This Week in Startups - Bill Gurley, Brad Gerstner, & Jason Calacanis on the state of tech markets, hosted by David Weisburd | E1875

Starting point is 00:00:00 And I think unless you have a really good reason for the company, you know, to stay private, I think the public markets as Amazon, as Google, as Salesforce and so many others have proven. This idea that you can't innovate in the public markets is total nonsense. This idea, you know, it's a cheap source of capital. It keeps, you know, the business efficient and honest. And so my sense is that you're going to see the markets really open up in 24 and 25. We have a backlog because we've had almost no IPO. over the course of the last two years.

Starting point is 00:00:32 And so, you know, it's just a matter of price. IPO markets are always wide open, Jason. It's just a matter of price. This weekend startups is brought to you by OpenFone brings your team's business calls, texts, and contacts into one delightful app that works anywhere. Get 20% off your first six months at openphone.com slash twist. Dev Squad.

Starting point is 00:00:57 Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one U.S. developer plus 10% off at devsquad.com slash twist. And Squarespace, turn your idea into a new website. Go to Squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10% off your first purchase of a website or domain. All right, everybody, welcome back to this week and start us. We're trying a new format. Today, we're just doing a little roundtable.

Starting point is 00:01:34 And we want to talk about the markets, private markets, public markets, the interaction between those two and maybe give founders and investors who are listening to the podcast an idea of what 2024 might be like. It's been a pretty eventful 23 and 2022, obviously, at the end of the surf era. So with me, two of my besties, Brad Gersner and Bill Gurley, don't need any introductions. They've both had multi-decade epic careers in our industry. And David Weiss Bird is here with us to moderate and read the news and sort of tee everything up in our little roundtable format here. David has a nice podcast called the Limited Partner podcast, which I was able to be on.

Starting point is 00:02:20 And David, what do we have here to kick us off with markets? Yeah, so let's start. You mentioned ZERP. So, 2023 was the year that ZERPS funded startups finally started to die. Although ZERP technically ended in March 2022, companies started to die at scale, really, in 2023, due to the lagging nature of funding. According to Peter Walker at Carter, Carter represents roughly 50% of the market. So roughly 1,500 or so companies at large died in 2020. this equals the largest death toll for startups since the dot-com crash of 2001. The question becomes, will more startups die in 2024? John Redmond from Discovery, a $2.5 billion hedge fund in Connecticut, has estimated that roughly 1,200 private companies will, quote, unquote, exhaust their

Starting point is 00:03:13 financial reserves by the end of 2024, which is a signal of further startup deaths, as well as potential uptick and M&A and IPO activity in 2024. It's likely that 2003 has been the worst and 2024 will be better. One leading indicator is rounds with special terms, which are coming down from a record high in Q1, 2022 to a local low in Q3-20203

Starting point is 00:03:39 as it relates to liquidation preference, participation terms, and cumulative dividends. Given that we have Bill Gurley on the call, maybe we could get his views. Bill, what are your views on the industry today? Well, I think it's important to just step back and look at this from like a 20, 30-year cycle standpoint before you just kind of drill into the details. So, you know, the industry's been inherently cyclical the entire time I've been in it.

Starting point is 00:04:05 And I've been through two or three of these waves. And they're really powerful. One of the reasons they're so damn powerful is you typically take risk on very slowly and then risk off seems to happen overnight. and you go from a world where you're slowly feeling more glass half full. And every time you take a step along that journey, people take on more risk. They do riskier things. But the other thing that happens is valuations expand. And so you get this massive multiple expansion as more risk is being taken.

Starting point is 00:04:40 And simultaneously, investors and founders are being less conservative. they're being less thoughtful about margins and profitability and all that's being reinforced by the market. And so it is the game on the field. Everyone plays it. And then one day it crashes and it tends to crash pretty fast. Now, the thing that's very different about this time period from the previous crashes is so many of the large startups had accumulated so much capital that the effects of the wave crashing are delayed. delayed rather than immediate. And I think you're seeing this in the data you shared, right? The deaths weren't a year ago. They're starting to happen now. I would expect 2024 to be just as bad as

Starting point is 00:05:29 2023. And the gauge I'm using to estimate the window is just how much capital people had. And so there were numerous LP decks that I was privy to see, you know, a year ago where people brag that it 80% of their companies had two to three years of cash. And so the day of reckoning is really when you get to the end of that. And there's a ton of things that complicate this. One, valuation, multiples have collapsed, although they've come back a little bit recently, which we should. And so there's zero chance you're going to get to the valuation you raised at two years ago, a year and a half ago. And it takes founders, board members, it takes them a long time to get okay with that, like to kind of accept.

Starting point is 00:06:15 it and then build a strategy that it recognizes it. You have cap charts where you have too much capital, too much lick preff, and those terms that you showed are one way around it, but people just kind of have to come to grips with that. And we'll see what happens when they run out of money. And then the other thing is, you know, maybe it seems unfair to some, but the expectation for what a good company is

Starting point is 00:06:43 and how much risk you can take and how profitable you need to be. and whether or not your cash flow positive, those rules today are dramatically different than they were three, four years ago. So there's a chance your company can't even get to that place because you started with something that didn't have the fundamentals necessary to get there. And so we have, you know, we're in this place where people are slowly coming to grips with where they were. It's interesting, you know, the number of shutdowns that you mentioned, the press doesn't seem

Starting point is 00:07:15 to be paying much attention to this. That's kind of a shockingly large number to me when you when you put it in front of it's not not shocking because of where we went through. I kind of expect it, but shocking just relative to what I've what I've been seeing and reading. And then one thing, and I don't mean to distract the conversation because I think what I just talked about is the is the big picture. AI is living with an exemption here and is acting exactly like things were two or three years ago. So you have this one avenue where there's behavior that's exactly like it was, which is also quite unusual. Hey, Nick, maybe you can pull up the tech multiples chart just, you know, again, in this

Starting point is 00:07:56 telescope out, you know, view here. You know, to Bill's point, this is a cycle you're looking at. And this was the cycle since 2012. Multiples largely, this is software as an example. This was a forward revenue. So multiples really were hugging around, you know, give or take 10% of that, you know, six and a half seven times forward revenue line. And then you see this explosion that we all, you know, now understand associated with ZERP, zero interest rate environment in 2020 and 21. And it took this cyclical nature of the venture industry and it amped it up on Red Bull, right? I too have lived through, you know, kind of 99, 2008, but in neither of those situations, did you have the federal government,

Starting point is 00:08:42 you know, having multi-trillion dollar stimulus packages and frankly, negative interest rates. So that forced even more equity risk into the pool. As we all know, venture funds were bigger. More of this stuff got funded. And so the bigger, the high, the lower the low. And to Bill's point, you know, when you look at where we are today, you see the blue line on the top half. You know, it's come down dramatically.

Starting point is 00:09:06 It's now below that dotted line. The bottom half shows by our estimate, there's an ultimiter estimate of all software companies that we're still trading about 12% below the 10-year average multiple. Well, why might that be, right? Because this is all else being equal. Well, interest rates are higher than they were during this 10-year average. They're, you know, almost 4%. And they were about 2.7% during this 10-year average. So you'd expect the multiple to be lower. Growth rates for these companies are actually slower than they were during this 10-year period. But they started to tighten their belts and get more profitable. So that's the offset to growth.

Starting point is 00:09:42 So to Bill's point, I think what this chart demonstrates is we're through the readjustment in the public markets, right? The public market corrects quickly, but we have this delayed reaction among founders and boards who make tough decisions, right, to deal with those 1,500 companies that are now overcapitalized, aren't growing as fast as they should be, not nearly as profitable as they should be. And 2023 was the beginning of the working out of all of those issues. And remember, there are three doors you can choose. Number one is you shut down the company, right? The company may run out of money or you may choose to shut it down and return capital. Door two is that you arrange, you know, you tighten the belt of the company, you get it on the best path and you arrange a sale for the company.

Starting point is 00:10:31 It may be an aqua sale of the business or an outright sale of the business. And then door three is that the company actually is able to grow in to those huge valuations that Bill talked about. That's the hardest. Less than 5% of the companies that were funded during 20 and 21 will ever be able to grow into the valuations from those prior periods. And I think boards and founders now are making peace with this. At first, they were hoping that we would snap back to prior mania. Now they're at peace with the fact that we're not going to get there. So whether it's Instacart choosing to go public at, you know, $7 billion down from

Starting point is 00:11:04 its peak of $39 billion in the private markets, right? That's a clearing event. Or whether it's, you know, just this week, we see that Eric Vishria over at Benchmark, you know, help to manage the sale of airplane to air table, which was, you know, an important aqua hire among two great teams of technologists, two important companies. But this is the type of healthy thing that great venture capitalists like Eric and Benchmark do because they say, okay, we're not. not going to get to the place we thought we were going to get to, but if we fold these two teams

Starting point is 00:11:38 together, we reduce spend, we can get the profitability quicker, and it's better for both teams. Yeah, and just from the field, I mean, it's a great overview for everybody. Are you still using your personal number for business? Well, stop. Such a common mistake that founders make, but you never have to make that mistake again because of open phone. Open phone has readout every single detail of what a modern business phone should look like. Open phone makes it super easy to get a business phone number, not only for you, but for your entire team. And here's the magic. It works through a gorgeous app that works on your phone and your desktop. I can tell you open phone is amazing because all of our sales team and ops teams use it every day.

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Starting point is 00:12:59 If you got existing numbers and you're paying through the nose for some insane service, you can port those right over to OpenFone at no extra cost. So here again is the offer. Go to OpenFone.com slash twist and get this all organized. Get the 20% off as well. Openphone.com slash TWIST. There's a lot of triage going on. I was, as I was listening to both bills here, both PGs,

Starting point is 00:13:21 I was just thinking about a couple of boards I'm on where you have late stage investors, who their worldview is radically different than the Series A investor and radically different than the seed investors. If we get a haircut of 50%, which is literally in one case what we've experienced, well, that's going from a $5 million to a $500 million valuation instead of a billion.

Starting point is 00:13:39 We still feel pretty good about our investment and we want to keep working on it and growing the company. And then people who invest it at a billion, they're kind of looking at this, wondering if this company's ever going to hit that mark and maybe they should sell the company and because they have provisions, protective provisions, as you pointed out there,

Starting point is 00:13:57 maybe they're willing to get a push and just get their money back and then move on to the next bet that's not as convoluted. The number of shutdowns is very real, but I think one of the things Bill Gurley that we saw, and I don't know if you saw this, was the never-ending bridge round,

Starting point is 00:14:15 the never-ending safes, the never-ending extension of hope. And when you talked about people taking on risk and people having hope and having positivity, there's so much emotion involved in this. And when you lose five or six hands of poker in a row, you are in that negative zone, man, you just feel like placing bets is really hard. When you've won, you know, conversely three or four in a row and you're on a heater,

Starting point is 00:14:40 man, you may get Lucy Goosey and be betting on things you shouldn't. I feel like where, Bill, maybe you could talk a little bit about the psychology of private market investors. Yeah. I mean, well, you highlighted a couple things that are really important. One, I think it's very easy to get in these situations where different investors around the table have very different kind of return horizons and you can end up with with a lot of chaos in a company simply because these board members have different agendas for the reasons you exactly than you laid out. And I think for a late stage investor who knows they're underwater

Starting point is 00:15:18 or whatever, their goal might just be to move on, you know, to kind of, we use the phrase burnt waffle, like just kind of get it over with and move on. And whereas there might be people like, you and an angel situation where there's still a lot of return left on the table and you want to keep folks in and keep building. And that can be very, that can be very distracting for sure, especially for the founders. How do those, when those play out on the board level, the theater behind that, could you take us a little bit behind a board meeting where there's a misalignment on the exit? Yeah. I mean, if you can imagine, let's just say that four board members, two of them, they're going to lose money no matter what and two of them are going to still make

Starting point is 00:16:01 really decent returns. And you start thinking about discussions about M&A or should we go public or, you know, anything. And you just have, you might have two people who are very indifferent or who just want something to happen fast because their odds of getting a return are so low. And they also just might become, what I've seen is they become very, and different to shareholder interest and then just start, you know, maybe being very generous, you know, with employee packages or stuff like that and becoming less sensitive to the marginal price per share. Let me jump in there a little bit because Altimeter, you know, we do a lot of series A and B, but we also do a lot of pre-IPO investing. So, you know,

Starting point is 00:16:49 during this period, we were late stage investors in some of these companies. And, you know, I'm going to give you one specific example. I don't think that's been talked about public. which is this company Hoppin, which in many ways was a bit of a poster child for, you know, you know, kind of what happened during COVID. This was a company that was, you know, bringing group meetings, you know, kind of a better version of Zoom for people to come together and do group meetings. You can imagine what happened to that post-COVID, post-vaccine. And add, you know, every firm you can imagine, and it from Excel and GC and IVP and Dreson and Altimeter and Tiger, etc.

Starting point is 00:17:27 down the line. And at the end of 2021, when I saw the numbers really, you know, starting to hit the wall, we sat down and had a conversation with the founder and the board and just said, listen, we've got, you know, hundreds of millions. In that case, nearly a billion dollars of cash on the balance sheet of this company because we thought it was a pre-IPO round. The business has changed dramatically. It's not your fault as the founder that the world's changed dramatically, but it has. And so we have to have a real conversation about the amount of capital that's on the, the balance sheet because, you know, like the game on the field has changed. It took us 18 months painful conversations among the founder, the early stage investors who had a very different

Starting point is 00:18:09 perspective than we did, right? Because we came in later. And ultimately, credit goes to that board of directors, credit goes to the founder of that company, and to everybody who came together. And mind you, these are not easy and they're not short conversations. But ultimately what we did is we distributed over half of the cash on the balance sheet. We right-sized the business. We were able to totally change the nature of the risk-reward profile in a way that was good for the early stage and good for the later stage. But that takes experienced venture capitalists, willing founders. In that case, Johnny didn't have to do this deal at the end of the day. So it really takes a lot of work. And that's why I was pointing out what Eric and the team at airplane and airtable did.

Starting point is 00:18:52 those are, you know, there are a lot of venture capitalists that came into the business over the last five years. And they thought, oh, this business isn't about having tough conversations. It's just about going to cocktail parties and doing the fun AI stuff. But the reality is when you go over the falls in one of these cycles, the job is not much fun for three or four years. Because you have to help these folks find their way. You're committed to them in good times and in bad times. And part of the, you know, like the company hop and, is in a much healthier position, you know, today.

Starting point is 00:19:25 And the investors are going to get, you know, a huge percentage of their money back on that business in a way that had you continued to burn $200 or $300 million a year, you may have lost everything. So I think it's important that founders and boards really step up to the moment. We've got a thousand plus more of these companies to work through. And, you know, that's part of the job. It's not just doing the fun stuff on the way in. It's doing some of the challenging stuff on the way.

Starting point is 00:19:52 the way out. To build on that, imagine the founder and their mindset. Now, in that case, in Hoppin, he had taken some secondary. And so it was a very different kind of situation. But I'm on a board where the founders haven't made any money yet. The business is stabilized, it's growing. And they have one group that wants to hire M&A bankers and sell the business. And they want the founders to drive a process with a banker. And then you have me and another investor saying, hey, what are the new AI features we're adding to the product, and how do the customers react to them? Now, imagine you're this poor founder,

Starting point is 00:20:26 and she has to now deal with, you know, one group saying, prepare a deck to sell this, and then another group saying, what AI features are we adding to the product? And then in the middle, there's the budget, and there's the target, and there's the plan. The budget and the target and the plan

Starting point is 00:20:42 for selling a company, I think you would agree, Gurley, is a very different market and plan for growing a business. In fact, these couldn't possibly be, I think, any different. In one case, you're trying to dress the business up to make it look better and more profitable. In the other case, you're trying to invest. Yep. Yep. Yep. Not everyone, it's great that, Brad, that you were able to get to this kind of collaborative result. And I've seen that.

Starting point is 00:21:09 I've seen self-imposed recaps, you know, where people kind of come to an agreement to get the company in a better place and other things like that. And that's awesome that you guys were able to do that. but I've also seen the conflicts that the adjacent is talking about. So they're all part and parcel of what comes with this type of environment. I think it's the first time that a lot of founders look at the corporate governance on their board, on all the non-financial terms that they've signed off on. You find out why all that shit's in the document. What is the old VC joke?

Starting point is 00:21:41 You give me the valuation. I give you the terms. So they learn that side of the coin. But the good thing here is as we start 2024, I think there really is a high degree of sobriety that if we, you know, you think about that multiple chart that we showed you, nobody thinks we're going back to where we were before. So now founders and boards, you know, who are sitting in those positions, like they, they have three doors. They have three choices they got to make. There's no ignoring the reality. there's no kicking the can down the road like, you know, folks were in 21 and 22, you know, and even in much of 23.

Starting point is 00:22:22 And so I feel pretty optimistic that the new deals are being priced according to the public market set of rules that exist today, perhaps with the exception of the AI enclave that Bill referenced. And then secondly, I think there is a lot of activity shut down, get capital back, merge companies together. Third door, which I mentioned, Bill and I have. long been in the camp that companies should not wait so long to go public. If you have $200 million in revenue and you're growing, right, get the company public. Don't stay private forever. There's a discipline that is good that occurs in the public markets. It will likely be at a discount to that private round valuation. You got in 21 or 22, but who cares? It's the truth. It is what it is.

Starting point is 00:23:08 Delusion is not a strategy. Except the valuation that exists in the world. Get the company. public, and then get back to growing the business, to Jason's point, get rid of the distraction of these competing set of founders, wash them out in a cap table process like an IPO, and get back to focusing on and growing the business. It's a pattern, I think, Bill, right? You have denial, resistance, acceptance, and that action. And, you know, as a founder and a board kind of go down this, eventually you have to take some kind of action, right, Bill? And I think...

Starting point is 00:23:44 Yeah, and look, I'm totally with Brad. I think, you know, Goku, who I respect immensely, and I think is one of the smartest people that's ever graced Silicon Valley. I say that because I really fundamentally believe it, but he had a post where he said, like, in order

Starting point is 00:24:00 to go public, you got to have 600 million of revenue and all this stuff. And I just don't believe it. I think we're kind of stuck because everyone's afraid. And I think the only thing that kind of it keeps people from going public is courage and determinism. And I think you will see, you will find that there is a founder out there who's just going to buckle up and go through it.

Starting point is 00:24:24 And yeah, it might be a little bit of a discount. I'm surprised we haven't seen more people do it for the reason Brad just said, which is it does clean up the cap chart, you know. And there might be cases if you have enough capital where you could do a direct listing, go public. And you might be somewhat indifferent to what the price is, at least on the first print. you know, because your goal is to get public. So, you know, if you're in touch with the valuations, and, you know, everyone should be out there studying it. If you understand what separates good company from bad,

Starting point is 00:24:56 I wrote a blog post a long time ago called the Keys to the 10-X revenue club where I go through those things, then, you know, there's no magic window six, 12, 18 months from now where valuations are going to be 5x higher or 2x higher. Like, that's not coming. And so if you're in touch with what your real valuation is and you're ready to be public, go. Like, just go.

Starting point is 00:25:22 And if you need help or if the big bank is afraid, I guarantee you that the second or third tier bank is ready to go and I'll help you out. Give me a call. Going from an idea sketched on the back of a napkin to a robust, stable product requires a wide range of skills. You can spend ages looking for a one in a million. developer who can do it all, or you can quickly ramp up an entire product team to help you build and launch your product with our partner, DevSquad. DevSquod provides an entire

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Starting point is 00:26:24 Visit devsquad.com slash twist to get 10% off your engagement. That's devsquad.com slash twist. Can you go back to Google and Amazon's IPOs and just give founders who maybe were in college when that happened and weren't playing the game or investors who weren't on the field? what the footprint of those companies were. And, you know, there was a little trepidation, I think, going public at that time as well for both of those companies. Yeah. It wasn't perfect either.

Starting point is 00:26:52 Google was a little bigger because they did this whole planned auction thing. And so it was, I think they were bigger. But Amazon went public, I think, you know, only after a client investor, I don't think they ever did a beat. And they were, they were like 70 million in revenue or something. They were really small. Salesforce. Salesforce went public. 60 million of current year revenue, doubling year over year. So it's going from 60 to 120 what public

Starting point is 00:27:16 at a billion dollars. Yeah. We took open table public doing 10 million dollars a quarter, so a 40 million run rate. And so it's all possible. Like, you know, it's just a question of whether you're cool with the valuation. And you've got to get a bank who doesn't insist that you raise 200 million dollars because that might not work with the, with the valuation that you're going to have to accept. But I do think we'll see some people move through. You know, it's one of those things is going to take a leader and then you'll have one and then you'll have two and then you'll have three. Stripes the likely candidate, Bill?

Starting point is 00:27:50 You would say stripes the one blocking everybody psychologically? I don't know the problem with that is like all the big ones, you know, they can go whenever they want. I don't think that really opens things up. I think we need, I think we need some leaders from, from non-mega companies to help, you know, build the pat, you know. Hey, Bill, one thing that we don't often say, but I think might be true as well, what emerged over the last 10 years was a new class of investors. They call themselves maybe venture investors, but I really think of them as investing in

Starting point is 00:28:23 quasi-public companies. These are companies with over, you know, kind of a billion dollar valuation, their late-stage investors. And, you know, they have a self-interest in keeping these companies private for a long time because like private equity, they can continue to put more and more capital in. It's like a private club for public market companies that only 50 people can compete for. It's a much better market for you to make money in than the actual public market. I don't think it's better for the founders.

Starting point is 00:28:51 I don't think it's better for the companies. Who's in that club? Well, I mean, the names that you know, you know well, the crossover investors, the tigers, the go-toos, you know, the green oaks, the altimiters of the world. but then I think there's, you know, all of these... But what are the companies? Stripe, striped matches that bad. Stripe, bite dance, SpaceX, you know, go through the list. All of these companies could be public.

Starting point is 00:29:16 And I think unless you have a really good reason for the company, you know, to stay private, I think the public markets as Amazon, as Google, as Salesforce, and so many others have proven. This idea that you can't innovate in the public markets is total nonsense. This idea, you know, it's a cheap source of capital. It keeps, you know, the business efficient and honest. And so my sense is that you're going to see the markets really open up in 24 and 25. We have a backlog because we've had almost no IPOs to over the course of the last two years. And so, you know, it's just a matter of price.

Starting point is 00:29:52 IPO markets are always wide open, Jason. It's just a matter of price. One interesting thing that facilitates what Brad was talking about is we've, we've, become quite comfortable with secondary. And in fact, when we were going through ZERP and there were people with tons of money in their pocket and they wanted to cram it into these companies, they would encourage secondary as a way for them to get ownership because the founders and the early investors didn't want more dilutions.

Starting point is 00:30:21 So they would literally knock on doors and say, let us help you do this. And if you're a rather large angel or an early A or B investor or a big founder, you know, It's hard for you to get liquidity through that type of mechanism, but it relieves a ton of pressure on the management team for the employees to be able to get liquidity. And so you find yourself in a forever cycle where these companies might stay private for a very, very long time. And I think we will see a few examples, and I don't know exactly which company, but where that proves to have been a mistake.

Starting point is 00:31:01 like for the reasons Brad talked about. And I, my favorite, my favorite metaphor here is to, is to imagine a football player that goes from high school to college to pro. And, you know, could you imagine, you know, on draft day or a week before draft day, the number one quarterback candidate says, you know, I think I'm going to opt out because, you know, if I play on Sunday, they're going to, they're going to be way more scrutiny. They're going to look, they're going to study all my stats. I don't think I want to play at that level.

Starting point is 00:31:31 or I don't want to play in that environment. And everyone would laugh at someone that did that because the problem is, once you've started handing out options to your employees, once you've taken investors onto your cap chart, you're in a game where your job is to constantly increase price per share and one day to provide liquidity to those people. And so there's no way to opt out of that game.

Starting point is 00:31:58 You're in the game. And the better you do, the harder it gets. so it just keeps going up, but that's the obligation you have. Hey, Bill, did you guys, did you guys wait too long to take Uber public? Would you have, would you have liked to see an Uber go public before, you know, gross started slowing and, you know, at evaluation less than whatever it was, 50 billion bucks? Possibly. And so, you know, we had some pretty big mistakes and leasing and stuff that might have been exposed and, and, and dealt with sooner. You know, as, as Jason has said on, on this and other podcast, if you, if you bring up Uber, I have to,

Starting point is 00:32:31 take a second to just really, really think Dara for all he's done. Like, because the first job was to clean things up and put out the fires, which he totally crushed. And then the second job was to increase the value of the company, which is he's starting to deliver on that. And, yeah, it makes me very happy. There was no doubt, Bill, in your mind, this is we're on the topic of Uber. And this sort of speaks to conviction.

Starting point is 00:33:00 when you see a billion rides going on and the company's losing a billion or $2, you never thought, like, this could never not be profitable because you knew customers would pay a little bit more money. But the press was kind of fixated on this. This can never be profitable. This can never be profitable.

Starting point is 00:33:16 This business is a terrible business, but the same people who were saying that were using the product every day. And when the prices went up and the venture, you know, discount and the competition with Lyft started to recede, people had no problem paying an extra five bucks a ride, three bucks a ride. My belief it was all a ZERP thing. Exactly.

Starting point is 00:33:36 And you had massive amounts of capital. You had a clear winner in a network effect business. But the benefits of that winning were delayed because you had capital being thrown at the second place player in a way that we've never seen before in the history of venture. But we may be witnessing now in the LLM market. As Bill has described it, which I love, you know, capital was used as a weapon of economic destruction because the cost of capital was free. And the healthiest and best thing that's happening to the venture market is the fact that we have interest rates back at 3.5% because you can't have number three, number four, number five, number six raise capital to compete diseconomically against the market leader. And that allows the backers and the founders and the market leaders to emerge with profitability profiles much, much faster. Yeah, it was interesting.

Starting point is 00:34:38 It was a, what a wild experience to see that amount of capital use that way, our first time in history. And people looked at Amazon as the playbook for that bill, I think. They said, hey, Amazon was never profitable. They broke even, broke even, but they built this huge, you know, revenue base. Tam was huge, you know, look at all the prime subscribers, look at all the adjacent businesses like AWS they were able to build an advertising business. So there is something to this, I don't want to say lose money at an alarming rate, but a break even and build the business for growth. And how do you balance that? Yeah, I mean, well, well, yeah, if you know, if you know you have a network

Starting point is 00:35:19 effect, like how far do you want to push it and how aggressive do you want to be in Bezos, you know, push it. You go back to that moment in time, you know, between. 2001 and 2004. There were multiple times where the press was convinced that Amazon was going bankrupt. And he did have people chasing him, especially in verticals, and he put them all under. Part of it was what we started the podcast talking about is just the cycle. And he had to adjust his game to the cycle. So in 97, 98, 99, he had unlimited capital being thrown at him. and when that changed, he had,

Starting point is 00:35:56 he did cuts. Like he had to do cuts. He had to get to break even. And eventually he did. Yeah. So, but look, he's one of,

Starting point is 00:36:05 there are, if you look at Bezos, Benny Off and, let's say, Reed Hastings, they all push the edge of this, like trading off profitability for growth.

Starting point is 00:36:17 And I think they all did it in a way they were rewarded for. But it, it makes for a, a somewhat frightening ride for the people that are on the yacht. It's like going up and down the PCH at like 70 miles an hour. You're just right along the edge. You're like, shouldn't it be a guardrail here or something?

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Starting point is 00:38:13 2024 looking forward? Maybe Brad, what do you look at at the market today? And where will it be in 2024. Well, maybe just a level set. Nick, do you have that chart of, so this is the state of series B and Series C for software deals. So we just looked at Pitchbook, all the software deals that were done. And as you see, we're down, you know, 90% in 2023 in terms of B&C software deals from the peak in 21 in many ways back to the 2017 trend, which makes a lot of sense to me, given that we're back to 2017 level of interest rates, etc. But, you know, what this means is that we had in 20 and 21 this explosion of early stage seed and series A software deals that were done.

Starting point is 00:39:00 And the reality is they're not finding a home. And so now maybe I click in a little bit to Altimeter. And I think there were a lot of private venture deals. And I think there are a lot of people who looked at that period of time. And frankly, prices had not adjust back. Back to Bill's point, the market was delayed in the venture industry into getting its head around the fact that the world had totally reoriented around a different axes with respect to interest rates. And then, you know, if I just look at the list for Altimeter, here's the deal. We did nine deals in Q3 and Q4 last year.

Starting point is 00:39:36 We did four Series A, two Series B, and three pre-IPO deals, okay, late-stage deals. And I think that is reflective of the opening up, the prices coming back down to planet Earth. The prices that we invested in are back to 2013, 2014 level pricing, again, set aside the AI enclave that Bill's talking about. And so that's what I see happening in the world around us. Those were competitive deals with, you know, the sequoias and Andreasons and Red Points and all the other funds that folks know about. So I think the market is getting healthy because pricing is resetting. And, you know, Jason can comment on what's going on in the earlier stage market. But unless firms like ours are willing to do those Series B and Series C deals,

Starting point is 00:40:25 then you've got a real problem of the pipeline of Seed in Series A that can't find a home. And Brad, you look like a genius today. But at the time, you must have been getting a lot of pressure from LPs, a lot of people internally. How did you resist that pressure? and what was your operating principles on doing so few deals? You know, really, we didn't get a lot of pressure from our LPs. LPs were pretty pissed off at the cadence of activity in 2021, right? Like venture firms were not getting the message.

Starting point is 00:40:57 There were a lot of venture firms that were accelerator to the floor through Q2 of 22. Because remember, venture firms are not in the public market business. So it's easy just to say, oh, that's a public market problem. that's not our problem. The problem here, though, was that the melt up, the balloon was created by a macro event, namely ZERP, and the deflation was created by ZERP. So I think because we have a foot in both markets, we were quicker to the set of concerns that caused us to hit pause.

Starting point is 00:41:28 And, you know, I would also say that, you know, founders don't stop doing interesting things. In fact, I think the most interesting time to back founders are during the tough periods. and that's why you've seen these nine deals we've done over the course of the last couple quarters. These are some of the best Series B and Series A deals that we've done in a long time in terms of the quality of the team, the TAM, the revenue profile of the businesses, the product market fit, the efficiency. They all took the religion and got fit. In fact, every inbound that we get that it starts with, we've read your letter, time to get fit, we're efficient. And, you know, like nobody's coming in, you know, burning insane amounts of money anymore. And I think it's that health restored to the market that's causing venture firms like Altimeter to be pretty foot forward and in market as we head into 2024.

Starting point is 00:42:24 If you want something to put a lot of optimism around, I do believe it would be an incredible time to go start a company if that's something you've been thinking about doing. It's just a much more rational environment in the whole. ZERP environment, the number of competitors you would have would be dramatically lower. Your ability to hire people is obviously a ton easier than it was before. If you're having to want real estate, it's near free out there. We'll pay you to come to the office just to make it not a ghost town. And so, you know, it's an incredible time to start a company and benchmarking others are wide open for Series A deals.

Starting point is 00:43:02 So, you know, reach out to whatever you need to reach out to. but like it's a fabulous time to start something. And I think history has shown that these windows of pessimism are a really good time to get going. And so I would I would highly encourage anyone who's kind of been debating starting something that this is actually a fabulous environment. Yeah. Just on the early stage to build on that, the biggest issue for the past 10 years that I hear from a founder is not raising money. Raising money was easy. go to an accelerator,

Starting point is 00:43:36 they're trying to fill seats at accelerators. You get your first 100K or maybe get 50K from your friends and family, 100K from your accelerator, raise a 500K to $2 million seed round, pass the hat, party round. It was all so easy raising money. But then once they had the money, they couldn't find a CTO.

Starting point is 00:43:53 They couldn't find a VP of engineering. They couldn't find a sales executive to be their first sales executive. And when they did find those people, they said, well, I've got an Uber, an Airbnb, and a Google offer, and I'm going to try and get a Microsoft offer. And, you know, then they'd come back and say, well, I need 300,000, 400,000 in total cop. Now, this is a startup that's raised a million, so they're going to give 400,000 out of the gate. They can't match the Facebook offer. And now, Facebook, Amazon, Uber, everybody's on a hiring freeze,

Starting point is 00:44:24 and they're still doing, I believe, the quiet gentleman's riff where, you know, maybe the bottom 10% of people are cut in a performance review on a rolling basis across the entire organization. What this means is now we see applications for Founder University or a pre-accelerator of two or three former Uber, Airbnb execs who are working on a side hustle and they're not incorporated yet. So the talent availability is incredible. It is incredible. And when you don't have... Yeah, comparatively, yeah.

Starting point is 00:44:56 When you don't have those, it's also become international. So there's two very subtle things I want to point out that founders at the early stage, I'm talking year zero founders where we invests. There's two things they're doing that nobody's paying attention to. One is they are so good at running remote teams that they are able to manage a developer in Argentina, India, Ukraine, or in Silicon Valley or working at Lake Tahoe but demanding a Google's level salary. but once you learn how to manage those people in a Slack room on Zoom

Starting point is 00:45:32 using huddles, whatever it is, you don't need a Silicon Valley person anymore. You don't even need an American. And now they're telling me, oh, well, I'm getting people in Portugal for $60,000 a year as a developer. I'm getting people in Manila for my EA operations role, SDR roles

Starting point is 00:45:50 for 3K a month, 2K a month. And they know how to manage that. So their burn rates are coming down. I'll see people who have 12 employees and they're spending $50,000 a month total. That's their spend, not their burn, Bill. And I'm like, how's that possible? That's 4K a month per person.

Starting point is 00:46:04 We have no office. We got 100,000 in free credits from Azure or 250,000 from Azure and 100,000 from Google and 50,000 from whatever, Amazon. Yeah, and we're hiring people internationally. And then the second piece is AI. And the idea that you would hire somebody to write copy to make a logo, to be a designer, with co-pilots writing content faster,

Starting point is 00:46:30 with SDRs, researching things. Everybody's getting 20% faster, 30% faster at their job every quarter. So now you see three, four, five-person teams hitting a quarter million in revenue, 10-person teams hitting a million in revenue. And this is what gives me massive hope, the efficiency that founders have,

Starting point is 00:46:49 and they expect this round of funding to be their last. When they raise that 500K or $1.5 million seed round, they're telling me, we're going to get to break even on this. We don't want to be in the Series A race. We don't want to be dependent on venture capital. We just want to have seed investors, get our 500K checks, and preserve the cap table. So I think this is going to be a revolution in funding. And this vintage, I think, will be the best vintage since the Uber vintage, the Airbnb vintage.

Starting point is 00:47:17 Jason, does your selection criteria change in a post-AI, post-ZERP market versus a pre-ZERP, pre-AI market. Are you fundamentally looking for different teams or is it just different valuations? It is a great question. I think when you're a venture capital, so listen, I've gotten to sit at a poker table with Bill Gurley for over 20 years and as a journalist asking questions and ask other folks, Ruloff, Michael Moritz. I've literally had a group of unofficial mentors who have been able to ask questions to. And that's helped me refine process. Because if you think about what a venture capital success is based upon and I've really studied it, it's based on their brand. Bill Gurley's a great brand. Brad Gerser's got a great brand. He just said before, when people contact him,

Starting point is 00:47:59 they first say, oh, we're fit. So what Brad did by writing that fitness letter was he put out a flag and said, hey, if you are a fit company, come talk to us. And so he's, now he's got a deal flow that is different and differentiated from other venture firms. It's the fit people come to him, right? Or Bill Gurley has the people with network effects because, oh, he did web van. Oh, he did Uber. Oh, he did, you know, this other network. Oh, he did eBay. They want people who understand networks. So your deal flow and then your decision making and then your ability to double down on an investment. I believe those are the three criteria for success and venture.

Starting point is 00:48:36 Everybody's got different theories on this. And I'm an LP and 20 funds that aren't mine. And I look at those things. Deal flow, decision making, doubling down. On a decision making basis, I was having this talk with Ruloff two weeks ago. We had lunch and he said as the number, as your deal flow goes up, you can become more discerning. Right. You can expect more.

Starting point is 00:48:55 Now when people come to me with a deal that's 30 times revenue and there's no technical person and it's a solo founder and the customer churn is too high, well, we have other competing deals that have three founders and two of them are technical and they have a lighthouse customer and they're asking for 12 times revenue. So you can actually skim the cream as it were. And I think when I started my career, it was just investing in my network, but then over time as your deal flow goes up, we have 20,000. applications for funding a year now.

Starting point is 00:49:27 And we invest in 100 new companies per year. So 50 BIPs, you know, one in 200. And so I've really thought about that question a lot. And basically, more deal flow equals a higher benchmark, so to speak, for investing. Hey, David, one of the things that Jason reference, and I'd be curious to Bill's point on this, because I don't think we've ever seen this in our 20-some years bill here, that if you look at the expected, the consensus headcount growth in engineering in 2024 for meta, for Google, for Uber, et cetera. It's flat to negative, right, for these companies. And this is coming on the

Starting point is 00:50:11 heels of a year where you already saw negative headcount growth for Google, for meta, etc, as they tighten their belts. And this is because of, you know, their teams getting to 20 to 30% more productive out of the gates with co-pilot and their view that that will continue for years. So this point to Jason, if the finite resource in Silicon Valley is engineering and technical talent, right, if that is the most important resource, that's the resource that you couldn't find and you couldn't afford during ZERP. It's not just that ZERP's ending. That would have in and of itself created a much better environment to Bill's point to start a company. It's the ZERP is ending at precisely the same time that we have this inflection in AI-driven co-pilots,

Starting point is 00:51:02 which is causing the biggest companies in Silicon Valley that sucked up all of the talent, that's at the price level for all the talent. They're no longer hiring those folks. And so you have two major factors contributing to this abundance in terms of technical talent at this moment in Silicon Valley that I think is unique. it certainly compared to past cycles. Yeah, I agree with that. And I think that's one of the many reasons why it'd be a great time to start a company

Starting point is 00:51:32 and going back to the people availability. I do push back a little bit on this notion that, oh, you'll always be able to run a company with only four people. What I've seen in the past is we evolved with our tools. There was a great story about Bjorn Borg trying to make a comeback. And he insisted on using the wooden racket, even though everyone had moved to the graphite racket and he got his ass kick. And like once once we get the benefit of the graphite racket, like once everyone has it, then you're just back to where you were, right? And so then you're,

Starting point is 00:52:05 then you're competing on all the same terms. So I don't think there's, I don't think there's an infinite lift in productivity because it eventually gets whittled away by competition. And, and if you don't use it, you die. So that, that's true. The thing that I'm curious, Bill, your take on as things got cheaper to start companies, the outcomes became much more dramatic in venture. So cloud computing was, I think, maybe the biggest one where, you know, and we work, you know,

Starting point is 00:52:39 getting rid of that quarter million dollar check that you needed to give to a landlord and getting rid of the AWS, getting rid of the quarter million or half million dollar check you had to give to, you know, a co-location facility and having to hire a chief security, officer and a bunch of folks. Now with AI, it does feel to me like, you know, three people are going to be able to get companies to 500K a million in revenue. You didn't see anything like that in the first part

Starting point is 00:53:05 of your career. The road to a million in revenue, what did that take back in the day in terms of investment to get that first million in revenue? Yeah, I think I think you're absolutely right, Jason. I think there's a flip side to that, though, that is, you know, if you want to build a company that's going to do a billion in revenue one day. Like, you're eventually going to have to hire people. You're going to step up. You're basically going to have to spend money. So, you know, maybe, maybe there's more opportunity for angel back companies to never do,

Starting point is 00:53:37 you know, venture rounds and sell it 20 to 50 million dollars. And that's to be a huge win for those founders and, uh, and their early investors. And, and, and all that gets into people understanding. whether the opportunity they have in front of them is something that, how much, you know, potential is really there in that opportunity and how much value can be created and how much runway do you have, run room, you know, how big can it be? And then adjusting your capital strategy to that opportunity. I don't think, you know, the other thing I would add to prove that point is if you happen to be on something that is a really big opportunity, there are going to be two or three other

Starting point is 00:54:19 startups. And if you're the one sitting there saying, I'm only going to hire five people and someone else staps up against it, Bezos style, then you'll get run over. Yeah. I mean, there were competitors to Uber before Uber, right? We had sidecar, I think, came out before it and taxi magic. There were a couple of other folks that you had, you had, you had actually met with them, yeah. Yeah. And they didn't have the ambition of our guy who, who. Absolutely. So you got to get, you got to get all that figured out. So let's talk a little bit about AI investments in AI in 2023. In 2020, there was a total of $87. billion deployed by VCs into AI. A lot of that went to a small handful of companies. You had Open AI that raised $13 billion. Anthropic raised $4 billion from Amazon and apparently is at a

Starting point is 00:55:13 run rate of $850 million as reported by the information inflection AI raised $1.3 billion. Just those three deals made up over 20% of all VC AI funding. So the question is, will we see the same amalgamation of capital among the incumbent startups? Are we going to see more of a distributed funding of new AI startups? Hey, David, I want to clarify one thing because I think this happens quite a big. I want you to go back and find that information article. And I think what you'll see is they claim that they would hit $850 million in 2024.

Starting point is 00:55:49 So their actual run rate to 100 million. By end of year, yeah. And this is a classic little trick that people play. You might if I were recording on that? No, no, I think it's actually good. No, no. I think it's a good learning moment here. I kind of like to be it in there because people hear these numbers and they start saying they're real,

Starting point is 00:56:06 even though that was just a forecast that they had put out. No, I think it's the nuance is super important. And I've had founders take last weeks, let's say they had a record week. They take that week and they times it by 52. And they're like, you know, like, but that's because like some sale came in of a quarter million dollars. And they're like, oh, a quarter million dollars times 52 is this amount. So that's where our run rate. Look, this stuff's unbelievable.

Starting point is 00:56:31 Like, you can't sit here and say that it's all a hoax, that it's all scam, that it's all like, like there is real revenue coming in at very high volumes. I mean, you can see it in the NVIDIA sales. and so it's happening and it's interesting and people care and that's why this is an exception and it's a mania and it's still acting like ZER. It could be that gap revenue is one of the only regulatory things that are positive in today's market. Yeah, I mean, and there's some interesting, there's some interesting elements of AI and that and that because these big companies have at least today, I'll say, gotten away with giving away credits for equity.

Starting point is 00:57:20 These companies now have credits. Most all of them want to be the revenue of records. So you don't pay them separately from the hosting service. You pay them with the hosting embedded. And this creates massive opportunity for gamifying revenue because you're reselling hosting services. So if you lower the price enough, you're definitely going to create revenue. And so it's a world that could get sloppy because of everything that's happening in all the components. And when I say that, it's really important to say, I know there's real stuff happening too.

Starting point is 00:57:59 So it's not, it's just, it's a manic world like it was in 01 for everything else. And so you're going to see a lot of really good positive stuff and you're going to see a lot of crazy manic stuff simultaneously. And that's really the lesson, you know, that I would approach. apply from that 99 to 2001 period. It's very difficult as an analyst, and we're all analysts. We study the world around us. We study the world of startups. We try to make sense.

Starting point is 00:58:28 We try to predict the future. We try to make, you know, an asymmetric bet in our favor. At this moment, you have to hold two simultaneous truths, right? One, this thing, in 99, it was the internet. We knew it was going to change everything in our world forever, right? And I think now we would probably say there's probably consensus on this panel that AI may very well be bigger than the internet itself, bigger than mobile, bigger than cloud computing, we'll be investing against it for the next several decades of our investment career. But the simultaneous truth you have to hold is that there's a lot of stuff going on that is radically mispriced because there's no ability to forecast durability of revenue, whether LLMs are going to be important, getting smaller, getting bigger, etc. And the prices that are being paid are applying a discount to them that almost assumes certainty,

Starting point is 00:59:23 like a certainty of the forward view. And so if you believe that AI is as big as I believe, and I think everybody else here believes, it's going to play out over decades, right, not play out over days or weeks or months. And so you have two camps that have assembled. You have the dogmatic camp that thinks it's all of that, everything's radically overvalued, you shouldn't do anything. And you have a dogmatic camp that says, you know, AI everything. And the truth is you've got to be in the game.

Starting point is 00:59:51 You've got to be studying. You've got to be understanding what's working, what's not working? What are the end use cases that are driving productivity for enterprises? How is this going to change search forever? You know, what does this mean for Google? All of those questions. And then as Warren Buffett, you know, has famously said, the hardest thing is to do all that work and then do nothing to wait, to let

Starting point is 01:00:13 the next card be turned to understand a little bit more, right, whether or not you truly have asymmetric risk reward. And I think that's kind of this moment we're in. Every venture firm in Silicon Valley in 1997, 98, 99 was scrambling to get a search logo, Altavista, excite, info seek, you know, go through the list. How did that work out? Lycos, etc. They all thought they were smart. And guess what? They got most of the bet right. they knew the internet was going to be huge. They knew search was going to be the gatekeeper to the internet. It was going to be the tax collector and that it would absorb a lot of the profits, right?

Starting point is 01:00:51 But you would have been better off not placing any bets and investing in the IPO of Google in 2004. And you had to capture 98% of all the profits ever generated by internet search. And so, you know, being too early is tantamount to being wrong sometimes. And I think this is one of those moments where as a firm, we're just trying to study. work hard, but be cautious. I think what you just described with these language models, and it was very interesting when these language models got funded, they skipped the normal startup path. They just went right to late stage funding, which, you know, I think is a function of

Starting point is 01:01:26 the deep mind people were so rich. These AI folks were already making $3, $4, $10 million a year with packages and places. So the money instantly came in in nine figures for these language models. I think the language models could be Likos excite in that, you know, it may wind out there's just one of them that just is superior to all the ones and is most updated and who knows who's that's going to be. Or it might just be that there's 20 of them like publishing platforms like WordPress and other publishing platforms on the web. And the whole angel community didn't get to participate in language models. And then what I see with startups is they're taking the same prompts, the same code, and they spit it out to find. language models and whoever, and they're looking at it and they're telling me like, yeah,

Starting point is 01:02:12 chat GPT4 is a little bit better, but Claude is good, this is good. So I think they're going to quickly get commoditized and I think they're going to be indistinguishable for 90% of jobs. And if they're all indistinguishable for 90% of jobs, it's a commodity business. It might be like storage. It might be like compute. Does anybody care where they're storing their images or videos? You know, what do you think, Bill? And the open source models are particularly disruptive, play here, launched by meta and then Mistraw has really good numbers out of Europe and

Starting point is 01:02:44 to the extent that Amazon and others can host those without fees, it would be very, very I personally, based on everything I've studied in conversations with our friend Sonny, I do think that

Starting point is 01:03:02 the variables that have been used to drive the nonlinear growth both in the parameter count and in the window where they study relevance, I think those are probably topped out, and they're trying to differentiate based on merging multiple models, but the user experience on that is janky and slower. And so I do think there's a chance that we're up against a,

Starting point is 01:03:29 on the LLMs, up against a bit of a ceiling. And we'll see, though. And I think that's why the start, that you're seeing are finding that there's not much difference because they're all kind of heading towards the same ceiling. Well, I will say coming out of last summer, we already started to see a cooling in terms of valuations and up rounds for these AI startups. I think that a lot of firms are coming to that same conclusion.

Starting point is 01:03:58 I don't think it's quite as euphoric as it was in Q1 and Q2 after Chad GPT came out and there was this mad scramble. I think everybody's trying to discern what is real. And remember, David, the valuations and the companies that you pointed out, almost, I think, in every one of those cases, it was set by a non-financial investor, right? If Amazon or Google or Microsoft or one of these companies is marking or leading one of these investment rounds, right? You should significantly discount the importance of that valuation, because while there may be some financial investors who jump on that bandwagon, they're not setting that price. the market. And so, you know, I think that we've seen a relative cooling. I think LLMs has been where what consumed a lot of the action. We're starting to see applications emerge. I'm personally

Starting point is 01:04:50 very excited as Jason and Bill know about the impact this is going to have on Google and what's coming next for the consumer. And so whether it's the really interesting work that Humane's doing, humane.a.I or whether it's the work that's going on at Apple, I think Apple's going to have a large language model and a full new Siri come, you know, Q2, Q3 this year. You know, Lama 3 is coming in Q2 of this year. Zuck's going to be in that game. Microsoft wants to be back in the consumer game. What's the best case, Brad, for meta being a leader in AI?

Starting point is 01:05:24 Bill just sort of mentioned, hey, they did this disruptive thing. They're behind. They know they're behind. So they did the open source model. They may have even leaked some of it. what's the best case for meta? Is it that their products are just that much better and their feeds are more addicting? Or is there a new product that comes out of meta where they just heads on compete with chat GPT with an app, with a co-pilot?

Starting point is 01:05:47 What's the best case scenario for meta in AI? Yeah. So I would direct you in three directions. Number one is reducing friction from existing products to make them way more pleasurable to the end user. you know, thrill customers. So, you know, if you talk to people today, the number one source of apparel leads for anybody in the apparel business is Instagram,

Starting point is 01:06:09 but it's still a lot of friction. I'll hover over something, and then I have to go to a sub-site. I have to fill out all the information, et cetera. Instead, there's just going to be an agent that says, hey, do you want to buy this? I'll take care of it for you. Right.

Starting point is 01:06:21 So it just tells us Brad's wearing this shirt right now. Right. Click here to buy it. So shopping agents are coming in 2024. I think they'll radically unlock a whole new level of commerce and activity that occurs on Instagram. Number two, WhatsApp, remember the interaction model for so much of this is chat. We see startups in South America that have 20 million MAUs that are bots built on top of

Starting point is 01:06:46 WhatsApp as a platform. So expect in 2024, you're going to have vertical agents and horizontal agents that are built on top of WhatsApp. This is a platform that's two and a half billion DAUs, right? In India and South America and other parts of the world, This will be the platform of choice for launching your agent into the world. And then, of course, you saw Mark last year experiment with things like meta-a-I and characters. You know, expect a lot more on that.

Starting point is 01:07:14 I would say this company, from the time, you know, the fall of 22, the time to get fit letter, it's extraordinary to watch the turnaround. Mark singularly is doubled down on AI. The whole company is focused on AI. and I think there's going to be a tremendous amount of innovation. And I would say one of the, if you said, what's a surprise prediction over the course of the next two years? Remember, everybody got out of the hardware game, right?

Starting point is 01:07:42 Yeah. Apple won the game. Siri was your agent. I think this opens the door for everybody to get back in the hardware game. Ray-band glasses, I think when meta reports in January, their Q4 returns, meta glasses I have everybody in my office is wearing them they've been a blockbuster hit this season killer use cases listening to music but you're going to see a lot more innovation coming whether you have devices that are in your pocket like humane uh that are going to connect you

Starting point is 01:08:14 because it allows you to bypass the operating system it allows you to bypass iOS and apple knows this which is why they're coming with their heater in q3 q4 this year and you're going to have I think they're going to scrap Syria. I think they're going to go to a fully new LLM-enabled AI that's going to drive your search experience. They're sitting in pole position. They ought to be able to win. But I think you're going to see Microsoft and everybody else back in the game. Gurley, what do you think in terms of those magnificent seven type companies?

Starting point is 01:08:44 Google with their blue links is the franchise at risk with just getting an answer, meta with the glasses, Apple may be throwing a hell Mary and Siri 2.0 actually working. What do you think of those major groups? As Brad hinted at, I do think voice recognition is a key part of all this. If we're going to, you know, a lot of the major disruptions out there that it happened over the past 30 years relate to the UI that the customer is using. You know, when we went from mainframes to PCs to browsers to mobile phones, like they all teams the UI. and it's hard for me to imagine AI being great without voice recognition. Like the efficiency of talking to something is so much better than having to type, you know.

Starting point is 01:09:33 And we also got excited about like chatting as a potential UI and there were actually startups created like four or five years ago. It never happened. I just don't know that people want to type. I think if you could get the talking right. So I do, I think kind of combining a great LLM with great voice recognition is a really important milestone. It's such a great insight because if you think we've, we've been trying to have this voice interface for 20 years, right? Bill, drag and dictate, you probably looked at some of these companies back in the day. And my perception was the payoff from speaking was very low.

Starting point is 01:10:13 Siri, lower the music. Siri, pause the music. Like, it's not enough of a payoff for me not to just. click the volume up and down button. But if you say, get me a reservation at one of the five best sushi restaurants within 20 blocks of me while I'm in Manhattan and I want it in the next hour, and it actually does that, that's a major lift. That's a major payoff. So I'm willing to do that. And I found myself when I was skiing this time, I answered and reply to, and Siri can do this where you can like reply or, you know, and I find myself doing that. And then,

Starting point is 01:10:49 on the iPhone 15, I don't know if you gentlemen have it, there's a thing called the action button. Do you know about this? The action button? The action button is just a button that you can program to go directly to an app. I set my action button when I press it.

Starting point is 01:11:01 It does a shortcut, and my shortcut is the chat GPT4 interface. Voice interface. So I'm driving in my car. I got my Tesla on self-driving. I got this and I just press the button and then I'm having a conversation with ChachyPT4 about history.

Starting point is 01:11:22 You know, and I was with my daughter and we were having a conversation. She wanted to know the history of a certain war and a certain people. And it was unbelievable. It was like having a tutor in the car with me. And so I agree with you. I think this could be the big breakout. By the way, one cool kind of tactical minor example of this is the Roku remote. It sounds like you had a great experience using Chatshaport as an educational tool.

Starting point is 01:11:46 Not now. Now people know what you're really connected to, Jacob. Both on the mobile app and on that small remote that Roku has, there's a microphone button. And you can say fast forward 10 minutes or turn the volume up or turn the captions on or turn the captions off. And it's awesome. Well, again, the payoff to put captions on and off is like five or six steps, right? And so when the payoff is greater, an AI kind of makes the payoff greater, then it's worth doing it, right? The juice, the squeeze is worth the juice.

Starting point is 01:12:22 The juice is worth the squeeze. There's a second part to get to the reality you talked about. So I think this first hurdle is, can you get voice recognition great and combine it with an LLM? The second part is equally difficult, which is can you build an infrastructure for transactional, you know, things in a digital world that you describe? Jason, and I think it's harder than people realize. I think Google struggled over the years with can they do deals with, you know, the aggregators in a way that's mutually beneficial. And for the part, there's just been a kind of friction in trying to make that happen. And if you don't do the aggregate. What's an example of that? Like Expedia or something? Like trying to work with Expedia or

Starting point is 01:13:02 booking, you know, dot com because there's an ad relationship. And Google always wanted there to be a jumpball competition between the players. But the users, but the user, that example you just shared, you don't want it to come back and say, do you want me to get a quote from booking and a quote from Expedia and a quote from, like you don't want that overhead. Just give me my reservation. Yeah. Yeah. So how do you make that happen? Because if you can't work out a deal with an aggregator that's mutually beneficial that's hidden under the covers, now you have to go out to each individual small business to make this all work.

Starting point is 01:13:39 And that's nearly impossible also. Yeah, that's a multi-decade process. Well, this one, though, I mean, you know you got me in a place of passion, Bill. This one is the one that I think is going to get cracked. This isn't Jason a 10x moment. This is a 100x moment. This is when we talk about having a personal assistant in each of our pockets, personal assistants don't just tell you, you know, some information about World War II.

Starting point is 01:14:01 They actually do that makes your life easier or better. They book the restaurant. They book the hotel. They book the airline ticket. I've talked to lots of friends at Meta, at Google, at Apple, etc. They would all echo Bill's point. It's harder to do than you think.

Starting point is 01:14:17 Caparthe, in fact, went to Open AI, I think in 2018, tried to do this, worked on a project called World of Bits and said it was much harder than you think, but he thinks now is the time. The timeline they give me is that, you know, you have the rebirth of these models on devices

Starting point is 01:14:33 like Apple this summer, but it doesn't get you to action. The action bot is sometime in the 18 to 24-month-time horizon, I will say that Apple and Google have a huge advantage in this regard, because if you think about the app ecosystem, they have payments on both sides. They already have a relationship in the app store with booking.com with Expedia, et cetera. And so they're able to connect that plumbing up in a way that may be harder for meta to do, maybe harder for OpenAI to do. But that's the work that's going on now. Sounds to me like an argument, Brad, that the incumbents, Open Table, Yelp, United has a great.

Starting point is 01:15:10 app now or Emirates when you and I go to the Middle East, we take Emirates typically. They're all starting to have good apps. It might just be you to just ask Siri to open open table and that open table gets to the reservation, yeah? I think for certain, my, I've thought about this. I think for something that's a very important transaction in your life, like, you know, real estate or something, you might have a separate AI relationship with someone for the more tact. stuff, you know, I don't think that's going to work. I think it violates the premise of what you, you said. And the other thing I would highlight did I think makes the same. Yeah, yeah, yeah, yeah, yeah, you just want it to happen. One click and done. The other problem, I think, all of the incumbents have with this second part of facilitating this transaction, they've all had monopoly-like power and they've all tended to treat part of.

Starting point is 01:16:10 in a win-lose way. And I would put that on nearly every one of them, Google, Facebook, Amazon. They don't play nicely. Apple. They don't. They haven't built win-win relationships with partners. So that's an opportunity for somebody? No, they just, they always, well, Google in particular, like, was born, we're putting

Starting point is 01:16:32 these people up against each other and actually led their revenue growth and all that. But, but yeah, they've just, they've had so much market power that they've, They've created cultures where the attitude is, we win, you lose. Squeeze the partner to death. And Facebook has done that. I mean, name the companies that have been built on the backs of these companies. Facebook, I remember Mark Pink is telling me that his personal relationship with Zuckerberg would allow Zengut to flourish in the Facebook ecosystem. And that's where all their apps would work.

Starting point is 01:17:04 And then he woke up one morning and Zuckerberg slit his throat. So I just think, like whoever, figures it out, I think they're going to have to have a bit of a mindset shift because if they could work out a win-win deal with one of the leading partners, it would allow them to knock off some of these verticals a lot faster. ChatGPG seems like a good possibility there. If they just let everybody have their revenue, do it for free and just make the 20 bucks a month on the pro version.

Starting point is 01:17:32 That seems to be the best model. You can do it for free. This is a huge moment of potential, massive disruption to these monopoly models. You know, I've said Google is the greatest monopoly in the history of capitalism. They're in the best position, but they also face the biggest innovators dilemma. It's almost impossible to me to see how they go from the age of 10 Blue Links to the age of answers and actions and maintain the same monopoly profits. They'll be in the pack of competitors. But to maintain the monopoly profits, you have to assume that everybody else in the game.

Starting point is 01:18:07 It's impossible. It's impossible. On a per user, on a per visit basis, it's impossible. It truly appears to be impossible. I would say that maybe another solution is that the leading LLM lets the consumer choose, which of these services companies they want to work with, and then they have open, you know, connections to each of them, and then it uses what you have selected.

Starting point is 01:18:30 That's another way you could potentially get there. I mean, just trying to get another browser to work on your iPhone as the default is just so much lift and so hard, where, like, when you ask Siri for music, it just automatically goes to Apple Music. I want to use Spotify. It doesn't make it easy. They kind of put these hurdles up and, you know, Siri doesn't go deep into Spotify. Well, this gets into my point.

Starting point is 01:18:52 Yeah. And then there's other, there's some of these, some of these potential players have vertical services that might compete with that. So anyway, that's, it's, it's, it's a lot that has to happen to get it right. It's super fun to watch, so. But when you have a fiduciary working in the background for your, your behalf, right? It's not going to be an auction.

Starting point is 01:19:11 My meta will simply say, hey, Brad, do you, you know, do you prefer booking or expedia? And I'll say, you know, booking or expedia. They'll say, do you prefer Uber or Lyft? And I'll say, Uber. They'll say, do you have an Uber number? And I'll say, yeah, I'll text it to you in a minute. I'll text the Uber number to them of my frequent flyer or my loyalty on Uber. It's going to be this ambient thing that's really, you know, seamless that occurs in the

Starting point is 01:19:36 background, they asked me once just like my personal assistance. And once it's done, longitudinally, it gets better and better and better every single day. It's assuming the LL, the leading front end LLM doesn't say, well, I'll only do that deal if Uber or Expedia, whoever bends over and gives me crazy economics. No, the reason I don't think that happens is because this is no longer, you know, Google, you know, determining the terms. We're going to have seven or eight people. And by the way, for meta who gets zero money in the travel vertical, why wouldn't they do it for free? Why wouldn't chat GPT do it for free? They disrupt the hell out of their competitors. They deliver a more

Starting point is 01:20:16 thrilling consumer experience for their customers. Your margin is my opportunity, right? I mean, I hope that's what happens. I really do. I've just, I've lived through the past 15 years of these companies not respecting the vertical marketplaces. So it'll be interesting to see. So I'm going to, I'm going to force a decision on you guys. You've been talking. about a lot of the Magnificent Seven, Alphabet, Amazon, Apple, Meta, Microsoft. We didn't talk as much about Nvidia, but obviously, Nvidia is a very significant player, and of course, Tesla. If you had to choose one prediction for 2024 in terms of the best performing on a relative

Starting point is 01:20:52 basis and a worse performing, what would your choice be? We'll start with Brad. Well, first I would say that I think 2024 and 2025 will again be two more years that tech-oriented companies that are represented by the Magnificent Seven will outperform non-tech. So if you look at the performance of the NASDAQ versus the spy or the SMPX technology, I think you're going to continue to see meaningful outperformance because of all the benefits of AI that we've just talked about. You've also heard us say that all seven of the incumbents generally benefit from what's going on here, All their cloud businesses get bigger.

Starting point is 01:21:37 All this AI stack has to get built. But if you put a gun to my head today, I would say the non-consensus pick I would have on the long side would be Nvidia. You know, it's trading low 20s, PE multiple. I think the demand is going to continue to outstrip their supply for a long time. I think the runway is still very long and very wide. And there's a wall of worry about Nvidia.

Starting point is 01:22:00 A lot of people like Chima think that they pulled forward all the demand for the next two or three years and, you know, that this is like dark fiber in 2001. And so that wall of worry causes the multiple to have compressed pretty dramatically over the course of last year. I think they will continue to surprise to the upside. And then on the downside, again, I think I would pick Google. I think Google will still be positively returning in 2024, but I just think it's very challenging for their multiple to expand in a world where 10 blue links are clearly dying. I don't know. know how long that timeline will be. It's not going away overnight. They've got an incredible team over there, but I think it's very challenging. The only way I think I'm wrong on Google is if

Starting point is 01:22:45 Ruth and team get really aggressive on the cost side, they were probably the least aggressive in terms of getting fit in 2023. And I think there's massive opportunities for them in the future to tighten their belt. Yeah, I, you know, I'm going to choose a biased answer on the long side and and go with Uber. I think that the new CFO brings a mindset on cost management that the company hasn't had. And we saw the powerful stock performance that META was able to deliver when that kind of attitude was kind of brought into the company. And I'm hopeful that that can happen here. and it's coincidental or simultaneous with the core business just having, you know, a lot of wind at its back with with lifts inability to kind of fund losses forever off the table. It's just a really powerful dynamic for the company.

Starting point is 01:23:47 And then on, I would probably echo the Google comment on the other side. When the world is worried about disruptives to your business, It's just really hard to have any multiple at scratching whatsoever. And so you find stocks that look cheap on a P.E. basis, but they just can't get anywhere. And Jason, you get the final word? Well, yeah, I'm obviously long Uber as well. And I do think, yeah, more financial management is a great thing. They could probably do what they're doing with half the number of employees.

Starting point is 01:24:22 And I'm not advocating for half of people to lose their job. But the point is what we saw at Twitter X and what Elon did there, it is probably the case that every tech company could cut half their staff and still perform at a high level. And they might even function better. And we saw that when Google cut and Facebook cut 10,000, 20,000 people each. So I'm super long Uber, but when we look at the Magnificent Seven, I think Apple has some fundamental problems in that. and I like anecdotes about consumer purchasing behavior

Starting point is 01:24:57 because I do think that they can be super insightful, especially in a company that's launching a lot of products and has a lot of buzzwords, et cetera. I skipped for the first time iPhone 14. I skipped a generation of iPhone. Now, I was the person who would send somebody to line up and pick up a phone for me, and I would always buy the interim.

Starting point is 01:25:17 So between, you know, iPhone 5 and 6, they would do the S or something, and I would buy that too. So I would literally just trade in my iPhone every year for the newest one because it really had it felt like such a profound change now I skipped I went from 13 to 15 and my reason for skipping was not financial it was just I didn't want to go through the process of unboxing it. There wasn't literally there wasn't enough juice from that squeeze of unboxing and setting up the phone that one hour for me to buy it and upgrade it. And then I talked to my family this Christmas and some family members are skipping three or four generations. They're going from 10 to 15, 11 to 15. And you're starting to see that in the revenue numbers.

Starting point is 01:25:55 And I don't think the glasses, the goggles are going to make up for it. I don't think they have enough new products. And I think it's like the Steve Jobs product roadmap has been exhausted. And I don't know that goggles gets them there or services gets them there. So I think Apple's got a lot of headwinds. Google, I'm actually bullish on. I think that the franchise of search is going to take a long time to deprecate. and I think people are going to do more searches

Starting point is 01:26:22 and they're going to do more queries because it's going to be so fun to do queries. So I think that the lift from doing more queries will outtrip the disruption and what they have in YouTube as a base for a language model and what they have in your Gmail and what they have from the browser and what they have from Android.

Starting point is 01:26:39 Remember, they have like 5, 6, 7 billion user franchises from Android, YouTube, search obviously, docs. What am I missing in there? billion franchise. So I feel like they're going to get a lot out of that data. So I don't think they're out of the game. All right.

Starting point is 01:26:57 138. 138. You can write that down the day. We'll watch it. Well, one area where Apple has momentum, I think, is Apple pay. Oh, yes. It's really on fire.

Starting point is 01:27:10 On fire. So good. Yeah, both online and all. You know what? It's interesting. I was where I was skiing. And because you can't get service people, in ski towns now, right?

Starting point is 01:27:22 It's just like a major problem. Any tourist town, people, because of Airbnb, etc., people can't live there, so people can't drive to Lake Tahoe to work. What they did is they've replaced, like with a toast kind of system, whatever, the ability to order from your seat at the lodges.

Starting point is 01:27:38 And because of Apple Pay, you know, the idea of typing in your credit card is just, why would I do that if my watch does Apple Pay or my phone does it instantly? And I'm starting to see Apple Pay come up for like clothes purchases. Like I didn't think it was going to get there so quick. It's not just like getting yogurt,

Starting point is 01:27:57 you know, frozen yogurt. It's happening everywhere. So yeah, I agree with you. That's a really interesting business. That's your negative pick for the year, right?

Starting point is 01:28:04 I think Apple is a negative and I think I'm not long, I'm trying to figure out who I'm long in that group. What are you talking about? You chose Apple as you short and you chose Google as your long. I heard it. No, no, I'm just that I'm not as negative on Google.

Starting point is 01:28:18 We were restricted to the Magnificent. Not as negative negative on Google. I think, I'm trying to think, I think if we're betting on stock prices, you probably would go with Nvidia because of that reason. So I would have to pick my long being Nvidia and Apple being my short. So he's already changed from me, though. No, no. I'm just saying I think you guys are the wall of worry of Google and I think it's a little overblown. Okay.

Starting point is 01:28:40 I think they have opportunities. Anyway, well, there's been an amazing episode. David, great job. Moderating reading the news, Bill Gurley. Awesome. and Brad Gershner, amazing. We'll see you all next time on this week's service.

Starting point is 01:28:52 Bye-bye.

This Week in Startups - Bill Gurley, Brad Gerstner, & Jason Calacanis on the state of tech markets, hosted by David Weisburd | E1875

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