracy that what they were doing was Fugazi. They knew that this was a grift. I have no sympathy on anybody who gets their wrist slapped or gets a speeding ticket or worse. because I would like to see accreditation laws be changed so that people can take a test, just like a driver's test or in the few states that have gun owner tests, gun permit tests, we could just educate people. Maybe you take a three-hour course. You take a 50-question test.

It doesn't have to be a series seven, but, hey, this is diversification. Hey, these are risky assets. These are non-liquid assets. This is preferred shares. These are common shares. You know, here's how governance works. Here's how boards were. Just so a normal person who's not in the top 6% of the country who are accredited investors

could participate in this. That's what the SEC needs to do. That's what our government needs to do. Have a path for people to be educated to participate in these things. What the country doesn't need is for sophisticated investors to then create a path for people to circumvent the securities law and then flip tokens. I have spent the last five years being criticized because I've said all along, You know, if you can't use the product, if you can't talk to the customers, you know, calling back to your asking me about that tweet I did and my experience as a journalist, if you can't talk to the customers, you can't use the product, then it's probably either a fraud where it's a pre-launch company.

And I think the majority of these tokens that are being sold are either pre-launch companies, which would value them at $3 to $10 million, or they're frauds, or they're run by incompetence, or their frauds run by incompetence, or their frauds run by competence. It's some combination of those three buckets. And I invest in the first bucket, pre-launch companies or about to launch MVPs all the time in my accelerator. But I don't take the shares of those companies and put them on a listing and tell people, have fun staying poor if you don't buy these tokens and you don't get it. Okay, Boomer and all this other bullshit that these very sophisticated faith investors did to the public. So I don't have strong feelings on it, Joe, but it's a complete utter grift. Do you think there's going to be a criminal response in some cases? Certainly. You say you think the regulators are only in the second inning. So that would imply that there's a

lot more coming. Like, what does this look like? Yeah, I mean, it's just a little head of T. I was flipping and grifting. You know, property justice and the Southern District of New York and Florida's, you know, district attorneys, like there's a large group of district attorneys who would like nothing more than to get the pelt of a crypto, you know, grifter and put it on their wall for when they run for mayor or governor. And now people have lost a lot of money. So there's a lot of people like a year ago. People didn't want this a year ago.

There wouldn't have been a political appetite for, say, prosecutions because people like when the line goes up. But when the line goes down, I assume people want to see someone pay. Well, also, you know, that's when somebody who's in your local jurisdiction says, hey, my aunt took a second mortgage on our home and bought this cryptocurrency and they lost their money. And three of her friends also did it. And so now there's an actual victim, as you're pointing out, Joe, because the tide's gone out. And those people essentially got a free option because, you know, it's a cynical view, but they got to buy the cryptocurrency. If it went up,

they could sell it, like these retail investors. And now that it's gone down, since it was illegal, all of them can now go after these companies. And so that's just starting. And we're like two pitches into the first inning. We are not even close to the second ending of this. It is going to become five years. If what I learned from the dot-com era is any guide, it's going to be years of litigation and pain and suffering.

Now, do people go to jail? We just had somebody on the FBI's most wanted list who was the Bitcoin queen. Yeah. So I don't remember a dot-com person being on the FBI's most wanted list. So if that might be the canary in the coal mine, when the FBI's most wanted list winds up being three or four crypto people, I think you've got Pete Griffith. Just on this topic, you were invested in Robin Hood. And Robin Hood is pretty highly leveraged to crypto nowadays, at least. Did they make a mistake? You know, I think it's fine for people, not speaking about Robin Hood, I think it's fine for people to participate in crypto if they're accredited investors. and if they're educated.

I sincerely believe people should be able to do what they want to do with their money. They're allowed to go to Vegas. They should be able to do that. So on the retail side, I do think people should be able to buy tokens or crypto. I just think it should all be regulated. And I think, you know, what Coinbase and Robin Hood and all of these platforms really need to think about is, you know, when they put these tokens up, who should be buying them? And what knowledge base do they need? And I think I'm a big fan of the freedom for you to do with your money what you want.

But I also think there is a responsibility of the people creating the tokens to do it. And now what is the liability for platforms? I think that's somewhere in between. So the people who are creating these things, those are the people who are 99% responsible in those early investors. I'd say the platforms and other folks, like they're 1% responsible for this. People should be able to buy and sell whatever SPAC. They should be able to gamble. I'm a gambler. You guys know that. So I feel fine about that. But I also think the silver lining of all this is people are very critical of this, you know, Gen Z, Stonks, Robin Hood, Generation, meme stocks, crypto. I actually think what we've done is we've made one of the most, the most sophisticated generation financially that's ever been created. What these 20-somethings have learned in their first couple of years or decade of investing dwarfs what the generations before them knew. I know, you know,

young people who are trading puts and calls and shorting socks and buying crypto and alternative assets. So I think all that's really good. And I think you'll learn by doing. So even if people did, you know, get burned a little bit by GameStop, I am super permissive of young people and retail investors being able to do what they want with their money. And I do think they understand the risk they're taking. So even the people who bought crypto, I think they knew what they were doing. They wanted to make an absurd return in a short period of time. And if they got burnt, that's on them. It's like going to Vegas and just putting all your money on like one hand of blackjack. You knew what you were doing. You knew it was a stupid bet. But you have the freedom to do that. And you should have the freedom to do it. That's my personal belief.

All right. So what do you think about your podcast co-host and say this is my fintech that I'm taking public at a SPAC. It's to me what GEICO was to Warren Buffett and tweeting and posting about public companies. Okay. So let me talk about SPACs generally. So that I don't get re-aggregated and say, J-Cal through Chimoth under the bus. That was going to be my title. That was going to be the title of this episode. Here's the thing about SPACs. If you want to participate in SPACs, you've decided to do what venture capital is do for a living, which is these companies are highly, highly risky. You're deciding to invest in Amazon, Netflix, IVillage, double-click, you know, pick the company, Facebook, and then all the failed companies before they were traditionally

ready to go public. In other words, you know, in recent years, people have had billions of dollars in revenue in the public. If you want to invest in a company with tens of millions of dollars or millions of dollars or $100 million in revenue, you're now playing the VC game. This is a high volatility game. This is like playing Potlim in Omaha, you know, in Macau. You're not playing in your Texas Holden game anymore where it's predictable. You're playing a high variance game. And so we were investors in the private market for a company called Desktop Metal.

We love this company. We love the founders. We love everything about it. They decided to do a SPAC. Okay, great. Now we're at $10. Companies worth, you know, whatever, a billion more than its private market valuation. And now it's trading at $2.48.

sense. Still a great company. Bird, Joe B. I'm not investors in those companies. I know people who are investors in them. Those are all getting crushed, too. Why? Because the big feature of being private when you're nascent is you get to figure things out, right? And you're not under public scrutiny. These private companies go through pivots. They have revenue, you know, surge and then collapse, and then they have competitors show up, and then they have things break, they have regulations. The greatest feature of Uber and Airbnb going public after 10 years being private was that these businesses were very stable relative to the SPAC companies that are coming out. So again, do your homework. If you want to play VC as a retail investor, you better be in it for 10 years. I invest in companies in decade increments. I still own my Robin Hood shares, still own a lot of my Uber shares, and I decided to hold both of them for the second decade, right?

But that's the problem with SPACs, is that people came into them and thought these were very mature companies. And if you looked at any of the data, you knew these were private market companies going public earlier. Now, this is how the market worked in the 80s. We just haven't had it during our lifetimes. People who told me, you know, who were VCs in the 80s, you know, the Microsofts and the Lotus of the world would go public in years three, four, five, six.

We decided to have companies go public in years eight, nine, ten, ten, eleven. So, you know, recently in our lifetimes as adults, you know, in the 90s and 2000. So I'm glad there's more inventory to people to choose from. I think going into the SPAC, you know, disastrous companies and, you know, they've all lost, what, collectively 50%, 60%, in some cases more, you know, go into those and look for bargains, I think. I think you'll find some there. But for somebody to take these electric car companies that haven't delivered cars yet and then value them at $100 billion, I was on, you know, all.

in and my other podcast this weekend startups talking about how ridiculous these lucid, Rivian, whatever, SPACs were. There was a whole cohort of them. And so buyer beware if you're going to play VC, the VC game is to get to know the founders to talk to the early customers. Nobody did that work. You got to do that work if you want to bet that early. I was about to ask exactly this question because it feels like to me with SPACs and the VC space

more broadly, to your point, it feels like. a lot of it comes down to whether or not the sponsors are acting in good faith or whether or not they just see this as a tool to get a bunch of money. And the money's there. People are throwing it around. Why not start a spec and just get a piece of it? And we can maybe, you know, figure out what to do later or maybe that's not even part of their plan. How do you actually go about, you know, evaluating founders or sponsors on that basis? How do you figure out whether people are in it for the right reasons? Yeah, I would just look at the core business. So let's take BuzzFeed, trading at $1.69 at the time recording this $228 million in market cap. That company has

$300,000 million in revenue. I think they're going to do $400 million this year, and their run rate's about $400 million. So they're trading at less than their run rate. Their price to sales ratio is like 0.6 or something, 0.7? This is crazy. Like this company should never go in public. Media is a terrible business, obviously, but you just have to look at the revenue. You have to look at the growth. I don't, but I'm looking at it. I know this sounds crazy. I'd have to look at the growth rate and the spend, and I don't know if Jonah's made massive layoffs over there.

But if he laid people off, and this was a profitable company, well, then we'd start looking at it and saying, okay, I don't know if it starts growing, 20 times earnings, 15 times earnings, 10 times earnings, maybe two or three or four times price to sales ratio. You could actually see it being a takeout candidate for somebody. So, and I'm not giving financialized here, but I do look at Peloton.

I do look at, you know, BuzzFeed and some of these that have gotten really walloped and say, huh, and how much cash do they have? Like, we're going to get to the point, Joe, where, like in the dot-com era, the company has more cash. Cash on hand and marketable securities will be greater than their market cap. In which case, you could buy the company, sell the asset, and then distribute the cash and make a killing. So I think that's why Zendesk is being taken private. I don't know if you saw that. They got over a billion dollars in revenue, over a billion dollars in cash.

they're getting sold for $10 billion or something or going private for $10 billion. So that's when you know we're bouncing on the bottom. But you just have to, again, to your question, Tracy, look at the customers, look at the product, they will tell you the truth. The promoters, the press, the analysts, the CEOs, like all of that is secondary to the customers.

Anybody who talks to customers who own a Tesla or who are an Airbnb host or who are Uber, Uber drivers or who take Uber or take Lyft or use DoorDash or Calm, they'll tell you they love the product, right? Or they love participating in the marketplace. Or if you just look at how long have they been in Uber driver, how many rides have they done? How many DoorDash delivery have they done? That will tell you a better story than any promoter or any CEO.

And these promoters will live and die with their track records. I think Chamoth will have a great track record at the end of the day. He's my friend. I am a super biased source. But I know he's very thoughtful. and, you know, people should understand if they're going with SPACs and they're playing VC, you're playing a very high volatility game. It should be counterbalanced.

That should be the small portion of your portfolio. And the rest of your portfolio should be balanced with, you know, index funds and, you know, blue chip companies and bonds and real estate, right? That's what's getting lost here is, you know, these really high risk, high reward companies and opportunities, what percentage of your portfolio should they be? When people ask me about angel investing, I'm like, if you really love doing this, low single digits is what I would tell my mom or my brother,

if they want to do the work, and make sure they can afford to lose the money. Same thing with SPACs, same thing with crypto. This is Caroline Hyde. And I'm Ed Ludlow inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation, and the future of business. Every weekday, we bring you the top headlines

from the world's biggest tech, companies. From finance to defense, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg. tech podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today

wherever you get your podcasts. So you mentioned, okay, like in this SPAC wreckage, there might very well be some diamonds in the rough that come out. And you also mentioned in the very beginning that you think this is like a great time to be investing in early stage companies because valuations have come down so much. You think this is a great time to get aggressive. But let's talk about like the last few years. One of the things that's come up on our show, is like all these people who had like substacks and rolling funds on angel list, suddenly getting into the angel investing game over the last two years, maybe starting in March 2020 with COVID or a little bit before that.

Like how bad is the pain going to be of all these different startups? Like what is the survival rate going to be? And how prepared are these founders for an actual downturn, the likes of which maybe we haven't seen in roughly 20 years? Yeah, well, 80% of startups die, you know. that are backed. So that's your starting point, right? And then, you know, your fund tends to be, you know, a typical venture capitalist has 30 names in a fund, 30 companies. And, you know, the top two companies will be 95% of their returns. So that's kind of par for the course, right?

That's what you would expect. Now, a lot of founders raised money when the market was hot, and a lot of them were in denial and thought every round of financing would get easier. And why shouldn't they think that? They got into an accelerator. They raised an angel round. They did a pre-Series A. They did a Series A. All of that was pretty easy, and it got easier each stage.

And then Series B, they had people asking them to take their money. And then Series C, they had people throwing money at them and not doing diligence. So just imagine you're a founder. You're 35 years old. And that's the market you were born into. Okay, you're going to think about the world a certain way. Okay, yeah, it's going to get harder. but how hard could it get?

Like every round of financing you've done to now has been easier than the next round. So everything you've experienced has been a complete head fake. And whatever you learned up to this point is not going to service you going forward. It's kind of like being like the smartest kid in your school and then you wind up going to Harvard. And it's like, yep, you're a dime a dozen

where you are the most beautiful actor and talented person in your, you know, summer stock and your high school musical, and then you go to Hollywood. And it's like, yep, you're just like everybody else. There's nothing unique about you. Sorry. That's what the transition people have to go through now. And many of the people who I watched up close and personal became better at raising money from VCs than getting money from customers. That is the big red flag. You have to be better at servicing your customers than servicing your investors. It's important to be able to get investment, but ultimately that investment is all in service of delighting a customer,

retaining a customer, and expanding the spend with that customer. And that's, you know, the change people have to make. I've seen a lot of people who thought they were Jedi knights, and all of a sudden, they get into a serious Jedi battle, and they lose two or three limbs. This is like serious Jedi shit. Like, you think you are a Jedi, you think you know how to use a lightsaber, and then you come up against a Sith board and you lose your hand. Period. End of story. Like, that's what's happening. here. People were pretending to be Jedi's. They're pretending to be entrepreneurs. And they are just not cut out for it. You know, we've seen obviously the announcement of layoffs, right? We know they're picking up and we've seen them. Our founders, even today in July 2022, have they sufficiently marked their

mind to reality? Or are they still, are there still many who are in a state of denial? Most are still in denial? Sort of related to this topic. There's been a lot of talk recently about the end of the millennial subsidy or I guess like the urban lifestyle subsidy. The idea that all these conveniences that people took for granted before like ordering a car through Uber or ordering food via Grubhub and things like that, that the cost of those are all going to have to go up as the companies sort of pivot from spending lots of money to grow their market share to actually making a profit or at least trying to now. How is that playing out? Like do you see evidence of that in the companies that you are either invested in or very, very familiar with?

Yeah, I mean, Uber would be the best example of it. You know, they were losing a dollar a ride, and then they went down to losing 60 cents a ride and then 20 cents a ride. And so for anybody who was an insider, it was abundantly clear that at any point in time, when the competition with Lyft and other services or DoorDash for on the each side of the business, when that competition abated and those second third-tier players ran out of money and stopped getting free capital, then the network effects would benefit whoever was in the lead, right? And so Uber clearly was in the lead.

And we actually see that manifesting itself over the last couple of years, which is to say drivers are getting paid more money, drivers are drawn to the Uber platform, the prices of Uber's have gone up, Uber's revenue has surged, And now what we'll see this year, I predict, and Dar has been pretty clear about this, is the money printing machine will turn on. Just like Amazon can do that. And I want to stop right there real quickly because we recently had Jim Chanos on the show. And he said, you know, look, 2020 for many of these so-called sharing economies, whether it's DoorDash or Grubhub or Uber or whatever, like, that should have been the most amazing.

Everyone was home ordering stuff online with stimulus checks from the government. And they couldn't make money in 2020. And his line is like, if they can't make money in 2020, when? When will they? And so why do you think? It's a, wait, why? Do you believe that, I mean, do you still hold your Uber shares or some of them? Yeah, I do. So why, like, what's it, you know, you think they're going to, that's doable, that they can turn the corner and that they're with their existing. There are two things to look at. Yeah. Number one, stock-based compensation is for these companies has been a large portion of their losses. And so if stock-based compensation changes a little bit and that's been a big back channel in Silicon Valley,

end with the large fund holders of private equities is, hey, maybe we need to talk about stock-based compensation. Now that all these layoffs and hiring freezes have happened at the fangs and, you know, certainly layoffs and salary cuts even, I think are going to start next. That's going to be the true sign that we're in something dark is when people's salaries get cut. Wait for that. That will be the true time. That's the true sign. And that's coming. You think cash salaries are going to get, are coming down? 100%. I think the way it works is, and this is like the cynical insider stuff that people don't like to talk about. But what people do is they lay off a bunch of people, then they reset the

salaries and hire people back at lower salaries. And so that's de facto a salary cut, right? So if you lay off a third of your staff and then you put the positions back out, but they're at a lower price and people can work from home and they can work from anywhere, that's the way for like a Facebook or an Apple to reset it without saying to the people who currently work for them, hey, by the way, we're cutting your salary 20%. They just say, Apple just says you have to come back to the office. Oh, you don't come back to the office, okay, I guess you don't want to work here anymore. You were overpaid. Now we're going to put those salaries at a different number. In some companies, if things get really dark, they might just say, hey, the management team's taking 20 percent cuts and everybody else is taking

10. And then they just challenge people. If you don't like it, you can leave. And if things get really dark, I think it's a 50-50 that we'll see this happened in the second half of the year. You know, I've seen the layoff approach. First, it's a reorganization, then it's layoffs, then it's mass layoffs, then it's pulling the offers that have been done. done. Remember, those were a lot of big headlines. Oh, I had an offer at this company. It got rescinded. The next piece is the salary cuts. So that's a true bottom sign. Look for that. It's not guaranteed, but it could happen. And so we got to this with Uber and if they couldn't make it in 2020. I think a lot of these companies got too big. Facebook, Google, Uber, Airbnb all could operate

with 20, 30, 40 percent less people. And in a market where the public markets want to see cash flow, it's just time to shift gears and do that. Airbnb, like, oh, a third of people during the pandemic, I think. Uber did something similar. And so these companies were getting rewarded in a low interest rate environment where they could just keep raising capital for growth, top line. Now people want to see the bottom line. Uber is perfectly positioned to do that. And what you have to do if you're one of these rocket scientists is to say, are you going to take less Ubers or do less DoorDash or less Uber eats if it costs $1 or $2 more? The answer for 90% plus of use cases is I'll absorb the $1 or $2.

And the proof of that is that's actually happened. Ubers have become more than $2 or $3 more expensive. Now, for Uber pool, will it make a difference? If somebody was paying $6 and now they have to pay $9, yeah, there are some people who might say, I'm going to take the subway. But that's not the people who are the profit anyway. The profit is in the whales and the bigger rides and the more luxurious rides, the Lincoln Town cars, etc. So, yeah, it's pretty easy to figure this out.

If Uber charges $2 per ride or delivery or DoorDish, that's the same thing, which they're all doing, and they cut their staff and they cut stock-based compensation, these things become money printing machines. Now, I get Jim's point. Jim's point is like, why didn't you do that before? Well, we weren't being rewarded for that before. The investment community told us to do the other thing. And so when you saw Dara come back, I think it was last year and he just said, listen, I met with all of our large shareholders. They said they want free cash flow.

They want profits. I'll give you that. He's pragmatic. You know, he's a dog. You know, he knows what he's doing. He's not his first time at the rodeo. And so he's willing to make the cuts and raise the prices. And that's what everybody's going to do.

And they get rewarded for that. And then you know what will happen? Everybody's going to be like, why aren't you growing faster? And so it's just the pendulum of being a CEO and a board. They're going to be like, oh, we want more than 27 percent. over year growth. Can we get to 34%? So you got to play the game as the rules are saying to play it on the field, you know, and the rules of the game are now show us profits. The companies that showed profits, you know, didn't get the funding previously. What's your base case for how bad

things might get? And then secondly, you know, you mentioned that in the current down cycle, you're still taking a bunch of meetings and there's still opportunities out there at an even lower evaluation. How much money is actually out there on the sidelines and ready to get deployed in the current cycle? And how much does that help? There's a ton of what I call, you know, dead or boring money, money in bonds or boring assets and safer assets. And so, yeah, people are scared right now. I think there's a lot of existential and macro issues. We talk about it on all in, you know, every week. And so, you know, some people, like David Sacks is incredibly obsessed with the Ukraine. It's like become his entire Twitter feed. And it's like, I thought you were a SaaS investor, David.

Like, you know, but this is a perfect example. Like, he is very scared about that escalating. He's a very smart individual, is one of the smartest people I've ever met in my life. So smart people right now are very concerned. Some of them are concerned about Taiwan. Some of them are concerned about, you know, or they were concerned about COVID. Everybody's got a different thing that makes them scared in the world. I don't operate that way. Because I get to invest in the early stages, I know great companies are built all the time. And great companies are built when there's wars going on in the world, when there's famines going on in the world, all these terrible things can occur. And Google and Uber and Facebook and Robin Hood and other great companies are going to be

made independent of those things. Entrepreneurs are going to keep creating. And in fact, when the market is the most troubled, that's when your selection gets easier. Because if you're creating a company in 2008, 2009, 2010, well, you have to be a true maniac. I mean, you have to be a true mission-driven founder who is going to do this no matter what. And I've just seen it so many times in my career. People who were starting companies in the early 90s were maniacs. People were starting them after the docon bust in 9-11, were complete utter maniacs, myself, and included. And people who started them after 2008 were completely and utter maniacs. And that's when the great companies are formed. And then they grow through the down and up markets consistently.

That's really what it's all about. So I don't worry about these things. I do not live in fear like a lot of my other contemporaries and get obsessed with these things. I just like to focus on the founder and the customer and the product. It's really, you know, it's one of the great things about just being a simple kid from Brooklyn. I don't need to overthink this. I don't got no Ivy League education. I didn't go to Stanford. I didn't get perfect SATs. I just look at what the product does. I look at what the customer thinks of the product and I place my bets. And you know what? That's a better way to do it in my mind. It's simple. You just put the ball in the basket, take a good shot, rebound the basketball, and then on the other side, you know, take a good

shot and put the ball in the basket and re-and-and-then. And then you get to buy the Knicks. Yeah, yeah. Yeah, fuck yeah. Let's go. I mean, that's what else would I do? No, I mean, I just would like to see New York win a championship. I did a little spreadsheet a year ago during the pandemic. I was kind of trying to figure out what I would do. With the last decade or two or three of life, I have left when my friend Tony Shea died the day after my birthday and it kind of rocked my world a little bit. And I just thought deeply about what I want to do and what actually gives me joy and fun. And yeah, I like skiing. And I like hanging out my friends and laughing and doing podcasts and writing books and watching the Knit game. You play poker with Phil Homance, right?

Yeah, every week. We hit him on the show years ago. Yeah, Phil's the best. I mean, he's amazing. Great human being. I mean, even with all the outburst and craziness, which I thought when I met him was for TV, and now I realize he's just,

it really is truly who he is. I mean, we've had some epic battles at our private poker game. But when I had my little, like, existential 50-year-old, you know, J-CAL crisis, I just thought, well, fuck,

if I keep infesting at this, rate and I go up 50% or I double the number of dollars I invest every year. Yeah, there's a chance I could be traced commas and I could buy the Knicks or make a run at them. So why not create an outrageous goal? So my two outrageous goals are to invest over the next 10 years and be one of the top five investors in the history of Silicon Valley and have a long shot chance of leading a syndicate. That's why I bought the domain name, the syndicate.com and I invest in 100 deals a year at the syndicate with 11,000 accredited investors. It's the largest one in the world. If I keep doing that, I might be able to lead a syndicate to buy the Knicks someday, and that would be a great thing to do

in my 60s. Either that or run for office. So it's one of those two. My daughter's a knicks fan, so hopefully you can turn them into winners. Jason Calcanus, that was a lot of fun. Thank you so much that was entertaining. It was very entertaining. Thank you so much for coming out on a lot. My pleasure. That was great. Thanks, Jason. Hey, don't forget to rate and subscribe, everybody. Oh, yeah. I'm a podcast, I've got to ask them to rate and subscribe. Tell a friend about the podcast. That was fun.

Yes. I'm thinking, sorry, I'm thinking, do you remember that Simpsons episode where like Homer Simpson goes to work for Hank Scorpio and he wants to buy the Dallas Cowboys? He confesses his dream is to buy the Dallas Cowboys. And at the end of the episode, Hank Scorpio buys him the Denver Broncos. No, I don't remember that one. I was thinking, you know what, the Simpsons episode? I thought they were going to reference.

Oh, go on. Well, you know, Jason was talking about if I just do this 10 more years. I thought you were going to refer to the one where Homer bought Halloween pumpkins before Halloween and just thought they were going to just keep holding the pumpkins and draw a straight line up. Well, actually, that's not a bad episode to reference. Because one thing that keeps coming up in all of our episodes lately is just the like cyclicality of human nature. And this idea that for years, investors were comfortable with these companies, growing market share, spending money, raising more money in public or private markets in order to do that. And then suddenly it's like, oh, no, no, you really do have to return a profit.

And then, you know, I think Jason is right. At some point in the cycle, people will come back and be like, no, no, it's time to grow again. This is your opportunity. It was a good point he made about to the Chino's point about like, oh, well, why weren't they making money in 2020? And it's like, market wasn't telling them to make money. The stocks were going straight up. I hadn't really thought about that. But, you know, it's something that comes up.

It comes up on our energy episodes. Yeah, exactly. It's like, what are investors rewarding at a given time? And so if that 2020 on paper, yeah, it's a good environment for some of these gig economy companies, but if the market is still in that mode of, no, we're not going to reward you for cutting spending. We're not going to reward you for slamming the brakes on growth in the name of profitability. Maybe I could see how that's a counter argument for why weren't they profit. at that time. Absolutely. It just feels like there's a tendency for people to run too far in either

direction. And it's really hard to stamp out because to some extent that's human nature, right? Yeah. By the way, the issue with all these legacy VCs getting into unregistered securities, arguably, with crypto tokens, and then tweeting about them and then retail investors buying them on exchanges, I thought Jason's comments were pretty pointed on that. And like, it does, seemed to me like this could be lawsuit season or investigation season. And I do wonder if any of these are legacy VCs will regret pivoting towards talking about publicly traded instruments as much as they did. I'm very curious to see how it shakes out. I still think the regulators should have been there from the beginning. I mean, some of these tokens quite clearly resemble securities offerings.

Well, you vote and dividends can theoretically accrue to them. So that sounds like a stock to me. Yeah, absolutely. So why not say that that's illegal or it should be a registered security and where were the regulators? Where's your 10Q or whatever? Yeah. But yeah, I mean, it does feel like some sort of shakeout or reckoning is coming, but I guess it's hard to predict. Yeah. All right. Should we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allo. And I'm Joe Wisenthall. You can follow me on Twitter at The Starwark. Follow our guest, Jason Kalakana's on Twitter. at Jason. Follow our producer, Carmen Rodriguez, at Carmen Armin, and follow all of the podcasts, Bloomberg, under the handle at podcasts. Thanks for listening.