This Week in Startups - Reddit communities revolt + Brad Gerstner on state of private and public markets in 2023 | E1761

Starting point is 00:00:00 All right, everybody, first up on the show before my spectacular fireside chat with the fifth bestie, Brad Gersner. I want to talk about this Reddit situation. As you may have heard, Reddit, the most famous and successful forum or community site ever created in the history of the internet. Let that sync in. Is currently dealing with a strike, a strike by the members and the community managers of their own website. This week in startups is brought to you. by LinkedIn jobs. A business is only as strong as its people, and every hire matters. Post your first job for free at LinkedIn.com slash twist. Vanta. Compliance and security shouldn't be a deal breaker for startups to win new business.

Starting point is 00:00:48 Vanta makes it easy for companies to get a SOC2 report fast. Twist listeners can get $1,000 off for a limited time at vanta.com slash twist. and iConnections is a platform to connect and meet with elite capital allocators through their online platform and bespoke events. The first 25 VC funds to sign up for iConnections Miami 20204 event in January of next year will receive a 20% discount. Head to iConnections.io slash twist to sign up today. Why are they striking? Well, the red or for short mods are on striking. because third-party developers are revolting after Reddit said they were going to charge for its API.

Starting point is 00:01:34 Now, for background, what this means is there are apps in the App Store when you type in Reddit, and you'll see there's a half-dozen apps, maybe a dozen. In the early days of the Internet, there was a culture of APIs where people could build around other services. So if you had access to Google's API, you could use their search results or Yahoo, had one. And it really started at Yahoo. They had something called SearchMonkey, and they inspired people to build apps and use their data. Reddit did something similar, and so did Twitter. Twitter said, hey, here's the API, have added. Why did they do that? Well, they were constrained. In the 2004 to 2010 era, when a lot of these sites were launched, there wasn't a lot of money

Starting point is 00:02:21 available to startups. And those startups had very few developers, and developers were a precious resource, they said, hey, if you want to build something like Samyze was a search engine for Twitter, if you want to build tweet deck, a desktop client for professional Twitter users, the developers would make it. And the understanding was, hey, you're giving us free developer resources. You're on your code. You're using our data, but you're making our service generally more valuable. And then once the services became big, like Twitter, Reddit, etc., they decided we're going to deprecate these services because they became cash rich and they wanted to control the experience with users. And doing this means that there's going to be some hard feelings.

Starting point is 00:03:06 And the feelings have gotten, people are a little sensitive. So as of Monday evening, 8,000 subreddits, in other words, topics have gone dark. This means either they went private or they stopped allowing new posts. And you say, how is that possible? Well, the way Reddit works is you can create your own subreddit. Now, there is this illusion that you own that subreddit. We've had people on this podcast who created Wall Street bets and other things who have felt bad about having their subredits essentially taken away from them, which if you're building your house on somebody else's land, at some point they can take the land back. And that's essentially what's happening here. The people who are of the mods are saying you can't post and you can't even see the content here.

Starting point is 00:03:51 So let that sink for a second. Now, they could, it's going to be very hard for Reddit with this many subreddits going dark for them to fire everybody. It would be essentially like turning off their entire community. But there is a bit of background here. You remember back in April we covered that the New York Times did a profile of Reddit's CEO Steve Huffman, really brilliant entrepreneur who co-founded Reddit with Alexis O'Hanian. The title of the article was Reddit wants to get paid for helping to teach big AI systems. And basically the article is about how Reddit was going to start charging companies that use its API to train their large language models. And we've been talking about LLM's ad nauseum on this program.

Starting point is 00:04:30 So you shouldn't know what they are by now. You know, in order to guess that third or fourth word in a sentence or try to essentially come up with good ideas, you have to have a model. What's one of the best models in the world of human content creation? Well, one of them are newspapers, right? Those serve a certain niche core is one, Twitter is one, Reddit's one. And then, of course, you have things like open source projects. All of those data sets are what modern LLMs are built on top of. But you need permission.

Starting point is 00:04:58 And people didn't get permission from Reddit. So Reddit said, hey, this is a way for us to make money. And it's quite interesting because for my whole career as an angel investor and a venture capitalist now with a fund for the past, I think, 12 years I've been doing this. People have always told me, hey, somebody's going to want to buy our data. And it really never happened until now. But actually there is a market for data we think. It's possible that these language models will have enough free data that they can use that they wouldn't have to pay Reddit. But if it was a reasonable fee, why wouldn't you to make your large language model that much smarter?

Starting point is 00:05:31 For somebody like Microsoft, Open AI, closed AI, or Google, there's no price that Reddit can charge that's going to be too expensive or that Twitter can charge. But if you made a free version of a mobile app, which these third-party developers have done, well, you probably are not making any money or a small amount of money. So Reddit started in 2005 and didn't launch its own mobile app until 2016. Remember I said before? These startups were typically constrained in terms of their revenue. So they went 11 years before launching their own mobile app. And Reddit users have relied on third-party apps.

Starting point is 00:06:08 Allium Blue was won Apollo. Those apps would not be possible without the API. And Reddit, of course, got more users to use the service on their mobile phones, thanks to those folks. But the API, while it's great for people to tinker with the platform and to create these things, when you start looking at how successful these apps have become, well, Reddit wants to charge something around $12,500 for every 50 million requests. And that's going to start July 1st. But at that usage point, one Reddit app, Apollo says they would need to pay $1.7 million a month. So let that sink in, 20 million a year. So now,

Starting point is 00:06:47 Apollo and a bunch of other popular third-party apps. They announced they would be shutting down June 30th before the API cost kick in. Last Friday, CEO Steve Huffman did an AMA and asked me anything on the API issue. And he made 14 replies in the thread. It's generally really poorly received about the API pricing. The folks on Reddit, I mean, they're largely from anonymous accounts. And the currency of Reddit is being dank, a word for, being dark slash funny slash irreverent, let's say. And so Steve's Reddit username has been

Starting point is 00:07:26 Spez, SPEZ for since the beginning. And here's one question that came in. How do you address the concerns of users who feel that Reddit has become increasingly profit-driven and less focused on community engagement? Valid question. All right. So he responds quite reasonably. We'll continue to be profit-driven until profits arrive. Reddit is trying to be profit-driven, especially because they have an IPO coming up. Unlike some of the 3P apps, third-party apps, we are not profitable. So in another exchange, username Sri Mucan said the announcement of the API changes felt very abrupt. Your New York Times industry suggests this was in response to the rise of chat ch pt and other large language models, LLMs. Were these API changes or in the pipeline prior to chat GPT or is this really a knee-jerk

Starting point is 00:08:09 response to cut off, get a cut of LLM training data to which Huffman replied, yes and no. To the things happened at the same time, the LLM explosion, put all Reddit data use at the forefront and our continuing reference to reining costs to make Reddit self-sustaining, put a spotlight on the tens of millions of dollars that cost us annually to support the 3P apps, third-party apps. So again, that's a super fair response. He's being completely honest with the community. And when you look at these third-party apps, well, they are siphoning off the top users. Why are they siphoning off the top users? Well, the Reddit app is not as good. as these apps. These apps have been and at it longer. These apps only have to do one thing.

Starting point is 00:08:50 Reddit has to do everything. So they're always going to be slightly better than Reddit's app, or chances are if you have this, you're going to have two or three apps that are better than Reddits. What does that mean? The top users then are going to go to these apps. So for Reddit, which wants to make money from advertising and perhaps some of these apps like the Twitter third-party apps, which have been deprecated as well in a very similar fashion, those apps were taking out ads on Twitter's case. So not only were they removing ads, they were taking the top users away

Starting point is 00:09:20 from the platform who advertisers covet the most. So a lot of this has to do with the top users and, you know, having insights into them. Remember, these third party acts are getting all the data of all the usage. As I said, 8,000 subreddits with over 28,000 moderators have gone dark. Some subredits will be shutting down indefinitely,

Starting point is 00:09:37 whatever that means. I think that means until they've run out of fish sticks and hot pockets, but, you know, they could be back sooner. three reasons why this is super interesting to me. You know, a lot of Reddit's value is created by these unpaid moderators, and they are doing subredits really because they're passionate and they found friends. So it's affiliation in some cases.

Starting point is 00:10:02 It's recognition, you know, being on the leaderboards. Some of them could be on the edges, you know, drunk on their power. But they don't get to participate in the profits. And some of them probably do. Also, the IPO is coming. and they need to get this revenue going. So it couldn't be a worse time. I think the Reddit members are doing this because they know they can.

Starting point is 00:10:22 And it's interesting because AI is forcing their hands. Now, there are a couple of hot takes I have. Number one, I think it's all going to blow over pretty quickly. What they could do, and here's a nice middle ground that I'm sure Steve has thought of and maybe he'll deploy, is I would offer to either buy the third-party apps and hire those folks who become developers. and then maintain them. So you have maybe different apps that, you know, have different focuses and different themes.

Starting point is 00:10:52 So one could be for power users who are using the site all day. One could be for mods, etc. I know it's a lot to handle, but that could be a path forward where they buy these folks out, give them some equity, turn them into, you know, advocates and promoters of Reddit as opposed to detractors. So if you think about these folks, they're the ultimate promoters of Reddit who have now been turned into detractors. And you want to flip that. So how do you flip it? Either you buy them and give them equity in the company and say carry on, or how about saying this to the different

Starting point is 00:11:21 Apollo's of the world in these apps. We'll split subscription with you, revenue with you 50-50. So you can be an official third-party app. We want 50% of your revenue. You know, we get control of your subscription data or whatever. We have co-access to it. We get data about the users. And then we'll give you 30% of the revenue that people see. And we'll know that because we'll know the number of views you get in your app. Everybody wins, revenue take, and you make it a five-year deal or something. So now these folks are going to make more money, and you can feel free promoting them. In other words, you let them eat. You let them get their beaks wet. And that would solve the entire problem. And then if you think about the top mods at Reddit, I had offered,

Starting point is 00:12:01 back in the day when I was at AOL, we had a clone to dig and Reddit, or inspired by FARC, and which is really the, and Slashdot, which are really the origins of these news plus community sites, or these community news sites. And we just hired, I think, 20 people from Reddit and 20 people from Dig. And we just offered them $1,000 a month. So I went to AOL and I said, listen, for a half million dollars, I can get you 40 of these people who are already doing it to program the homepage and program some topics. And it worked. So I think you could offer the top mods a job in mod support. So you keep the mod structure. And this, maybe they're doing this already at Reddit, but the ability of, hey, if you get your subreddit to a certain level of critical mass,

Starting point is 00:12:46 hey, maybe we'll hire you for $5,000 a month, or maybe we'll split ad revenue with you. This could change the entire nature of Reddit. You have to be careful because, again, a lot of people who are doing this are not doing it for the money. And then if they do it for the money, they're going to compare it to their day job. So if you're a developer making a quarter million dollars, you know, at Uber, you might not want to make, you know, an extra $50,000 a year for your subreddit in advertising. But if you're a journalist and your subreddit makes $50,000 a year, you might feel great and you might quit your journalism job to try to double that $50,000, get to $100,000. So I would think of a substack Patreon-like model here where you could

Starting point is 00:13:23 enable mods to make some money, i.e. I subscribe to this specific subreddit. I give a dollar. I give $10 a month, whatever. And that gets split 50, 50, 70, 30, however Reddit wants to do it. And that would be very appealing, I think, to the folks on Wall Street. I know if I was going to buy the stock right now as an ad-based system with a little bit of a possible data business, it's not super interesting to me. But if it had a revenue share like YouTube, that would be groundbreaking. And that would be what I would pursue if I was Steve. Interesting take from our guy, Artie Bucco. You know, Artie Bucco from The Sopranos went on to a great career in venture capital doing Bucco Capital.

Starting point is 00:14:05 He says Reddit is walking a tightrope now, need to choke out third-party apps to serve ads on Core app, have now pissed off all their free labor mods who are now revolting. Ben Thompson put a while the adventure that is the end of free money continues. And that's really referencing ZERP, zero interest rate policy. If Reddit is worth $10 billion or $20 billion, at some point, the free money invested into companies like Reddit, WordPress, whoever, they're going to need to basically demonstrate revenue and go public. And it has to be consistent revenue. And the ZERP part of this where there's free money everywhere is truly over.

Starting point is 00:14:52 You see that with Airbnb and Uber most of all. Those businesses were in dogged competition with infinitely funded competitors. that were taking all the margin out of these businesses, seemingly with DoorDash. And luckily, that ZERP phenomenon is now over, and we're actually getting the nature of these businesses. And the nature of Airbnb is it's printing money. The nature of Uber is it just tipped over into free cash flow

Starting point is 00:15:19 and is going to start printing billions a year, billions a year in free cash flow. I believe that, and I'm still holding a large percentage of my shares from the seed investment. Reddit is expecting a $15 billion valuation on their IPO. The last known revenue number was $400,000. million in 2021, but 2022 was a horrible year for advertising. I wouldn't be surprised if they didn't grow much. Maybe they had a flat year, 500 million, 600 million. But I don't think they're

Starting point is 00:15:45 tripling revenue or doubling revenue. It might be like 30%. And that 15 billion number, based on the 2021, 10 times 400 million is 4 billion, 20 times, 30 times, 40 times is 16 billion. Is it worth 40 times top line? Probably not, especially if it's growing less than 30 percent, 40% year over year in which we don't have that number. So maybe it's going to be worth 20 times revenue, 15 times revenue. We're having a little bit of a tech rally, but I think they need something exciting and fun. I really hope they consider my proposal of sharing revenue with the mods, sharing revenue with the app developers.

Starting point is 00:16:23 All right, let's get to this awesome fireside chat with my bestie, Brad Gersner, from Altiminer. We talk about macro, macro, macro, macro trends. and it's an awesome fireside chat that happened at our Angel Summit. The Angel Summit is 100 capital allocators, VCs, LPs, angel investors, fund of funds, sovereign wealth funds, endowments, etc. Coming together for three days in Napa, we have it every June. The one that just passed was amazing. And hey, Steve, when you're out of your quiet period or whenever the time is right, please do come back on this weekend startups. Okay, here's Brad. creating a job post and finding qualified candidates can be time consuming.

Starting point is 00:17:04 We all know that. It's insane, right? Like just the amount of time it takes to find somebody, unless of course you use LinkedIn jobs because LinkedIn is closing in on one billion users, as I predicted, well over 900 million members now. And think about how many insanely qualified people are out there right now looking for work. Just go post an open role right now on LinkedIn, and you're going to be 100% certain that you have access to the most qualified candidates available in the world. And guess what? First one's on me. Your boy J-Cal.

Starting point is 00:17:31 That's right. Go to LinkedIn.com slash twist to post your first job for free. You got nothing to lose everything to gain. And one of the things you're going to gain is that purple ring. You ever see the purple ring around people's profile? That means that you're hiring. And when you see that, everybody in your network is going to know you're hiring. And you get some friends of friends.

Starting point is 00:17:48 You know, those are always the best candidates anyway. One of your friends says, hey, I know a great salesperson. They were laid off or they were part of a Rift, no fault of their own. And maybe you land that person who is a game changer, a bar. Razor for your startup. That's exactly what I did for launch, for inside. And I found so many amazing people on LinkedIn jobs. It's a faster way to find better candidates. All right. I'm doing some programming right now in your brain. I say LinkedIn. You say better candidates, faster. LinkedIn jobs, better candidates faster. LinkedIn jobs will help you find qualified candidates that

Starting point is 00:18:18 you want to talk to faster. Post your job for free. LinkedIn.com slash twist as LinkedIn.com slash twist to post your first job for free. Terms and conditions apply. Next up is Brad Gersner from Altimeter Capital. Brad, you were in the room for Mars presentation. I'm curious when you hear her framework for picking hits at the early stage. Juxtapose that with where you spend a lot of your time, public markets and frameworks for making decisions about picking future hits there and working with those founders and supporting those founders in the context of you made a big bet on Nvidia recently before the big run-up. That seems like a pretty good example.

Starting point is 00:19:01 Snowflake seems like a pretty good example from your portfolio from the private side. And then, of course, maybe supporting founders sometimes with tough love in the example of Facebook. So a lot of places to go. But let's start with just what you thought of her framework. Just that. Just that. But it's going to give us a good, I'm giving you the roadmap.

Starting point is 00:19:20 Yeah, exactly. I'm giving you a good roadmap. This is great to be here. And, wow, like, I think, you know, Marr's presentation, you know, I'm sitting over there taking pictures. I'm a lot, I was live blogging, Marr, your blog, or your presentation to the besties, right? And she had that slide and it was Mike Moritz and Bill Gurley and there was J. Kell. And of course, they love that. They're having a field day with that.

Starting point is 00:19:45 Okay. And Gurley's like, he's because he didn't put his hand on his chin. If you notice Moritz and Gurley both have their hand on their chin, Rodan style. And you were like, you know, so it's like not going to happen for it. But I'm going to try. I've been leaning into, you know, the Steve Jobs five fingers pose. Okay. Yeah, that's a really super important one to master.

Starting point is 00:20:10 I have to workshop it a bit more, but yes. But that was a great presentation. Listen, I totally agree with her. It comes down to picking. and picking is picking whether you're in the public markets or you're investing in Snowflake, when it was pre-revenue. And one of the things she talked about, you know, Clive talked about,

Starting point is 00:20:32 is that Luck befalls the prepared mind. And what links those three people together, what links the besties together, is you have people who spend 20 hours a day thinking and preparing the mind and debating and messaging one another with analysis, with rebuttal, sometimes quite sporty. And we're deeply passionate about how technology is moving humanity forward. And unless you like authentically feel that, unless you get up every day studying that, trying to learn with a curious and a fresh mind, I think then it's very

Starting point is 00:21:17 very difficult to compete. Because the byproduct of doing that is that occasionally you have an observation about the world that is orthogonal to the observation that other people have. And yes, there are patterns that get developed along the way. But, you know, everybody, you know, when I went to Harvard Business School, they taught about the efficient market hypothesis, right, that everything is known or quickly will be known and so things are priced efficiently. Invidia was priced at $125 a share in January of this year, of this year. The consensus sales forecast was that data centers would be down 6%. This is all of the world's best sell side analysts.

Starting point is 00:22:01 Goldman Sachs, Morgan, Stanley, etc. Thought that data center growth in the year of AI would be negative for Nvidia. Instead, it's up 80%. Right? That's how wrong they can be. And so I think people take comfort in crowds. They build models that all look the same with linear deceleration and, you know, like, and they don't want to be too far out of the crowd because it's an uncomfortable place to be.

Starting point is 00:22:26 There's career risks there, et cetera. But when I have entrepreneur after entrepreneur walking into my office saying the single greatest bottleneck that we have in the world of AI today is our access to H-100s. Like, you can't get an H-100 for three years. We'll pay any amount of money for it. Right. Like, and you start studying, right, these patterns. It was not hard for us to get our head around that.

Starting point is 00:22:53 And by the way, Gavin Baker is going to be talking later today. He's forgotten more about silicon and about, you know, chips than I'll ever know. But sometimes that's a burden, not an advantage. And I think one of the advantages for us is I try to take a very first. fresh look at these super cycles, just listen to what I'm being told, look at it relative to what the consensus thinking is. And, you know, Snowflake, when it was pre-revenue, the consensus thinking was that cloud was too costly, was not as performant, and was less secure. That was 2013. That was the state of the world, right? But if you went and you talked to every entrepreneur,

Starting point is 00:23:31 did they like having to set up a data center? Do they like having to rack servers? So, and you looked at the trends that were happening, it was pretty clear. that those lines were going to cross. And if they did cross, the biggest winners in this thing called cloud were going to be databases that were re-architected cloud native. And so we found the founding team out of Oracle, you know, who had been working on this for two and a half years with some great early investors that were in it. We took a chance. I think another incredible example is when we watched revenue and the headwinds that the advertising market was facing, Google, Facebook, Snap, and we were looking at how fat these companies had become and just how much

Starting point is 00:24:16 money they were spending. In the Dow market, we started having this conversation at poker and just in group chat about, well, if the earnings are going to go down and they're going to get compressed, well, if you stop spending money and you cut costs, well, then the earnings can go up. And there was this incredible resistance that nobody would ever do that. It was just, nobody had the sheer will of force to say, you know what, maybe we don't need as many people, maybe we don't need as many departments, maybe we don't need to give the free lunch or whatever it is. And you and I were talking about Facebook. And I was like, God, it just seems, I heard your whole sort of rationale of how they could turn

Starting point is 00:24:57 things around by just changing maybe how they thought about spending. And that's Sunday night. We were having the conversation. I saw you say, look, they're cutting 10,000 people tomorrow. And I said, whoa, if Zuckerberg doesn't like to lose, he's only, only won his whole life. Well, fuck it. Brad thinks that he can do this. I'll just buy some shares. That was at $91 a share or something. And that one turned out to be exceptionally correct. Again, a non-consensus thought, Silicon Valley could do more with less. When we just lived in a

Starting point is 00:25:25 culture of just keep spending, it all works out in the end. So maybe you could talk about that call that you made, which is a really great call, obviously. It's up, I think, two or three X since then, but more important than that call, the sort of operating philosophy and how that's impacted these companies. And maybe we'll use it as a way to segue into some slides after I answer it briefly. Listen, we've been talking about this for a year, right? Overpoker on the all-in pod, you know, etc. And we actually had a rant about it on the all-in pod the week before I wrote the letter, I think, or maybe two weeks before I wrote the letter. and the world had concluded that Facebook was dead.

Starting point is 00:26:10 That Mark panicked. He threw a f***le-haired, renamed the company Metaverse, this thing that nobody really understood what it was, but it was a bet bigger than the Apollo project, and things must really be bad. Okay. And then the very next quarter, they missed. They were bad.

Starting point is 00:26:28 And then it got bad again because we started. it was 22 and we started heading into like, you know, this recession. And so that was when, you know, I had been an owner of Facebook since 2012, right? So getting back to this contrarian thing, right? My first, I was not in the private market, you know, I had passed on the pre-IPO rounds in Facebook. Why? Because it was trading at $40 or $50 billion and I thought it was ahead of itself. And we were making this transition to the iPhone and I wasn't sure how that was going to play out. They were building their app in HTML5. There was a lot of questions about that.

Starting point is 00:27:08 And if you remember, it's on the cover of Barron's magazine, the big proverbial red arrow broke the IPO price, went to $17 a share, and it said Facebook's over. This is about the transition to the iPhone. And as I was looking at the iPhone and looking what was going on in China, infinite scroll seemed to me to be way better experience than being tethered to the desk and looking at Facebook. So it didn't just like, it didn't jive with me, Clive Davis style. I was like, eh, like I actually think mobile's better. But they just kind of, it screwed up. They didn't build a native app. So they built a native app. They started sandboxing it. And, you know,

Starting point is 00:27:50 experimenting with marketers. And I happen to be out in Phoenix at Google Zeitgeist conference, where they have all the major CMOs in the world. And we're on a hike. And so I just started asking these CMOs, is anybody here playing with Facebook in the mobile sandbox? They're all like, oh, yeah, yeah. It's the day literally that, you know, it's bottoming at like $17 a share. And I was like, how is it working? They're like, incredible. Like, it's working great.

Starting point is 00:28:16 And I was like, oh, this is easy. Like, go buy some Facebook, right? And it wasn't like this was inside information. Anybody could have done the research. But it was way easier to jump on the Barron's bandwagon and say it's all over for Facebook, rather than do first principal research, you know, and study it and ask the questions, right? And so we became such a key point there, though, like actually doing first principle thinking and doing a bit of like on the ground research.

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Starting point is 00:30:10 I start talking with Mark's team who we had built, you know, these are, I live in Silicon Valley. My kids go to school with these folks. You know, we play poker. Like, these are our friends. And, you know, so we had built trust and credibility with the leadership team. I'd been on CNBC defending Facebook for years against a lot of the attacks that were being levied at Facebook. Because, frankly, I think there's a lot of good that comes out of social media. And sure, there's bad that comes out of social media.

Starting point is 00:30:36 I don't think these are bad people who are trying to cause cyber bullying no more than Larry and Sergey were. And so I'd built some credibility. We started having conversations. And I think what happened is in the age of excess, in the age of COVID, everybody working from home, these companies had doubled in size. And there were a lot of adverse consequences that the people leading these businesses were just kind of unaware of. Like, we were all unfit. Our firm, like, we were working from home. We weren't as good.

Starting point is 00:31:05 You know, and we just, we started having this conversation. And then, you know, I saw the lights going on for Mark and for the team. And, you know, and then, you know, Elon at Twitter. like was a huge catalytic moment in Silicon Valley to show people what was possible and the courage there. And, um, and I, I've, I've been so impressed watching what meta did, but it was a risk. I was outside the consensus. I mean, when the Monday that I dropped that letter and the only person I had shown the letter to was girly on Friday. Um, I shared it with Mark and, and Susan at meta. And then I, I, I published the letter on Monday. And, you know, and immediately,

Starting point is 00:31:43 everybody on Twitter and everywhere. He's like, oh, you're such an idiot. Mark controls a company. Super Majority Voting Control. He'll do whatever the fuck he wants. And it's like, of course. He will do whatever he wants, which is why I did this, because Mark has the power and the founder authority to actually turn the ship and do the right thing.

Starting point is 00:32:00 And it's incredible. Like, 38-year-old founder who made a decision that had the mental flexibility. He never had to talk with me. His team never had to talk with me. He didn't have to do any of these things. He didn't have to double down on efficiency and AI. Like, it's a little embarrassing to do that, right? You have to say, well, maybe this meta thing, we need to make it a little smaller.

Starting point is 00:32:22 Maybe we do need to double down on AI. Maybe we do. That is the sign of greatness. The refusal to talk to anybody who might have a different idea, the refusal to actually be mentally flexible. And so when I saw him do that, I was like, I'm pushing more chips on the table. Because he just told, like, we just turned over. Right. You know, the turn card, and now we're in a much better position than we were before. So, Warren Buffett's has often said, the art of investing, you only need six punches on your card over your entire investment career.

Starting point is 00:32:57 Right. And he said, the art of investing is not being anti-consensus, right? Because the consensus is often right. Okay. But the things that will really make the cash register ring, the snowflakes, the matter, is whatever. it's those moments where because of your hard work, your research, you have deep conviction about something that is non-consensus. It's invidia at 125 before it goes to 350. It's, you know, the cloud before people think that it can be performant and safe. Do the work. And if you find those moments when you're outside consensus and you have deep conviction,

Starting point is 00:33:37 push a lot of chips onto the table. because those are the moments that produce outsized outcomes. When you're chasing in the consensus, right, which happens a lot in Silicon Valley, right? When you're chasing and in the consensus, it's very difficult because then you're competing against the biggest brands, the biggest firms, everybody's bidding this stuff up. And as we just saw, there were moments in the heart of the crypto madness where that was the consensus, right? The consensus does not always end well.

Starting point is 00:34:06 Can I show a couple slides to you? Let's do it. Okay. I think, you know, talking about being in the consensus, this was a slide, right, that we talked a lot with SACS. And, you know, everybody was bold when we were at peak multiples in 21. Like, remember, everybody was chasing everything, right? Because rates had gone to zero. And the left axis is the multiple that things are trading out.

Starting point is 00:34:29 Yeah, is the multiple things for SaaS companies. Right. And the eight, the dotted black line is kind of the 10-year average. And you see where multiples had traded to. And at the beginning of this year, I mean, the argument that I was having around the poker table, you know, because Chimot was, like, was a little doomy about the world. And he's like, dig a hole, climb into it, buy treasuries, like, don't buy any of this stuff. And I was like, that was a fair argument to make when we were at the peak.

Starting point is 00:34:56 But now that we're down here, the consensus is saying the world's ending. The consensus was Mike Wilson at the start of the year. He said, after what's left this current technical around, We see the S&P discounted 23rd interest sometime in Q1 of 2023, and we're going to 3,000 on the S&P. Instead, we're at 4200. That's how wrong. And he, Mike Wilson was the guy who was most right in 21, but mental flexibility required that you changed your framework.

Starting point is 00:35:27 And at the start of the year, the argument I was making to our team and to you guys was the framework has changed. This is no longer about rates up and inflation up. it's now about economy and earnings growth. What relevance does that have for an angel conference? This was out of consensus thinking. This was the consensus. Mike Wilson, dig a hole, get into it by treasuries, right?

Starting point is 00:35:51 We're going to 3,000 on the SNP. And it's hard to fight that consensus with my LPs because they're like, this was the smartest guy over the last year. So listen to the smart guy. So when I'm pushing chips onto the table, they're like, whoa, why are you pushing chips onto the table? Now we've had our best start to the year in the history of the firm on the public fund side, right? And so, again, an example of being outside the consensus.

Starting point is 00:36:18 And this is what we said. The reset has created fair entry. So we're in the middle, we're in the beginning of a major platform disruption. Multibles are below the 10-year average. The platform disruption being AI. Correct. Again, I'm skipping through a bunch of these because we're doing this. But, you know, tech's already discounted.

Starting point is 00:36:36 It's the shit you can drop on your foot, the tractors and everything that everybody hid in during COVID that is now expensive. So just think about, again, are you a consensus thinker or are you outside the consensus? Are you chasing what everybody else is talking about or are you not? But here's the real thing. At the end of the day, all of this macro stuff that we do is very relevant for the public stuff. But in the end, the innovation that starts in this room trumps all that macro nonsense in the long run. Which was the point that got very heated on this last all-in pod that you probably heard. We had this kind of big flare-up where it was like, wow, this balance sheet for America is unsustainable.

Starting point is 00:37:21 True. There are geopolitical issues that are really troubling. Absolutely true, whether it's China, Taiwan, Russia, Ukraine. And there seems to be a culture war that's incredibly distracting and perhaps important to us. small number of people, but maybe unimportant compared to the bigger challenges the United States faces, certainly not as important as having a solid balance sheet. But during all of that, I just keep looking at the companies we're seeing as compared to other global companies. And when I meet with people from Japan, or when you and I went to the UAE, or I go to Australia,

Starting point is 00:37:54 or I go to other countries, they're all trying to replicate the innovation cycle here. And the innovation cycle here, I believe, is the strongest I've seen in my lifetime. Listen, when you're a fund manager like me trying to raise money for your fund, it's not an easy task. Let's face it. Well, there is a new way for you to find elite institutional LPs and its I connections. And this platform, which is an app online in person, it allows you to meet the most elite capital allocators. I won't tell you the names, but I was able to get in touch with and meet with beep, beep and three of the major funds that I was looking to me with all on I Connections. These are the biggest

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Starting point is 00:39:41 Great team over there. Well worth checking out if you're a VC raising a fund or you're a capital allocator looking to invest in funds. When you look at this innovation cycle, and let's pivot to AI right now, what will that do to these four really important platform shifts? obviously the PCs and servers, desktop internet, mobile internet, and desktop internet was just huge, but that mobile internet made it even bigger, data cloud AI, even bigger. What will AI

Starting point is 00:40:10 look like on this chart? Yeah, so I think the other thing we all have to get comfortable with is you have to hold simultaneous and sometimes truths that are in tension. Like I agree with Friedberg, we need a balanced budget amendment because politicians are incapable of not spending. And I think balance sheet does matter. I do think, as Chima says, it is a relative game, right, between other countries. But at some point, absolutes become important too. 20 years from now, right? UAE, perfect execution, us bobbling this execution, like, that stuff matters. Silicon Valley is incredible. It's as dynamic today as it's ever been, despite the state of California doing a lot of stuff.

Starting point is 00:40:56 trying to cook the goose that's laying the golden eggs. But we would just imagine where we'd be if government was constructive and on our side. Or indifferent. Right. Or even indifferent. I'll take it different. So I can share that strong belief and at the same time believe that the super cycle we're entering today will be bigger and more dramatic than any of our lifetime. And a couple thoughts on that.

Starting point is 00:41:22 obviously we know chat GPT is just you know I talked about on CNBC Sundar somehow allowed them to breach the castle and now it's a verb for search and discovery in the age of AI and it's gotten there a lot faster than the iPhone or the browser it's gotten there a lot faster than any mobile app did way bigger than a hundred million users today and two important points is sacha from Microsoft all the value gets created in the few years around the major platform disruption, Uber, Airbnb, Insta, bite dance, TikTok, etc. Think about the three years post iPhone, the three years post, you know, real internet coming

Starting point is 00:42:08 along. So we're in that moment, okay? We're early iPhone moment here. This is a really important, if you're going to work 20-hour days, work the 20-hour days right now. in the middle of the stasis of the 10-year super cycle, you know, that's when, you know, you may get to all the kids events. Today, you may have to miss a couple of the kids' events if you want to, you know, if you want to be here for this. And the second one was,

Starting point is 00:42:32 Gates who, listen, I made our first AI investment in 2005. I backed the head of AI out of the University of Washington. We ultimately sold that company to Microsoft in 2008. This has been a process undergoing for 20 years. Gates has been a process undergoing. been famously skeptical. He sees chat TBT. This is in 2020. I knew I'd just seen the most important advanced technology since a graphical interface. When you have, you know, the consensus, right? Gates didn't say that about crypto. Sotcha didn't say that about crypto. And I'm not here to hate on crypto, but I'm just saying that to me, when I connect the dots between what's actually happy. This is consumers voting. This is enterprises voting with what the hyper scalers are doing,

Starting point is 00:43:24 with Nvidia not being able to produce the product fast enough. We are at the most fascinating time since all of this started and I'm sitting in the front row and it doesn't mean you have to be betting on everything today. I think our AI anti-portfolio, so companies we've said no to, I think is 75 deep now on AI, including all the foundation models. So that doesn't mean that just because everybody's chasing his foundation models, they're all great investments. But the prepared mind demands that I meet with all of them. I understand the differences.

Starting point is 00:44:01 I understand what's going on with Lama at Met. I understand what's going on with the UAE's Falcon model. I understand, you know, and then we wait because in 1998, we knew search was going to be big. That didn't mean you should have invested in Likos or Alta Vista. or go or info seek or any number of them. But you wanted to be prepared in 2003 to invest in Google. That's the moment we're now in. Prepare the mind so that when you see the emergencies of the Google,

Starting point is 00:44:31 there are going to be trillion-dollar businesses and Vidi's at the tip of the spear that come out of this, and now is the opportunity to do the work to prepare, not necessarily to do. How do you know the difference between chat GPT there being a legacy company that goes the distance or it being Netscape. Yeah, you don't know. It's unknown and unknowable. Okay? That's the truth. And if you think you know, that level of dogmatism will get you killed, just like it does at the poker table,

Starting point is 00:45:01 right? It doesn't mean that you can't stack the odds dramatically in your favor, but intellectual humility requires you to think about the future as a distribution of probabilities. Right. And I would say the distribution, is so fluid right now because we are so early. And I'm beyond impressed. We have Brad Lightcap, the COO of ChatGPT at my place last week for a big event and a fireside chat that I led with him. I'm so impressed by their execution, right?

Starting point is 00:45:34 But they also just drop price by 90%. We also see open source models that, you know, can do incredible things in a very short period of time. So I'm building the relationships. I'm studying open AI. I'm trying to be helpful to them. We passed on the $29 billion round. But I happen to think they're the most important foundation model in the world.

Starting point is 00:45:54 And they may also be the most important personal agent in the world. So I'm in agreement with Gates. He said this at the Goldman Sachs event last week. Gates said, listen, I think the biggest, the successor to search will be pie. Your personally intelligent agent, right, that's going to help you. It'll be effectively a chat bot. You got Mustafa at inflection. that's attacking that. You've got Noam Shazir

Starting point is 00:46:16 and character that's going after that space. You've got ChatGBTGB that's going after it. I was playing with all three of him yesterday. I was texting with Noam Shazir. I mean, the founder of the company wrote attention is all you need on the Sunday morning. And I'm like, hey dude, you know, I can't find a character to help me make a French omelet.

Starting point is 00:46:34 What gives? Like, he's responding real time on a Sunday morning and I'm testing chat GPT versus pie versus character on who's got the best chat bot to help me make a French omelet. And it was chat GPT by a long shot. Yeah.

Starting point is 00:46:53 What do you think this is going to do to productivity inside companies and the size of companies and the amount of capital they need? I'm watching a lot of startups that if given the choice to write a job wreck and do a search and the amount of effort and time and cost that is versus I'm going to write some code and automate this. They're kind of like, ah, the amount of time to find somebody to fill this position, we could probably get 80% of it done if we just use some AI. It does seem to me, and I'm not a UBI guy. It's got a whole slew of motivational problems.

Starting point is 00:47:35 I think there's going to be new jobs that will be created. But I do think for what we do here and investing in companies, it feels kind of like you're going to need a lot less people to hit your product roadmap milestones. What are you short thought on this? Yeah. So a couple of anecdotes and then, you know, the meta point. Number one, I was with a writer yesterday, a famous screenwriter. I took my 15-year-old down to surf at Little Doom, and I was talking to her.

Starting point is 00:48:03 And she said, well, I was writing this morning with chat GPT. I was like, you're not allowed to write your own strike. and she said, don't tell anybody. I just told you guys. I just told us. Didn't tell your name. And I said, well, she said, another famous writer in Hollywood said to her, don't tell anybody. But unless we use this, we're out of business.

Starting point is 00:48:26 And she's like, it doesn't replace my idea, but here's what I do. I have an idea for a scene. And I describe the scene. I prompt the scene. And it starts writing. catalyzes me to think differently about the next part of the scene, the next part of the scene. She's like, at a minimum, this is going to save me a hundred hours per scene. Okay?

Starting point is 00:48:47 Like, she's long form stuff. And she's like, but, but what's even crazier is I think I'm writing better. She's like, it's like, it doesn't write better, but it causes me to get to the next idea in a way that I wasn't before. So that take, that's one thing though. Secondly, I just hired an engineer four years at Palantir who's building chat, you know, how altimeter is leveraging chat, GPT on the front end of our data stack. So we buy, we crawl, we have a lot of data, public markets, private markets, etc.

Starting point is 00:49:22 And, you know, last week he said, Brad, using Anthropic, we can drop the entire 50 page 10Q of Facebook into Anthropic because it allows you, it has enough tokenization. and now the prompt is a 50-page document, right? And now you start asking questions about that, which is pretty extraordinary. This will be a bigger productivity gainer, boon, for the global economy and the U.S. economy than the Internet itself was. It will be drive 30 to 50 percent productivity in a lot, many areas within the enterprise. It will make us all bionic, okay?

Starting point is 00:50:01 And so when I hear all these dummies telling me that, like, you, you, U.S. productivity is over, hyperinflation because we're never going to have productivity. Like, we're about ready to have productivity like the world's never seen. And it will also lead to dislocation. It will also lead to people who, you know, have quandaries over their purpose in the world. All those things can also be true that we have to get our heads around. Listen to Salcon's talk. Is Ted talk 15 minutes on the impact it's going to have on education, right?

Starting point is 00:50:35 Every kid, like this is the way that we're going to, you know, overcome these challenges of kids not having one-on-one tutors and teachers not having, you know, a wonderful teaching assistant. We have 30 seconds left. Can I did the last slide? Do it. And we're good together. Everybody's got to find their way to organize their lives and their business in order to prepare the mind. I think the biggest challenge you all have is how many things are coming at you every day. family, business, etc. I encourage you read the book Essentialism,

Starting point is 00:51:07 the art of doing less better. Essentialism is the organizing life philosophy and business philosophy. It's the cousin to minimalism in product design. I'm a minimalist in product design. I don't want to see buttons and knobs on my iPhone. And I'm a minimalist in life design. And it's called Essentialism.

Starting point is 00:51:28 And this really captures it, you know, back to, you know, tying it to just being enthusiastic about life. So every grain of sand passing through this hourglass represents 10 million human beings. There have been 110 million, 110 billion human beings passed before us. The life expectancy, the life cycle of those human beings was shorter than the invention cycle. 110 human beings in the bottom didn't see a single invention during the, their entire life. They hunted and they gathered for food.

Starting point is 00:52:05 They were on grarian situations. Think about your life. Like, at the top is the seven billion who are living today and you have a few grains of sand that go through the hourglass. Right. And the truth of the matter is we are all lucky to live at the 30 greatest years, you know, our professional careers, greatest years in the history of humanity on almost every dimension. It doesn't mean every individual, of course.

Starting point is 00:52:31 but it means collectively. And we are seeing the cycle time on innovation is shortening, right? It means more stuff is coming at us faster, right? That's hard for a single brain to process. So you have to have an organizing philosophy. Essentialism, I think, is a decent one. Find yours, right? Where you say, I got to figure out a way to tune out all this noise

Starting point is 00:52:58 so that my mind's prepared when the winning idea. I'll leave you with that. Thanks for having me. Amazing, well done. Let's hear it for Brad.

This Week in Startups - Reddit communities revolt + Brad Gerstner on state of private and public markets in 2023 | E1761

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