The Prof G Pod with Scott Galloway - Prof G Markets: Reddit Reignites the IPO Market, Microsoft’s AI All-Stars, and Private Equity Perks

Episode Date: March 25, 2024

Scott breaks down why he bought shares in Reddit’s IPO and what he thinks its first day pop means for the IPO market. He then takes a look at Mustafa Suleyman’s controversial move from Inflection AI to Microsoft. Finally, he explains why Calpers is increasing its investments in private equity — the best performing asset class of the past decade — and questions whether those returns are sustainable or cyclical. Listen to our interview with Mustafa Suleyman from September Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, 300,000. Not so many condoms will be available for athletes at the olympic village in paris this summer true story i had a neighbor and he asked me out of nowhere if you woke up and found a used condom in your ass would you tell anyone and i of course said no and he said you want to go camping damn it's good it's not that good okay and today we're discussing reddit's ipo that's right that's right we're discussing reddit's ipo microsoft's new ai talent and cowper's private investments here with the news is avid camper prop g media analyst ed elson ed

what is the good word it was my birthday yesterday so i'm pretty happy about that how was that what do you do when you're your age when you turn turn 14? You know, I just sort of did my favorite thing, which is worked on this company last night. Yeah, I bet. What'd you do? That is, I'm not lying. I'm going to celebrate this weekend, but I was recording TikToks with you. Yeah, that's right. And I did some research for this.

You're so hip and young. But what do, I'm kind of fascinated. I feel like I'm watching National Geographic. How do young people party? Like what? Oh my God. What, like, give me, break it down. Because people, I'm getting more and more people who are more and more curious about you. Where will you go to dinner and play your own music and stuff. So that'll be pretty fun. And then a friend of mine is having a party at some sort of secret location. So I don't really know about that. But I don't know, we go clubbing,

we go to house parties, probably the same shit that you do. Are you going to get me a birthday present, by the way? Boss, I get you a present every day. It's called a J-O-B. It's called a J-O-B. Am I going to get you a present? Yeah, that's just so me, isn't it? Well, I thought you would present every day. It's called a J-O-B. It's called a J-O-B. Am I going to get you a present? Yeah, that's just so me, isn't it?

Well, I thought you would have turned the corner off your cat experience now. No, I did not see. I saw Nana and I saw my death, but I did not see gifts for my 25-year-old employees. That's something. I miss that part of the trip. I miss that part of the trip. Well, as always, next year, I guess. Yeah.

Get on with the news. Let's start always, next year, I guess. Yeah. Get on with the news. Let's start with our weekly review of market vitals. The S&P 500 hit another record. The dollar rose. Bitcoin dipped. And the yield on 10-year treasuries fell. Shifting to the headlines.

The Federal Reserve held interest rates steady and signaled that three rate cuts will come in 2024. Still, Fed Chair Jerome Powell did not indicate when those cuts will begin. The Department of Justice sued Apple, stating the iPhone ecosystem is a monopoly. The suit also identifies anti-competitive practices across Apple's other businesses, including advertising, search, and news. Apple shares sank 4% on the news. Unilever is spinning off its ice cream business, which includes Ben & Jerry's. The consumer goods company is also laying off 7,500 employees.

That's about 6% of its workforce. Shares rose 6%. NVIDIA held its annual GPU technology conference, where CEO Jensen Huang introduced the company's next-generation AI chips called Blackwell. The company also unveiled new robotics offerings and a software to help companies develop their own LLMs. And finally, shares of Astera Labs, the data center chip company that we discussed last week, soared 72% above its IPO price on its first day of trading. It was the fourth largest listing in the US this year, and it set a high bar for Reddit's IPO, which came the next day. More on that later. Scott, where do you want to start? The Apple thing is kind of interesting. It appears

that Apple, who has definitely sort of avoided or stayed out of the crosshairs of the DOJ, it feels like people are no longer buying, nice guy, Tim Cook, Apple is just here to protect your privacy. It feels as if my understanding of the case, and our editor-in-chief, Jason Stavros, came on off mic to help me understand it, is that essentially Apple is debilitating or making it more difficult for super apps to emerge. And we've always said this. We've always said that the competitors to Android and iOS are these super apps that can do everything, are sort of your iOS to the digital world. They can do music, order food, order transportation.

You know, we think of, is it Tencent? WeChat, owned by Tencent, yeah. Yeah, WeChat. And that is sort of a, iOS and Android have gotten very used to – they're sort of in a detente. And that is iOS says, all right, you can have 90% of the world or you can have 85% of the world Android. We're going to have the 15% of the world that matters. And that is we're going to have the billion wealthiest people. You're going to have the six and a half billion less wealthy people.

And they sort of get along. And it's a much different approach. Apple is about subscription. They claim much more privacy. It's about signaling aspirational value. And Android is just this incredibly utile piece of software that you can get for free. And not only that, if you use Android, you can get the phone that hosts the Android operating system basically for free. And they live in sort of, I don't know, they coexist, if you will. But Apple doesn't want to let anyone come in and start offering super app-like capability because to a certain extent, that diminishes the value of iOS in their app store. And these folks have said they are unfairly

making it difficult for them to operate within the iOS environment, charging them more, you know, making certain kind of payment features difficult. And they've sort of said, fine, we're taking it to court. One accusation I found kind of interesting, they said, quote, Apple protects its smartphone monopoly by degrading cross-platform messaging apps. And the example being, you know, when you text someone on an Android, it kind of sucks. Like the messages are green. You can't use the thumbs up reactions or the heart reactions and all those other small functions. One exchange that they highlighted is actually something that we saw live at Code. And it was this interaction between Tim Cook and one of the attendees. I don't know if you remember this, but there was this guy during the Q&A

who was saying that texting his mom on his Android sucks and that he doesn't like that the messages turn up green. Not to make it personal, but I can't send my mom certain videos or she can't send me certain videos. And so we leave her... Buy your mom an iPhone. And the DOJ saw that quote as evidence

that this is a monopoly and that they're forcing consumers into a monopoly. I saw it as evidence that Tim Cook is funny and smart and also that Apple is just great at establishing moats. So I'm wondering if you think, just as an example, that green messaging function, which other than looking ugly in my view isn't really a big deal. Do you think that that is reasonable grounds for antitrust enforcement? Like a green, you know, a green text message or a differentiated box, other than it sort of says, this individual isn't wealthy, you should not meet with this person. I mean, that's at the end of the day, when you go out and you're, and you go to your cool thing where you play music and eat sushi, and you head out i don't know by the way just a just a little life lesson here here we go yeah just a little life lesson like

i can't afford condoms because i've got 14 kids to feed so i was excited to work that in um no but when you go out you're this is what happens in mating you start immediately you'll be like oh oh yeah, I work at Prof G. I'm kind of a big deal. Yeah, everyone knows what Prof G is. Yeah. Oh no, that's a, that is literally what you call the weak. That's like the weakest flex in the world.

You know, if they know it, if they know you, it's a, it's a big flex, but yeah. Yeah. It's like when I tell people, you know, I was on the board of gateway computer and be like, oh, well, good for you. Anyways, you'll go out, but I'm half kidding here. I think the power of Apple is it's the strongest. You will meet people, you'll talk about where you work, you'll talk about, oh, I went to Princeton,

which means my parents are rich. And you'll start dropping what I call, mating is essentially at your age, a series of controlled boasts. And the most subtle boast is, quite frankly, is an iPhone. It just says, because if you don't have an iPhone, it's sort of like, oh, it's unlikely this guy has a home in Montauk and can take me to St. Barts. I mean, that's what having an Android phone sort of says. And this is incredibly powerful. The brand is incredibly strong. The question is whether or not this qualifies as anti-competitive

behavior, where they basically make it impossible for anyone to compete. That if somebody, if because they control the rails and they have the dominant operating system among the wealthy, and they control the underlying operating system, do they go into certain verticals and make it impossible for anyone to compete with them? That's anti-competitive behavior. And I think that's what these guys are saying. The Fed held interest rates steady, but signaled three rate cuts will come. I don't know how interest rates responded to that. It feels like interest rates are coming down, not as aggressively or not as fast as I had predicted, but they're still signaling that

they're going to, you know, three rate cuts is nothing to laugh at. And typically the market tries to be a predictions machine and says, okay, we're going to bring interest rates down ahead of those rate cuts. My favorite here is Unilever spinning off its ice cream business. I mean, granted, I'm a narcissist. I actually think we had something to do with this. I had a few people who work at Unilever reached out and asked about our stories on GLP-1 drugs. And I think they have done the math. I think they've said, okay, there's a small group of people who just gorge on ice cream and are disproportionate number or represent a disproportionate share of their sales. And I would

imagine an economist and someone very smart there has said, these are the people that are going to be on GLP-1 drugs first and ice cream, or specifically our best customer who gorges on ice cream is going to stop. There's a non-zero probability in the next 24 months, they're going to get a prescription and stop gorging, which won't take our sales down. It's not 2% of the public on GOP1 drugs won't take our sales down 2%. They'll take them down 20 or 30%. In addition, their ice cream group, I guess, was growing around 2% a year, and their core business is growing 6 to 8. Really good CEOs are always thinking about the disposition of assets, of actually shrinking.

What do I mean by that? Jeff Bukas, the guy who ran Time Warner, he sold the magazine group. He saw the magazines were going into decline and he said, but they still generate a lot of cashflow. I'm going to sell them. He saw when cable businesses were trading at crazy multiples, he said, cable companies are going to have a tough road and they're creating a good value. Let's spin it off. Let's sell it. Now, having said that, they do get compensated if the share price goes up, but that takes a certain type of maturity. Now, in this instance, if you have a company that's growing at 8% and you have one division that's growing at 2%, the disposition of that division will take your growth to 9% or 10%, which should naturally increase the multiple

on your earnings. So the money you get from the sale, hopefully you get a good price, plus an expansion in your PE multiple, because now you're growing 10% instead of 8%, because you shed the group that was only growing 2%, that is accretive to shareholders. That's a good thing for shareholders. And most CEOs just naturally don't think this way. Just on the ozempic point,

the relevant statistic here, I think, is that according to Morgan Stanley, the number one food that Ozempic users cut back on as measured by average spend is ice cream. So yeah, I don't think this is a coincidence that the worst performing business for Unilever last year was the ice cream business. You mentioned sales rose 2%, prices rose 10% for ice cream.

So, I mean, this was a terrible year, and it's a great example of those ozempic downstream effects in business, which we've been predicting and have been discussing for almost a year now. The second story I find really interesting here is energy consumption, which we discussed last week. And this is coming at a time when Unilever is trying to reduce its carbon footprint. It's trying to shift to renewable energy. And apparently, cooling the ice cream accounts for 10% of the entire company's carbon emissions, which is just crazy to me. It's one of the biggest energy

consumers for the whole company. So if there's anything I've learned from this week and last week, where we discussed keeping data centers cold, it's that cooling stuff, whether it's ice cream or a data center, is just a huge pain for a business. And it feels like, you know, with these sequential stories, this is probably going to become a theme now, where investors, management are going to spend a lot more time trying to figure out, okay, which parts of our business are consuming more energy than they need to? Is there any way that we can shed those and offload those businesses? And in this case, it turns out that the highest energy consuming business is ice cream.

Yeah, it feels like the moons are lining up against ice cream. I think this is a really smart move. Um, do you eat a lot of ice cream? Not really. I've been eating really healthy recently. Yeah. By the way, did, um, have I told you that since my ketamine therapy, I haven't had alcohol? I was actually going to ask you that because you sounded really hung over on our Monday morning. No, that's how I sound when I don't drink the night before. I'm not exaggerating. I've had, I don't, I don't think my body, I think my body became so used to alcohol on a regular basis that I'm having headaches and withdrawals. It's like, where does the, where does the devil water daddy? That's, that's called, I think it's called being an alcoholic, but yeah. Withdrawal? Yeah. I don't want it. I think this is going to be enormous.

We keep talking about this, but. What is? Well, GLP-1. GLP-1, yeah. I thought you were saying ketamine is going to be enormous. Yeah. Maybe that too. During the trip, it's the only thing, and it seems to be the only thing in the universe.

But I believe Unilever is selling their ice cream unit, mult-billion dollar unit, because of GLP-1 trucks. They wish they'd sold it a year ago, but they're like, every day we're going to get a lower and lower price because they see the writing on the wall. Can we talk about NVIDIA? Let's. 10,000 people attended in person at the San Jose Shark State. 10,000 people for NVIDIA and around 100,000 tuned in virtually. I mean, one of the reasons this company, obviously being an AI, excellent execution,

explosive growth, but Jensen Huang is a great storyteller. And he's got the visual metaphor with the jacket. He's handsome. I just think he's great at it. He's the real deal. This isn't an overnight thing. He's not a child. He's not sending pictures of nooses and pills to 14-year-old girls. He's alike. deploy their own LLMs, it'll cost about $4,500 per GPU per year. So they'll say, all right, it's like we're moving to a software model. And this answers the question that they're trying to wrestle with every day. How on earth are we, NVIDIA, going to grow into our valuation? And there's two ways to do it. One is the explosive growth of top line and bottom line, their top line growth, which should translate to growth in their bottom line, but also the business we're in such that our multiple on those earnings goes up and the market loves subscription. A dollar in profit from a transactional business, non-recurring to selling the chips gets X valuation. The dollar

you get from subscription services gets one and a half to two X. So their attitude is, all right, if we're going to grow our top line by X, if 20 or 30% of that top line growth can be subscription, it's going to expand our natural PE and we can start to grow into this valuation. It's one of the, you know, we have this thing called the T algorithm where we look at the components of a trillion dollar company. And typically the companies that are moving towards a trillion or blown by it have some sort of subscription element. And I would say the first thing you should do, or one of the first things you should do in a company is to try and figure out how you build a recurring revenue bundle or subscription plan into your business. And even if

it's a small part of your business, as long as it's growing faster than the core part of the business, the transactional part, the market smells it and starts to expand your multiple on earnings. In addition, internally, you start thinking differently. You start thinking about the customer relationship. Instead of thinking, how do I get someone into my store to buy a bicycle? And then once they've bought a Trek bike, okay, how do I sell another one? If Trek says we're going to have a subscription service and we're going to charge people, hardcore bikers, I don't know, 50 bucks a month for a great bike, tune-ups, access to a community, that taps into a flaw in our species in that as time goes much faster than the human brain perceives it. So the example I use is Equinox. I think, okay, Equinox, I think it's

about 250 bucks. I go to the Equinox in Soho. Some of the best looking gay guys in the world, Jesus Christ. I mean, really good looking men. That's neither here nor there. And for 250 bucks, I get to go to this great gym and I think, well, okay, I work out three or four times a week. That's 12 times a month. That's 20 bucks. No, I don't. Between traveling and also living in London, which puts a little bit of a crimp in my Soho Equinox visit. I'm at Soho Equinox twice a month, which means technically I'm paying 120 bucks. And if they said to me, oh, great to see you, Scott, it's 120 bucks to work out today. I'd be like, well, I think I'm just going to go home and do some sit-ups. But because they've convinced me to move into a subscription model because I do the it's 120 bucks to work out today. I'd be like, well, I think I'm just going to go home and do some setups.

But because they've convinced me to move into a subscription model because I do the wrong math because humans can't perceive or calibrate time, it's a great business. You always want to be in the subscription business. So I thought that was super, super interesting. Any thoughts on NVIDIA? So the takeaway for me is just a very basic level,

just how culturally significant this company has become in basically a matter of months. I mean, if you had told us that Jensen Huang would be selling out the SAP center a year ago, we just wouldn't have believed you. And if you just measure the audience size, this was even bigger than the iPhone launch. So, you know, technology aside, I think you just got to hand it to Jensen Huang. He is riding this AI wave for all it's worth, and it's working really well. The thing that strikes me is it's so uniquely American. This would just never happen in London. You would never have the O2 Center sold out for the CEO of Unilever. America is so obsessed. We have financialized everything. It's all about money all the time. I think if the CEO

of Novo Nordisk said, I'm taking over Copenhagen or where are they? Where the fuck is Novo Nordisk? Denmark? Yeah, yeah. Denmark. I don't think they'd sell out a stadium. I think they'd be like, okay, good for you. Now pay your 90% taxes and shut the fuck up. Yeah. So this is a, it really is an amazing thing. But again, it's the moves of subscription and they're trying to figure out how to grow into their market capitalization. Oh wait, shares of Astera Labs. Oh yeah. That's a big one. I mean, that thing was up 72%. And I looked at this thing, and it went from 80 million to, I think, or 85 million to 120 million. So it has good growth, 40% growth. But that's not like NVIDIA-like growth. But after its pop yesterday, it's got about a $9.5 billion market cap. This thing's trading at its 70 times revenues.

I mean, come on. That is striking. So be clear. I don't know for a peak AI, but I mean, we are in the Himalayas here around AI in terms of valuation. This is a small company and it's growing, but it's not explosive growth. And it gets a $9.5 billion market capitalization. I thought this was extraordinary and even more so, and this will go into our next story. I think it kind of turned on the landing lights for the IPO market and up 72% on the, I think it was the first trade or when it closed on its first day of trading. That's extraordinary. And that is a really good signal for the IPO markets,

specifically the investment banks that make a lot of money and have a whole ecosystem around IPOs. Yeah. And we should just shout out Mia Silverio, who is our research lead. She did the analysis on this stock. She's the one who brought it to our attention last week. I like what you said last night. She needs to open up a hedge fund. And you and I can just run the media arm. Yeah, we'll just be in marketing. Yeah,

we'll be like the podcasters in residence or something. She can do all the real work. She's our chief investment officer. But yes, she's now brought to our attention two companies she thought were going to see an acceleration in their stock price. One was a downstream manufacturer for Ozempic and this one was, you know, these guys make chips that help you figure out manufacturing of AI or something like that. You nailed it. Yeah, yeah. AI, AI, whatever. Yeah, 70%. Yeah, so Mia, please find one more, and I'm going to absolutely double down on this.

We'll be right back after the break with a look at Reddit's IPO. We're back with ProfitGMarkets. Reddit finally went public at $34 per share, the top of its expected range. The stock opened at $47 per share, however, and popped as much as 70% in its first day of trading. At its peak on Thursday, the company had a market cap of nearly $11 billion. That's well above its IPO valuation of $6.5 billion and even surpasses the $10 billion valuation the company

received in the private markets back in 2021. Scott, we've been talking about this IPO for a long time now. What do you make of these initial results? The IPO market is back. I mean, Reddit was in many ways a really important IPO in 2024 because a big recognizable consumer internet company, it's the first social media IPO since Pinterest went public in 2019. And at one point it was up 70%. It closed up 48%. Tomorrow, not even tomorrow, today, a bunch of boards without even knowing it have decided that they're going to tell their CEO to file an S-1 and that they're going public. You're about to see a dramatic uptick in the IPO business of JPMorgan, Goldman Sachs, and Morgan Stanley, because there's a lot of good companies. I mean, you had,

I think, something like 330 IPOs in 2021, and 90% of them or 80% of them, because they were SPACs, below their offering price, and the market just felt like it got its eyebrows burned off. And there were only, I think, 70 IPOs last year, which is the last 24 months have been two of the driest years in the world of IPOs in a long, long time. A lot of pent-up demand, a lot of money on the sidelines, a lot of good companies waiting to go public. And these companies dip their toe in the water, and now they are doing the Mark Spitz-like butterfly. I mean, these are big, big one-day gains. In some, baby, we're back. The animal spirits are back. You're going to see a bunch of companies that are ready to go, line up, do their confidential filing, whatever it is. This was a big day for the IPO market. Now, when you look at the company, it's now trading at a price to sales ratio of, what did it do, 800?

No, actually, it's now trading at about 11. It was priced at eight times revenues. And that just gives you a sense for media, even digital media versus AI, right? Estera is trading at 70 times revenues. Reddit, even after its pop, is trading at about $9.5 billion, trading about 12 times revenues, right? So there's just a difference. But 12 times revenues for a company that's growing, it grew about 20% last year, is pretty healthy. And the question is the following. It's a global brand. It has the most traffic in the US of a company that's not owned by Alphabet. So some very positive things. But the analogy I use is my dad. My dad was always

trying to give me these tests to see whether I was going to be successful or not. It was really difficult, Ed. It was really difficult. He used to tell me if I couldn't run a six-minute mile by the time I was 14, I lacked grit and was not going to be successful really yeah yeah this explains a lot explains a lot yeah actually i think some of that was good i think a little bit of like a little a skosh of abuse abuse ish i think it's a little bit of abuse is a good thing for a boy um anyways did you did you finish it the six minute mile yeah yeah my dad something'm, now I'm being serious. Yeah. My dad used to do, he had this old handbook of the Royal Navy workout. It was basically burpees.

We bought a pull-up bar, pushups, sit-ups, and we used to do them together. And then we would go for a run on the beach before he left my mother for a stewardess of Continental Airlines, but we're going to ignore that. And it was wonderful. I still work out three or four times a week and it's because my dad got me started really, really early. It's something I do with my boys. My son pretty much every night at 9 p.m. FaceTimes me and I take him through just a quick 10-minute workout because it's been a it's been a real gift for me in terms of managing managing my depression and just feeling better about myself anyways it's it's um oh my god here uh the price to sales of reddit there we go that was a segue uh hold me ed Hold me, Ed. Hold me. Hold me. Oh, yeah. My dad. Okay. My dad used to say to me, he used to say, all right, he used to say the difference between glass half of like a good salesman and a bad salesman. My dad was Scottish and handsome, which spelled salesman and had no education. And he was a salesman. He literally sold shit. He sold Scott's fertilizer. He'd go

into, he was a charming guy. Everybody loved him. And he'd go in and he'd sell like a ton of fertilizer. But anyways, he said to me, all right, a shoe salesman goes to Africa. And then he comes back and he goes, yeah, it's not going to work here. Nobody wears shoes. And he goes, another salesman goes to Africa, comes back and says, this is amazing. No one has shoes. The way I bridge that to Reddit is the following. Reddit is probably the worst monetization of any platform in digital or any big platform. I think Meta gets something like 50 to 80 times the monetization per user on its platform as Reddit. Reddit has done not a very good job of monetizing its enormous traffic. It's a relatively small business,

you know, 800 million, given its traffic, right? Now, is that nobody buys shoes here or no one has shoes? Or this is great, no one has shoes. Does that mean that if they just start monetizing at a mediocre, if they monetize even at what Snap or Pinterest do, their revenues are going to explode. So that's the question here. Is the lack of monetization an opportunity? Or does it say something structurally about Reddit that they will have a difficult time figuring out? You mentioned the idea of like, is it a structural problem with Reddit?

And this company has been around for 20 years. I think a lot of people or a lot of the bears will argue, yeah, this is structural. I mean, yeah, 800 million in revenue last year on 850 million MAUs, and they lost $91 million. The company's still unprofitable. It has been for two decades. Now, the company has said that they're looking to diversify their revenue streams. And one example that they point to is that they're now pursuing these data licensing agreements with companies like Google, and we had that conversation a few episodes ago.

But those agreements are only expected to bring in, on an annualized basis, $66 million in revenue this year. So that's just not enough. So I guess the question for you as a bull and side note, I'm wondering if you've bought any of the Reddit stock, but what other revenue generating opportunities do you think Reddit can actually look into here? So side note, I did buy shares and the answer to your question is I don't know, but the reason I bought shares here.

Okay. First off, let's talk about the negatives. They haven't figured out a way to monetize this audience. I hate the UI. It's like Lycos and AltaVista called and wants their user interface back. I mean, it's just, the site is ugly. It's, you know, they have not, it's a small business given the traffic. So there's a lot, it's an advertising, it's not subscription. There's a lot not to like. Six and a half billion, valuation of pricing, which is just not a lot.

And the question I would put forward to you that I put forward to me and the way I answered it said, okay, we should buy this. One, it's a global brand. I'm still a brand guy. I think that matters. And two, would you rather have a platform with a small amount of traffic, I mean, really small, but did an amazing job of monetizing the users, or the third most trafficked site in America that was doing a shitty job monetizing? Which would you prefer to own? I mean, I think I'm with you that I'd rather the Reddit. And I always like to draw conclusions or draw analogies to total non sequiturs. But if you look at America, right, if you look at the biggest problems of ALS, income inequality, food insecurity with our kids, teen depression, a discourse that's become increasingly coarse, right, homelessness, all these things. I'm not saying those are easy problems, but I can look at any one of those problems and look around the world and find a lot of countries who have mostly figured

it out. What we have figured out is the really hard problem that no one else can figure out. And that is, how do you bring together this alchemy of grit, talent, capital, innovation, technology, culture, to create companies that five minutes after their earnings increase the market capitalization by $240 billion. So would you rather have a country, like where does, in 20 years, where do you have a better shot of having just a wonderful society in a nation that is not able to create

nearly as much economic value, but has, for whatever reason, figured out some of these social ills, or a nation that just prints Benjamins. I mean, just for whatever reason, continues to innovate and create massive prosperity, but hasn't figured out a way to solve some of these social ills. Which would you rather have? I would rather have America. I feel like the most frustrating thing for me about America is like, we figured out the hard stuff. We figured out the hard thing here. And there's absolutely no reason we should have food insecurity and homelessness in a nation that can figure out a way to create a quarter

of a trillion dollars in one company on its earnings release. There's just no fucking excuse. So I've always thought, okay, that means America, you'd like to think America's a good long-term bet. Now, bringing it back to Reddit, I think it is much harder. If I challenged you, I said, you got to figure out a way to monetize this massive traffic at Reddit, or you have to figure out a way to exponentially grow the traffic at a much smaller platform. I think you'd pick the former. I think it's a, building a product that resonates with hundreds of millionslection AI, as the head of its consumer artificial intelligence business.

Suleiman is also taking most of his Inflection staff with him to the tech giant. Inflection is one of the highest profile AI startups in the market and one of OpenAI's most formidable competitors, perhaps until now. Last year, it raised $1.3 billion in funding and it launched a consumer chatbot called Pi. Scott, you also spoke with Suleiman on the Prof G pod in September about that product,

as well as about his priorities at Inflection. I'm committed to a business model where the user pays. And that, I think, is the right thing to do. It is not the maximally profitable thing to do. We are a public benefit corporation, which means that first and foremost, whilst I am focused on returning value to my shareholders as a number one priority, my adjacent equal number two priority is to make shareholders as a number one priority. My adjacent equal number two priority is to make sure we do the right thing. Scott, any reactions to that clip in light

of his move to Microsoft? Well, first off, just on the statement about this whole public benefit thing, I think these companies, I think private companies are so good at making money, they shouldn't be trusted to do anything else. And I just worry, I think Mustafa is a good man. I think he's an ethical person. But what I have found and observed in companies is that, and it goes back to the financialization of everything, that when you finally put yourself in a position of power and in the seat, right age, all the moons lined up and you're like, oh, I could be a billionaire. I think the amount of incremental decisions leading you to a bad place are almost impossible to resist. That's my observation of these individuals, that they will pretty much talk themselves. I wouldn't

describe them as immoral. I would describe them as amoral and that they believe, okay, we're unfairly criticized. If I do the following things, I can get to this company position of power and we'll do the right thing. And wouldn't it be nice for me to be a billionaire so I could build hospitals and be loved? And that's what it means to be a billionaire in the United States. It means to be loved by almost everybody. And 11,000 people show up and root you on and you get to be the athlete that you never were, right? So the temptation to be compromised is just too great. So I don't like it when these individuals come out of the gate saying we're taking a different approach to business because I have found that they all sort of say the same

thing and I call it Sandberging. You know, I believe Sheryl Sandberg. I thought she was a really good person and really concerned about women. And then I woke up and realized she'd invented a business model and was basically the heat shield and the weapon of mass distraction such that she could depress hundreds of thousands of American teenage girls. And she absolutely knew what she was doing. Absolutely knew what she was doing. And I see it everywhere. And we keep falling for it. Jack Dorsey and his hushed tones about Twitter and his concern about the like button. Okay, fine, boss. You didn't do a fucking thing about it. And now Sam Altman is making these very concerned statements around the dangers of AI. Look, I can guarantee you, if we're waiting on their better angels to show up and for them to be evolved to the next level of generous, thoughtful statesmen who's always checking

his own desires for money. Don't bet on it, folks. Don't bet on it. It's our job to elect people that will regulate these companies. My favorite is OpenAI. It reverts to a nonprofit after it's made $100 billion in profits. There's like three companies in history that have aggregated more than a hundred bill. Thank God, once they're bigger than Saudi Aramco and Microsoft, they're going to start spending money back to the nonprofit thing. It's just such extraordinary jazz hands and bullshit. Anyways, what's really interesting here is I read this and I'm like, we're missing something. Because my understanding is after raising 1.3 billion in funding, something like 60 of the 75 people, including the CEO, are walking over to Microsoft? You just can't, you don table, you cashed my check, and now you're going to another company and my shareholder value is going to zero. There would have been lawsuits a palooza had people at the board not figured this out. And it says, the wording was really

interesting here. It says that it's not, what did they say? They're not buying any shares. What is it? They're not taking on any of their IP, but they've said that- They're just taking the people. They're taking the people, but they've said that- They're just taking the people. They're taking the people, but they've said that they're going to make the investors whole or something like that. Exactly. So Reid Hoffman, who's on the board of Microsoft, and is he on the board of OpenAI too? This is so incestuous.

This was such a backroom deal to make sure. My guess is Inflection probably read the tea leaves and said, it's going to be difficult for us to break through. There's some IP here. It's a good business. What if Microsoft gives us, gives the investors their money back? What if we figure out a deal and we can all go do our work and inflection can focus on a smaller business. I think Satya did this because I think he doesn't want to go through the bullshit he went through when he was so dependent upon Sam Altman. So this is Satya Nadella is Bill Walsh, the coach of the 49ers. And he slept really well at night knowing that I have probably the greatest quarterback in the NFL right now, Joe Montana. But if Joe gets knocked unconscious, I have the second best quarterback in the NFL, Steve Young, on the bench. I don't think Microsoft wants to make

this type of gargantuan investment and have so much market capitalization dependent upon the perception of one guy's genius, Sam Altman. They're bringing in Steve Young. I mean, the thing that I'm most confused about is whether the investors agreed to this. I mean, yeah, Microsoft, Nvidia, Greylock, they're all investors in this startup,

which raised $1.3 billion. And then inflection turns around and says, yeah, we're going to make you guys whole. So it's fine. But if I'm Greylock and I invested in one of the biggest AI startups in the world, which I was probably expecting was going to be one of my best investments. And then at the end of the day, I come out of it flat. I'm not that happy about that. So, I mean, I guess my first question, I have more questions. My first question to you would be like, do you think the investors are fine with this? Do you think they said, yeah, that works for us? And to be clear, they maintain their equity in inflection. So there's a possibility that they could get a decent exit here. But it just feels completely unlikely if you've just gutted the entire workforce of the company.

So, I mean, let's put Microsoft aside. Let's just imagine like your Greylock. You think Greylock said yes? Do you think they're okay with this? It looks like they've all come to some sort of agreement because I remember my first lawyer, such a neat guy. He actually was, I think he was a partner at Latham

and he was the lawyer at the General Counsel at Red Envelope and he actually left a lot to go coach high school basketball. Just a really neat man. Oh God, if you're out there, please reach out to me. But he said to me, he said, the valley runs on conflict. And that is, okay, so Reid Hoffman is AI's or Inflection AI's third co-founder and early investor through Greylock and a Microsoft board member. So he's got conflict all over this thing. My guess is,

if I had to speculate what's happened here, Inflection AI said, we're the number five. That's not a good place to be. Microsoft has agreed to give our shareholders, our investors, make them whole, give them their money back, and has likely said, okay, Inflection, you're going to be in a more focused, smaller business, but we're going to sign a multi-year big contract that's going to take the value of Inflection AI. It's going to make this a good company with a high valuation. You're getting your money back. And if you do the math, it was going to be a tough road ahead. Whatever happened here, everybody has nodded and held hands around the table and decided to agree on this because Mustafa Suleiman, if he did this without the permission of the

board representing the shareholders of Inflection AI, I don't want to say it would never work again, but you don't cash a billion and a half dollars in investors' money and then take your entire team. I don't care if you're in California or wherever, you just can't, you're just gonna rack up lawsuits. And not only that, I'm not sure Microsoft wants to hire someone like that. They're like, let me get this. So now we're gonna build, he could do that to us.

If someone else shows up with a bigger check, is he gonna take the entire AI team that likes Mustafa over to Lama or whatever, or to Anthropic? So clearly they have come to some sort of accommodation that the shareholders of both firms and the boards of both firms have agreed on. I want to bring up this idea of power because you look at the AI startup landscape, probably the five biggest names in my view are OpenAI, Anthropic, Perplexity, Mistral, and Inflection. Microsoft essentially owns three of them, OpenAI, Mistral, and Inflection. Now, the word owns is doing a lot of work there, but it's invested $16 million in Mistral. That

came out about a week ago. It's invested $13 billion in OpenAI. It reportedly has a 49% interest in its future profits. It's got a pseudo position on the board, this non-voting observer seat, which no one really understands. And now it's taken all of the key personnel at Inflection, which, by the way, is one of the biggest competitors to OpenAI. So they own three of the biggest startups in the hottest industry in the world right now. What does this say about the consolidation of power in the tech industry? And is this not

a bridge too far? Power aggregates to the powerful. Generally speaking, the cycle is you have a group of very talented people who break through, make a bunch of money, and they're like, you know what, I really like having a lot of money and I'd like to have more, at least hold on to what I have. So I'm going to weaponize the political system and engage in regulatory capture, make it very hard for small companies. And even if a pandemic comes along, I'll convince people to bail me out. And you don't have the churn. And that's what kills societies is they no longer have the churn or the competition that favors younger people and disruptors. And we're moving that way. Despite the immense prosperity, old people 72% wealthier than they were 40 years ago,

young people 24% less wealthy. And so this is when you just have pure market dynamics, and it's Darwin and there isn't regulation, you do end up with a small number of players aggregating just a disproportionate amount of the spoils. When we talk about Reddit going public at a pricing at six and a half billion dollars, NVIDIA added 40 times that after their earnings call. So the concentration of wealth here, it begins with the market dynamics. And I'm a big fan of Tim Wu. I think the best thing you could do to oxygenate the economy from the top down would be to go in and just have fucking break up Lollapalooza. five or seven of these guys in tech and then go into big chicken and then go into big pharma and just populate the ecosystem with a group of amazing companies that only have $500 billion in market capitalization that are more focused, more driven. There would be greater competition for human capital, raising wages, broader ecosystem. I mean, we are become way too concentrated. And I think this represents that.

So AI, the biggest threat in the short term of AI is disinformation, the biggest threat over the long term, in my opinion, is it's absolutely speedballing loneliness. But another issue here is this is just a continuation of a trend in technology and a trend in America, where the big get bigger by spending money on regulatory capture and network effects. We have to go in and break them up and redistribute the prosperity to smaller companies. We'll be right back after the break with a look at Calper's new investment strategy. We're back with ProfitG Markets. CalPERS, the largest public pension plan in the US with almost $500 billion under management

is shifting its investment strategy. The agency is reducing its stock and bond holdings and increasing its private market investments by more than $30 billion. The rationale? Kalper's analysis showed that private equity was the best performing asset class of the last decade with annual returns of nearly 12%. That's compared to 9% for public equities and 2% for fixed income. So Scott, Kalper's is doubling down on private equity here. What do you make of this investment strategy?

You know, what's that disclosure that past returns are no guarantee of future returns? So the question is, I mean, most markets are cyclical. And I've often said, find out what the hottest job is at a business school and short that market because MBAs are very rear view looking. So whatever's performed the best over the last five years, that's the industry they want to go into

realizing that, you know, every industry that's successful typically gets over-invested from human capital and financial capital, which drives down returns. And you should be thoughtful about potentially going into industries that may seem down, but might really recognize a pop, because you have to be careful about chasing the hot thing. Now, the question is, are the returns from private equity cyclical, like most asset classes, meaning it's had a great decade run, which means logically the next decade it might perform or underperform other asset classes, or is there a structural advantage to private equity investing? And there are some structural advantages. One, private equity firms

have to raise money with a long lockup, which by the way, isn't easy. Investors like to be able to get their money back if they need it. Typically, they raise money long and that is you have to give them or commit your capital for seven years. They have access to very low interest rates. They take control positions. They immediately go in there. They're typically in a control position. They take the company private. They bring a private equity mindset, and that is they're very smart. They understand financial engineering. They're not afraid to cut costs. It's also, the thing I've noticed about private equity is they're not afraid to pay management and they're very good at getting management vested and aligned with their interests. So they'll come in by a food processing company or a food distribution company that's

doing 800 million in revenues and doing 100 million in EBITDA and they'll come in, they'll buy it, they'll finance it really inexpensively. And they'll say, okay, we have really smart analysts here. We're going to look at potential acquisitions and we can fund them really easily. We're good at this. We're going to issue more debt and take our money out. We're going to sell the warehouse that sits on, you know, that you bought 30 years ago that's now worth more than any warehouse should be worth. We're going to divest of these businesses. Oh, and by the way, you know, Bob, you got 70 VPs. You should have 17. And we'll be generous with these people, but you have to trim the fat here.

They're usually, they bring in an outside perspective and they're usually very smart and they know how to make companies worth more. And then because the investors have a long-term time horizon, they can usually ride out cycles because if you wait seven years, for the most part, especially over the last 15 years, it's been up and to the right. And they can use leverage. So the returns here are really dramatic. It's probably not easy to raise money with a seven-year lockup and also say we're really smart operators. We're really good at this stuff.

We're not just throwing darts at a stock ticker. And so unless there's a dearth of capital that keeps them return side, what I would argue is that more likely than not, this will be an asset class that underperforms because what you generally find amongst asset classes, except like angel investing, that's just consumption. That's what consumption. That's

what I call FIPS, formerly important people who get psychic income from helping entrepreneurs. And by the way, that's great. God bless them. But it's a shitty part of the, it's just a terrible business because A, these things take forever and small shitty businesses require as much attention as big businesses that are doing well. And even if the business does well, at some point it isn't, unless you set on capital to defend your position, you know, you can get washed out. You can invest in a company that grows up to be Google. And at some point you might get washed out. Anyways, the other asset classes tend to be cyclical. They have great periods and they have terrible periods. Generally, what I have found is

when you know an asset class is about to overperform is when it's near impossible to raise money for it. Because what that means is the money that's going to go into it is going to get a much higher return. It is good to be in venture capital right now because the market has had a real thought. It is very hard to raise money, venture capital firms, unless you're big. And a lot of their companies are doing follow-on rounds because they need money and their valuations have come down extraordinarily. So a lot of VCs who have capital are really in the cap rate seat because they can do a follow-on round for a company that's a good company at half the valuation. So I think it's going to be a good vintage for venture capital. The question here, and I don't feel like I have an answer, is this,

is CalPERS chasing returns, which is not a good idea, or do they see a structural advantage around private equity and they want to get in front of it? I have generally found that asset classes, it is very hard for an asset class to maintain a structural advantage. And that if one asset class has overperformed the last 10 years, that's usually a decent indicator it's going to underperform the next 10 years. Yeah. I mean, my initial thought on this was this idea of steering with the rearview mirror. Like, they have this, they're very obsessive about the 10-year returns, the historical 10-year returns of all these asset classes, you know, fixed income, like 2%, real assets around 7%, and then

private equity is 11.5%. And it's sort of like, therefore, we're getting into private equity. And that, to me, was a red flag. The one signal to me that signals that they actually have done the correct analysis here was their future projection of returns. Because, you know, if they said something like, we believe private equity will continue to return 11 and a half percent on an annualized basis, that would be a problem. But instead, they actually projected lower returns. They projected 8% over the next decade, which was only one percentage point higher than their expected returns on public equities. And so what that tells me is that, you know, they're recognizing, yeah, it's been a freakishly good run for PE. And still, at the same time, we believe we have to get in. And the more I think about it,

it makes sense to me. Because if you look at the public markets, there's actually not that much to invest in. It's basically the mag seven. And if you'd have stuck with those, you'd have outperformed everyone. And then everything else, the returns are mediocre to crappy. I mean, we've pointed this out, the S&P returned 29% last year, but if you removed those seven companies, it would only be up 8%. Meanwhile, you have this other asset class, private equity, that is rapidly growing. It's gone from, in 10 years, $4 trillion in AUM to $15 trillion. And it's now beginning to feel like this is the elephant in the room where if you're not exposed to it, if you're not substantively exposed to it, especially if you're a pension fund and you're representing regular people, then you're probably acting irresponsibly. So I guess my question to you would be like, do you feel at this point that private equity is just too big to ignore? Do you think that everyone,

if they can, should be getting some level of private markets exposure? I think that's really interesting. And again, you catalyze a thought I hadn't considered, and that is because companies are staying private longer, that means the target market or the pool of potential investments has grown. And that is there's a lot of great big companies now that are really operated well that are private. And also, once a private equity firm controls a company, you can also get a bit of a kicker from the private to public pop. And that is the average multiple of EBITDA for a public company is 10.4x. The average multiple of a private company in transactions is 8.9. So if you can borrow money inexpensively, tighten it a bit, maybe increase the EBITDA a little bit, and then

take it public, you should recognize a pop right there. So maybe that explains the justification for additional capital allocation because the, I mean, there's just fewer and fewer stocks. I think the number of publicly traded stocks has been cut in half the last 30 years. Also, there are some real moats here to negotiate a private transaction versus convincing yourself you should buy Coinbase or a hedge fund manager says, oh, Coinbase, and then just buying stock and getting in. There's some real barriers to taking a company or buying a company. It's not easy. This requires real structuring skill, real financial acumen. You have to have operators on your team. I work with some private equity firms and they bring me in for very specific tasks and they expect me to know my shit, which is really unfortunate, but they want, they're not like, they don't want you to come in and do jazz hands around why this is a good or bad investment. They want you to come in and say, okay, you know, should Yahoo be spending this unit or not? And why? And what are some ideas around incorporating video? I mean, they really, they really get their hands dirty. And the thing

I've never bought, the populist argument that private equity comes in and ruins towns and companies. I've just, I'm sure there are instances of that, but what I have generally found is that they're good owners. And if they see growth potential, they'll invest. If they think the company is fat, they'll cut the fat. But I find that generally speaking, actually private equity players, like the absolute worst fucking people are venture capitalists i mean these are these are generally speaking generally speaking pretty awful people and and because they're lions and they're trying to create an ecosystem with a zebra they're the lion the entrepreneur is the zebra most private companies bc companies high growth companies generally there's a point where the interest

diverge and it is full body contact ugly business and all these, you know, Silicon Valley venture capitalists who pretend to give a flying fuck about the world, throw a big party to save the whales at night. And during the day, they're literally like trying to figure out how to fuck over entrepreneurs. Too much, too much. What I find with private equity is generally speaking, they figure out the deal. They're like, okay, management, we're going to give you 15 or 20% of the company. And then everyone's kind of on the same page. And generally speaking, the CEO of a private equity-owned company generally gets along. I mean, A, they've decided to let the private equity company buy them, but they generally have good relationships with them.

They have to get along with them. They like the CEO. And I generally find that they're nice people to work with. The really ugly side of capitalism I have found is in venture. By the way, the venture capitalists I work with at Section, they're wonderful people. It's the only check I'll ever cash again is this firm I work with, General Catalyst. They're wonderful people. So I'm making a very broad generalization here.

But I'll just stick with the venture capitalists in San Francisco are just awful people. Specifically the ones that their firm is named after a type of tree and begins with the letter S. They should rebrand themselves to Mendacious Fox Capital. Too much, Ed? Too much?

No, it's perfect. Nice, impersonal, unbiased analysis. Let's take a look at the week, Ed. We'll see consumer sentiment from March, and we'll also see the latest inflation data from the Personal Consumption Expenditures Index for February. Do you have any predictions? My prediction is really straightforward.

I think it's disco and champagne and cocaine for the IPO markets. And I think you're going to see in the next 30 days a bunch of companies file. And we're going to see a bunch of pops. Now, there was a bit of a head fake last year with Birkenstock and a couple others, and they didn't really perform very well, where they didn't get much of a pop. I think the Animal Spirits are back, Ed. I think that John Travolta is on the dance floor again. And I just made that up. I like that.

That's good. But anyways, I think we're about to see the back half of 2024. More IPOs than we've seen in a few years. And we're going to see some big, big first day pops. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director.

Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Wednesday for office hours, and we'll be back with a fresh take on markets every Monday. In kind reunion As the world turns And the dove flies In love, love, love, love Quick note, Ed. Go out tonight, get ridiculously fucked up, and make a series of bad decisions. True story. Every long-term relationship I've had,

I met the woman when I was fucked up. Will do. Go do it, my man. Go do it, my brother. Make me proud.