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Welcome everybody. We're here with dead cat.
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Is there newcomer? I'm here with Tom and Katie and
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we've got Rick. Heintzman who is a Firstmark
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Capital? We were talking about the
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markets. I was like oh can you just come
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on the podcast? Actually, just tell everybody
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this because I feel like yeah you know I tried.
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Try to for the newsletter, you know, accumulate bunch of views
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from Smart, Venture, capitalists about what you know the public
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markets mean, for the private markets because they're not
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always sort of 121. And Rick is one of my go-to son
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sort of translating. I think, you know, talks to
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smart people in the problem Marcus.
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Anyway, Rick thanks, thanks for being here.
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Hey, thanks for having me on. This is awesome long, time
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listener. So excited to be part of it.
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And it's excited to be on be on the record for Yeah, I mean,
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what is your eye level take away?
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Or, I mean, do you think this is?
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I mean, this is the hardest prediction to make.
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But I mean, you think this will stick.
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I mean, I think a lot of people we saw, you know, March 2020,
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where it seemed like that, that was the end of the world.
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And then everything rebound saw, somebody tweeting out that bill
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girly has correctly predicted five of the last two recessions.
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So there's certainly no shame in saying the word entering a bad
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period. But what's your?
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What's your honest take? Yeah, I thought will girly.
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I Yeah, I can make it like to make predictions about girly but
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I will make it slightly more difficult operations about the
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market. I think we've entered into a new
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normal. I am not going to call the
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bottom because I think that's hard to do, and there's too many
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things at work here, but I think we've entered into a new period
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where capital is not free and it's going to be more and more
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expensive even as the tenure is kind of popping up over three
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percent. People are saying oh you know
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this is, this is Well, then we're still at historic levels,
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so you're going to see dollars kind of trickle out a macro
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sense out of risk categories, out of it liquids and into more
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liquid, you know, fixed income where they've been before, and
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that's just going to recalibrate the supply and demand for
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venture capital and therefore make Venture Capital more
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expensive and more competitive for everyone.
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Could we maybe back up for a second here?
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And just maybe set up for listeners like from a macro
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economic standpoint or are, you know, A financial industry
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standpoint. What were the parameters and
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environment that kind of LED towards the last 10, however,
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many years of venture capital Investments?
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I mean like, what exactly were we working under that allowed
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for so much Venture Capital to enter the industry at what you
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say is cheap money. So, you know, compared to
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compared to Historic levels. When I was in the 90s when I was
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in college, they folks said, hey you had to have ten percent in
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cash, 60% and bonds and 30% inequities all act.
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He's in a small portion of that, could be a liquid equities and
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what happened was both would stimulus put kind of in the
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early 2000s. Post that recession and
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September 11th and then increasing stimulus and
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concluded quantitative. Easing post the financial
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crisis. We were seeing is unprecedented
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new lows in the and the in the fixed income Market in the
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high-yield market and what you could get for your risk free
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rate. So your cost of capital, Capital
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decreased tremendously. And so if you were an
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Institutional money manager, if you were a pension fund a
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foundation, someone like that. You said, well if I'm not
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getting any yield and fixed income, what could I go and put
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money in to get yield and as, you know, as more of that money
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kind of trickled out of fixed income and trickled into
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equities, you know, some portion of that trickled into venture
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capital and what we saw was interest rates Need to fall and
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there was kind of a self-fulfilling prophecy where
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culminated in the early days of the pandemic, I think April or
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May of 2020 where interest rates were effectively zero here and -
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in large parts of the world as correctly.
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The FED said, hey we need to stimulate this and we need to
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figure out what's going to happen on the other side of this
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pandemic. We want to make sure the economy
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doesn't crumble as well as everything else going on.
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So money effectively became free.
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A or even negative yielding and therefore people wanted to put
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money in whatever was happening and there is no discount for
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companies that weren't making a profit, but making a profit
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later and therefore, tremendous dollars, transferred into risky,
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but a liquid venture capital and the startup ecosystem on the
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whole dollars from where, by the way.
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I mean, where did you see kind of a new class of investors
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during that period starts a enter, enter the, you know,
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investment or LP or Whatever stage Market you're shaking from
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everywhere. So you know, there are there
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were firms that were allocating more dollars into venture
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capital or private Equity as a liquid.
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People call it Alternatives, liquids vcp was showing better
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returns, right? Because you're seeing that same
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supply-demand, Dynamic happening among the lp class and you are
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seeing worse returns among fixed income.
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So with that gradual transition and that's a self-fulfilling
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prophecy, right? The more money you put into a
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small asset Class the more that asset class is going to grow in
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the more it'll create yields. Therefore, as interest, rates
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are falling on the fixed income side and returns are growing on
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the Venture Capital private Equity side.
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It increases that that transition or increases the
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velocity of that transition, right?
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Saddam this down, even more. I means interest rates, were
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low, people, loved risky companies.
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With what produces the best risky.
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High-growth companies Venture Capital people flooded in to the
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private markets. And then the riskiest companies,
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raising a lot of money. So then the good companies, you
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know, sort of software businesses with high margins,
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were trading at extreme multiples earlier and earlier,
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because relative to sort of cash burning businesses, there was so
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much appetite to get in them that they drove valuations foot
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way up. Well put yeah, yeah.
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Money has if there's no risk associated with capital and no,
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yield required, people are just going to dump more and more.
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R capital in and that could be startups or that could be crypto
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or that could be an f and that's kind of how we saw during you
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know the spring and summer of 2020.
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Really up through most of last year.
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These companies, raising these bunkers around especially like
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fintech companies at insanely High multiples.
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I mean I was covering media during the time.
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So I was seeing this incredible rebound from, you know,
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initially everyone fearing that there was going to be no money
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in advertising to an abundance of advertising and companies
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kind of Really looking like they were doing really great.
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I mean it was this kind of 18-month Euphoria of what your
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what we're talking about here, right?
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Well, there's flooding in the system, the Fed was flooding the
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system with money and therefore they were more consumer
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companies being funded who wanted to spend that money on
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Advertising. Traditional companies were more
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than happy to spend money on Advertising because their
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threshold to return on their investment on Advertising was
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much lower. So every, you know, every part
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of the economy dollars were slashing around and therefore
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or, you know, everything was good.
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Okay. Let's and just for context for
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people. The NASDAQ Composite is down
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24%, right now? Year-to-date, yep.
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And then, as of today, it's down like two percent.
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So that I mean and yesterday I'm talking about Thursday, it was
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down in that terrified. Everybody was down about five
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percent. So that's that's that's what's
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got us scared. And and just to highlight one
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thing, I mean, it is amazing. You know, if you're not in the
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finance World, it Wasn't the pandemic.
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The terrified the stock market. It was the FED moving to raise
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interest rates. So it that is why this
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conversation Roots around interest rates so much that,
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that contrast pandemic. Nope, markets are fine, interest
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rates, that drives company, prices and everything and that's
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that's why we're sort of reacting at this moment.
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I mean let's split into like with our private Market Focus
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here and what this means for the private Market sort of the bull
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case and sort of the bear case for you know in a good Situation
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and a bad situation like to me in this in this, okay, things
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are going to be okay? The okay Market is there's still
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a ton of venture capital, there aren't sort of systemic risks,
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you know. They're, I don't know, what's
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the bull case. So there's a bull case is and
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I'm an optimist, right? So I'm always pulling for the
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bull case I'm always optimistic about what's going to happen.
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So yeah, and I want this to happen in the worst way.
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What you're seeing is that the digitization of every single
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industry were probably In the early Innings now you're seeing
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disruption happening every industry and whether it's a
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shift to streaming and media or whether it's a shift to The
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Internet of Things in railroad cars.
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So you're seeing a gradual disruption of traditional
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business practices. And disruption in the most
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sincere way, I mean, people use Spotify you exactly you're using
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Netflix, your parents use cable, and you're like, what's wrong
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with you? Like there is a most people are
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still using cable TV, there's still plenty of room for things
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to shift, over to the disruption that most millennials.
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Has already accepted as as meaningful.
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Exactly. And people are finding jobs on
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their on their phone and they're rare, and they're ordering food
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on their phone and all these things which are not only
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disruptive, but are more efficient, right?
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Your there's less, there's less aspects of the activity chain
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and traditional toll takers who were resellers or losing value,
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right? So you have to pay your cable
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company who then turn around and pay ESPN for you to EXs ESPN.
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Now you can just go on your phone and subscribe.
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So a lot of This out of these elements of digitization are
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creating a much more efficient economy.
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And so, all that's good. There's High return on
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investment and your, we still, we think we're in the early
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Innings of that, and it's coming waves.
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And I think the availability of free money led to a lot of
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Entrepreneurship. It's coming democratize is
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becoming Global and we're seeing great ideas come from
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everywhere. So from a fundamental, most
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macro basis digitization and the push for entrepreneurship Is
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making everything work better than it did before, and that's
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creating better companies than before.
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And those companies are also able to use completely new, go
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to market channels and reach more people more quickly than
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ever before. So if we started a company and
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we knew we were looking for chicago-based pizza makers, we
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go on Facebook or Google and advertise immediately to all
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those chicago-based pizza makers overnight and you know,
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therefore business has become better and more efficient.
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So that that's a Rate Tailwind there.
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So these companies are getting started, you know, there's also
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a much more evolved ecosystem in the funding of these companies
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through their seed, investors incubator seed, investor series
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a growth, all those things and all each element of that call it
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Financial activity chain has been well funded over the last
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period of time, you know. They're even the revolution rise
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to the rest funds, it will to deal with the large parts of the
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countries that were Venture Capital deserts individual
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Industries. Actors have individual Venture
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Capital firms are well capitalized and every make sure
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maybe maybe you know we talked here about like d1's the world
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like tigers, like firms can either redirect to the private
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Market. I'm sorry from the private
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markets to the public markets. That's where it's most
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dangerous, right? Right, that PSI, right.
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And we're still talking about the Brown case and they still
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have tons of if you're Henry or if you're it's hard not to talk
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about the the barricade. Yeah.
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So, so we're still saying These Guys, these guys have a ton of
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money and you know time Doing more at the series and series
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pay level. So you know, you're seeing more
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dollars and more parts of the ecosystem than you've ever seen
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before seed and a are still, I would call them frothy, you're
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still right? I mean, would you say that?
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I think we just begun to see valuation expectations reset.
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So usually it flows back through the system, right?
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Because the feedback loop is longer the further you are.
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If you're if you're trading a liquid stock you get feedback
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every second of whether that was a good trade, if you're doing a
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seed it Takes you years to get feedback and therefore this
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adjustment takes longer to get feedback into your cycle and
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decision-making. So we're seeing the reset on
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pricing happen at the sea at the series a now and it'll probably
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happen in the season series over the next quarter.
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But you know overall the ecosystem from a very macro
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perspective is great companies are creating value there.
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You know, these companies are also more profitable sooner than
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ever before, as there's a bunch of tools become Capital
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efficient and it's a Old funded activity chain to get companies
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from idea to the public markets in a relatively efficient way,
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that's the bull case. So you're going to the bear
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case, there's more companies than ever before and there's
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going to be a lot less Capital. So there you know as Eric said
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in the in the growth stage in the later stage companies,
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there's probably you know eighty to ninety percent down from last
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year, certain players have left the market completely that were
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top 10 players. In the private markets.
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Last year, other players are down significantly.
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This is the third longest time without a tech IPO this Century.
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I didn't know that after after, after the early aughts, and
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after the global financial crisis and the big IPOs
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coinbase, Robin Hood of 2021 are looking terrible.
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So yeah, it are looking to and there's, yeah, there's a
00:13:50
hangover. So the people who bought the
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IPOs last year, which also because their crossover funds
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tended invested heavily in the privates last year or so.
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Wow, the things I took out last year, I wasn't as smart as I
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thought these things are down 70% on average and the things I
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invested in last year thinking they were going public this
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year. I'm either getting liquidity,
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nor evaluation pop. I'm going to take a second and
00:14:15
figure out where this Market really is.
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So I'm just going to sit, I'm going to sit and wait because it
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doesn't feel like I'm missing out on anything.
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As you know, I was everybody else is sitting on the market.
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I can invest in anything I want including these these IP Rosa
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last year that are on set. So they're so the late stage
00:14:33
Market is completely pause with very few deals getting done so
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just to make that specific, if I'm a big investor and I'm
00:14:41
looking at Snowflake and data. Bricks snowflake is liquid, I
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can exit it. It's been marked down data
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bricks is, you know, presumably still valued at whatever it was
00:14:51
in August, you know, of last year.
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And so, are you really going to do a big growth around now
00:14:57
obviously fundamentals? You know, how the companies
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actually I mean matters. So there will be cases, where
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people still invest in the private company, but you have to
00:15:05
overcome sort of a huge, you know, that this the fact that
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you've really been marked down without that ever getting any
00:15:13
new shade, a flip. I mean for the first time in my
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career, you know, going back to 20, 25 years last year, there
00:15:20
was a private company, premium, meaning that people were willing
00:15:23
to pay a premium multiple to get into private companies.
00:15:27
Or historically, there was always a private company disk.
00:15:29
Count for, as you said, Eric liquidity, right?
00:15:32
So you know, you're able to if you buy Snowflake today and then
00:15:35
side tomorrow you don't want to be in data infrastructure.
00:15:38
Software companies you could sell it if you bought data
00:15:41
bricks, if you let around at data bricks today you know
00:15:43
you're in that for a couple of years until they go public and
00:15:47
even after they go public because there's a lock-up and
00:15:49
everything else and with so much uncertainty everything from a
00:15:53
shooting War to a resurgent pandemic to political
00:15:57
Crosswinds. You know do you really want to
00:15:59
I'm going to lock up my capital for a year or two and most
00:16:03
people are saying no for all Dimitri's to me the big question
00:16:07
on the bear case and this sort of moving into Tom's World Nara,
00:16:10
is whether there will be a company that really, like blows
00:16:13
up or like particularly even if they don't blow up, if there
00:16:16
will be our expectations for what a company, like, Uber or
00:16:22
instacart. You know, we saw lift drop by a
00:16:25
third right after earnings this. So so Caldo de, oh, go online to
00:16:30
offline market, we've never the market.
00:16:32
They those companies have existed fully in this sort of
00:16:36
bullish period and we really have no understanding of what
00:16:39
the true pricing of this industry and seemingly
00:16:42
overnight. I think that was what those kind
00:16:44
of incredible about it is, you know, walk?
00:16:46
Yes. Yeah, it was the fourth quarter
00:16:49
of last year overnight, everything changed and you saw
00:16:53
it as part of the budgeting process last year and, you know,
00:16:56
entrepreneurs were whipsawed, you know, you said 30 days ago,
00:16:59
Most three, three, most important things were growth
00:17:02
growth and growth. Now, you're saying the three
00:17:04
most important things, our profitability unit, economics
00:17:08
and long-term sustainable business model.
00:17:11
And if I'm trying to create a budget, oftentimes, there's are
00:17:14
going in different directions. And therefore, I might need a
00:17:17
new team, a new thought process, everything and, you know, it's
00:17:21
easy for an investor, like me to sit there and just cross things
00:17:24
off on a piece of paper and rewrite my top three goals, but
00:17:28
to operationally Change. That is awful, right?
00:17:31
I mean, it's almost like that. Cartoonish depiction of Wall
00:17:33
Street Traders, we're like in one sense.
00:17:35
You see them all saying like bye?
00:17:36
Bye. Bye.
00:17:37
And they're running around with the papers and then like, you
00:17:39
know, the color changes on the monitor there, like, sal sal sal
00:17:42
and they don't really understand, you know, fully what
00:17:44
happened to them. I mean, was it was fascinating.
00:17:47
I covered the earnings for Uber Lyft and doordash in the last
00:17:51
week and it was very interesting seeing the media, the way that
00:17:55
the media tried to explain what had happened because you They
00:17:59
would say, oh, lift higher earnings report, you know, Bob
00:18:03
shall embarrassment as it in is just like, no, it was actually
00:18:06
pretty good. They like beat their numbers.
00:18:08
You know, the thing that really killed them is the fact that
00:18:10
they're going to be investing more in and Driver growth, which
00:18:14
like, soon to be great news last year when they were doing it.
00:18:17
And then hilariously Uber decides to move up their
00:18:20
earnings. Pre-market to kind of circumvent
00:18:23
what they assume, you know, was a very specific lifts disease
00:18:26
because they're like, well, they're they're bad, we have
00:18:28
great earnings and I think that's like the first time since
00:18:31
the financial crisis rise as klieman brothers.
00:18:34
Right? That did the banks.
00:18:35
Yeah, move us. Exactly after Lehman, Bryce's
00:18:38
Lehman Brothers collapse, every bank had to rush to the street
00:18:41
to tell him, right? I'm not dead.
00:18:43
Yeah, I had people from Uber. I can include those people from
00:18:46
over, like, kind of spitting to me being, like, Pool Lift,
00:18:48
really missed the memo on how to run a profitable company.
00:18:51
Yeah, and, you know, that clearly was like and then they
00:18:54
decided to move up their earnings.
00:18:55
Uber does their things dropped seven or eight per sec?
00:18:58
She drops 10%, Immediately upon Market open and then doordash,
00:19:03
which actually has a very strong quarter.
00:19:05
I thought a lot of their fundamentals with great.
00:19:07
They have you no good growth. They have better Ibiza than
00:19:10
ubereats even their down like sixteen percent right now and
00:19:15
it's I think it must just be maddening inside these companies
00:19:18
as they kind of optimized for a very specific style of
00:19:22
projection and and signaling to the street to suddenly be told
00:19:26
everything. What you've done everything that
00:19:28
you've done is wrong. Yes, an Operationalize that
00:19:30
probably takes a year of rethinking about that and
00:19:33
they're hitting the expectations.
00:19:35
They set out but someone moved the goalposts.
00:19:37
When you say that, somebody moved the goalpost, like how
00:19:40
much of a recognition is there that the goal post is being
00:19:43
moved outside of the valley and outside of the industry by
00:19:45
things like the Federal Reserve? And how much recognition is
00:19:47
there? That the reason those metrics
00:19:49
could have been important and the people could have focused on
00:19:52
those things is because the market was willing to both take
00:19:54
the risk and pay for them. And when I say the market, I
00:19:56
mean the broader Market is influenced by fixed.
00:19:59
Come commercial, real estate. I mean, so when we keep saying,
00:20:02
somebody move the goalposts, actually not like an unknown,
00:20:05
somebody it was. So it's probably Public Market
00:20:07
investors, right? And that's the, that's the key
00:20:10
linchpin that they said, you know?
00:20:12
Hey, I'm unwilling, we in a rising rate environment.
00:20:15
I'm unwilling to fund losses in the long term.
00:20:19
So I need to see some definitive point where you're going to be
00:20:22
profitable and I need to see what this business looks like in
00:20:25
a run rate and companies who didn't respond to that got
00:20:29
crushed. Rushed and then, you know, then
00:20:31
private crossover investors or growth investors said, hey look,
00:20:35
they're crushing people who aren't Pro focus on
00:20:37
profitability. We're never going to be able to
00:20:39
get our company public. Unless we're profitable, then
00:20:42
they go back to the board and say, hey, rest of the board.
00:20:45
Did you see these companies got crushed?
00:20:47
They're focused on growth. And we're support, says yes, we
00:20:50
have profits and we want to see us, and that's the same guy who
00:20:53
said growth. What do you want from me?
00:20:55
I'm 60 days ago. Yes, maybe just made from the
00:20:59
outside. It I mean, like I said, I'm not
00:21:01
in over the industry or just outside of the industry.
00:21:03
It actually looked pretty logical to me.
00:21:06
I mean, when you look at all these other points, Eric had
00:21:07
this great newsletter looking all the times when people said
00:21:11
the bear markets going to happen.
00:21:13
And the one thing that wasn't really happening in those other
00:21:16
supposed inflection points is the rate, environment was not
00:21:19
changing. And so, I think it was basically
00:21:21
almost in tandem with this stock Slaughter, you saw the Federal
00:21:25
Reserve come out and say not just that they're raising rates
00:21:27
but they were immediately. Lee starting to not raise rates,
00:21:31
but to take some of the other measures off the table, that
00:21:34
weren't rate. Raises that had artificially had
00:21:37
the impact of keeping us most of the era that I've learned
00:21:41
business in that, I don't even know what the opposite of
00:21:43
quantitative easing is called. It's like so many things were so
00:21:50
many things it, because so many things were implemented post
00:21:53
financial crisis. And then post pandemic and post,
00:21:56
post post whatever you want. It wasn't just great.
00:21:59
Going up and down, right? It was buying back your own
00:22:02
paper. It was you know, it was all
00:22:03
these sorts of Market manipulation it's like people
00:22:05
like Eric go into Rick, be like explain to me the time of
00:22:08
tightening. Well, you've never seen before
00:22:16
we haven't seen this since to since when 2010 - tightening.
00:22:22
I don't think we've ever seen because I think that there was
00:22:24
quantitative each other. Yes, that's created during
00:22:28
crunchy, beings was crazy are in the Financial crisis.
00:22:30
Absolutely. The help of the banks and they
00:22:32
said what main problem is, like a lot of things.
00:22:34
Some is good, more is better. That thing we used in the
00:22:36
financial crisis, we could use that again, the pandemic.
00:22:39
And if we use some of that before, let's just lather that
00:22:41
on everywhere. And now, they like, at some
00:22:43
point, we have to reverse that and they still really hadn't
00:22:47
reversed what they did in the financial crisis.
00:22:49
And now they have to reverse all that, but even a 50 basis, point
00:22:54
change in in the Fed rate, hadn't happened in 20 years.
00:22:58
Absolutely. 2000. So they're doing a lot of stuff.
00:23:02
Yeah, it was when people were like well rates, haven't moved
00:23:04
yet. So why is this downturn
00:23:06
happening? It's like, what wasn't just the
00:23:07
rates again to your point. All the things create around
00:23:10
quantity, using those things were being quietly, dismantled
00:23:12
and expectations drive, so much of it.
00:23:15
Also, obviously you have the effect for everything has been
00:23:18
implemented, but so look, very perfectly logical to me from the
00:23:21
outside. I was like, yeah, of course.
00:23:22
And we don't know the floor of this, but I mean, obviously, you
00:23:26
know, fed policy keeps a lot of people employed, they focus on
00:23:29
Unemployment, we got to enjoy sort of this booming economy and
00:23:34
I mean there is some culpability for investors where it's, you
00:23:37
know, you know, it's not like no one everyone in the world thinks
00:23:42
that YouTuber is a money-losing business, you know, there we've
00:23:45
gone, there are lots of, you know, it wasn't a secret and
00:23:48
that both these companies lost a lot of money.
00:23:50
And that there would be come a pivot point where people sort of
00:23:54
reoriented, their thinking and sort of short-termism and Hedge
00:23:59
funds, get paid once a year. There are lots of reasons and
00:24:03
incentives that drive people to chase, you know, growth that
00:24:06
will come to an end. Well though it's the old thing
00:24:08
that your turkeys go further and further out on the risk curve
00:24:11
before they get slaughtered. So people knew that eventually
00:24:14
we're going to have to build a profitable company or if it's
00:24:17
self-sustaining financial company and then you kept
00:24:20
getting rewarded for not I like the turkeys.
00:24:23
I also like swimming without shorts.
00:24:25
I think we should put together a full list of all of the
00:24:27
analogies made. For people who take Too much
00:24:29
risk. Yeah, that was, that was the
00:24:37
Warren Buffett. When the tide goes out naked.
00:24:45
Yes, yes. Yes.
00:24:46
We can write the three questions that the Precast analogy is
00:24:54
driving the situation. I mean, in my piece, which I'll
00:24:58
include a link to In the post with this.
00:25:01
I mean, I had to charge from Red point where they showed and a
00:25:05
private investment dollars after 2008 and private investment
00:25:10
after the.com crash. And the point is, basically at
00:25:13
this is 08, you know, there was resilience and.com, you know,
00:25:17
investment, really, really dropped Katie.
00:25:20
You were sort of making the point that a key.
00:25:23
Key question. There is the interest rate
00:25:25
environment. Yeah, and I like a nerd.
00:25:27
I was like, Eric, I really wish they'd overlay Did you know him
00:25:30
here? I made a note to myself, look
00:25:40
this up before the cast, but then instead, I got on the
00:25:42
phone, with all these people, for, for the other things I do.
00:25:47
But in May 2000 fed raised rates 50 basis points the last time
00:25:51
before, before this week, and so not only were was the tech
00:25:56
Market crashing, but people had a safe.
00:25:58
We had another Halfway up somewhere to go differently than
00:26:02
maybe the pandemic where they drop rates tremendously and
00:26:06
folks like well I'm not going to go there they're not going to
00:26:08
give me any yield I might as well stay here and see what
00:26:11
happens in growth right? And obviously the complicating
00:26:14
thing for Tech in the pandemic is also everyone moves to zoom
00:26:17
sort of the technology industry. Sees companies, he Revenue skip
00:26:21
ahead because people are adopting stuff faster.
00:26:23
Now we're coming out of the pandemic and we're seeing sort
00:26:26
of the opposite where tech people wanted To believe things
00:26:30
would be stickier than they are. And in some cases, you know,
00:26:32
we're seeing companies like hoppin where there are questions
00:26:35
about whether sort of the tremendous growth is really
00:26:38
sustainable. So there there are.
00:26:39
There are there are other obviously any time you try and
00:26:42
tell a big story about the overall economy.
00:26:45
There are lots of pieces of play play at once.
00:26:49
Can I ask a somewhat hypothetical question?
00:26:51
Sure. Because you mentioned 2000 and
00:26:54
the basis of my move then and we saw a couple of things.
00:26:58
Obviously, a market crash. And a big fraud, right?
00:27:00
And Ron Worldcom fast-forward, 2007, the feds like okay, this
00:27:05
housing markets, very overheated.
00:27:07
We have rates move, we have a big crisis, the momentum stocks
00:27:10
were weirdly banks at the time, but we see them get crushed big
00:27:14
fraud. Bernie Madoff.
00:27:15
Here we are in 2022. Rates are moving up, momentum.
00:27:18
Stocks are down. What's going to be the big
00:27:20
fraud? It seems like a Tom question to
00:27:23
you. Like who's our next Enron or
00:27:33
Bernie Madoff laughs? Like, that's the good stuff.
00:27:36
I mean we saw the Archer goes thing, right?
00:27:38
I mean there are only like, I don't know, like a slam dunk,
00:27:42
but it's definitely the canary in the coal mine.
00:27:43
I do think that Eric has a point there that I think that a lot of
00:27:46
people who are using margin loans are might be the might be,
00:27:50
they might not be committing fraud.
00:27:51
They might not be a maid off. They went up being Enron but
00:27:53
they might be using a lot more leverage than they let on and
00:27:57
that could be a hedge fund. It could be a private Be fun.
00:28:00
It could be a growth fund. It could be an individual that I
00:28:03
think you're going to see things blow up because interest rates
00:28:06
are going up and their collateral base is going down.
00:28:10
And there's going to be folks who could not have modeled out
00:28:14
that their collateral base is down 70%.
00:28:16
And there's going to be margin calls and I think that's going
00:28:19
to be the, the overuse of Leverage when people thought
00:28:23
money was free and therefore, they could juice their returns
00:28:27
is going to. I would say, is an obvious Isis
00:28:30
or sing the things I've heard you know, could be one of the
00:28:33
one of these great disasters. I mean, and there's always the
00:28:35
cynical argument that Things become crimes.
00:28:38
When they go really poorly, the government is unhappy when
00:28:41
sophisticated people don't make things work.
00:28:44
But I mean, yeah. Without talking about crime at
00:28:46
all, I mean, you can just see sort of the interconnectedness,
00:28:50
you know, I mean, we had SoftBank, oh, huge softbank's a
00:28:54
big investor in Uber dd-do, you know, Uber is a stakeholder and
00:28:58
Didi, you know? A lot of internet connectedness
00:29:00
in the big risky bets. Then we see tiger Global
00:29:04
takeover, invest deeply in Internet.
00:29:06
So, they're just these players who are willing to deploy a ton
00:29:10
of money. They were taking correlated
00:29:13
risk. So if the correlations go, the
00:29:15
other way, they're going to have sort of a big negative impact
00:29:18
that doesn't mean they're doing anything.
00:29:20
I mean that to me, I mean maybe that will change what's amazing
00:29:23
about this time. Is it feels like it was?
00:29:25
It's so obvious. There was no secret.
00:29:27
There was no like hidden. Nothing.
00:29:29
Like we work, which I mean we work was the case of sort of the
00:29:32
market can sustain it. The sort of collapse isn't
00:29:35
bringing the system down but to some degree you know we yeah we
00:29:40
saw it and people were just willing to take a risk because
00:29:44
what else what else were they going to do?
00:29:45
I don't know, in correlated concentration risk was that's
00:29:49
that was kind of having a caught at mispronouncing but our chain
00:29:53
has or kano's and it was they they were in 10 media companies
00:29:57
that they were highly. Highly correlated and they used
00:30:01
additional leverage and crowded people out and what might be an
00:30:04
illegal way. But, you know, if you're
00:30:06
SoftBank and you're using leverage and your have highly
00:30:09
concentrated, highly correlated positions.
00:30:11
If this thing on whines, you know what happens?
00:30:14
It's interesting to me. Also the Foreclosure of the IPO
00:30:18
and the effect that that's going to happen.
00:30:20
A lot of these companies to write because you know we saw
00:30:23
the whole spak craze from a couple of years ago being the
00:30:26
quick way for a lot of these companies to go public and
00:30:28
honestly. It probably good that this back
00:30:31
window, is entirely closed. Now during this period because
00:30:34
things could have been truly disastrous if you had a lot of
00:30:37
companies sort of immediately going public and you know
00:30:41
getting crushed by the new expectations of what a company
00:30:44
is. But I'm also interested in a lot
00:30:46
of these Venture debt rounds, that companies have been doing
00:30:49
these sort of like bridge to IPO rounds.
00:30:51
Like we saw go puff do one earlier this year.
00:30:54
Vice has this kind of onerous is a slightly different situation
00:30:58
but there's a very His relationship with tpg where they
00:31:02
you know gave them what's akin to like some sort of a
00:31:04
convertible debt. Round no vices in a really tough
00:31:07
spot right now. I'm, you know, I think a company
00:31:10
that sort of relied on that with the expectation that like, well,
00:31:13
it's not going to be a big deal because we can go public.
00:31:15
And, you know, these shares will convert.
00:31:17
They don't, it could get ugly very quickly.
00:31:19
Don't you think that even historically Square, which is
00:31:22
now block had. That is one of its reasons to go
00:31:24
public. They had structured debt that,
00:31:27
you know, picked at a high Interest rates the longer, they
00:31:30
wait to go public. And I think you're right that
00:31:32
people thought the window to go public after being open for so
00:31:36
long would always be 0 and now it's closed.
00:31:39
You know, the other thing you're not hitting on, but is a guy
00:31:42
tied to this is, you know, the things that make investors
00:31:46
invest and put more Capital out is feeling good in driving
00:31:49
returns, right? So if you have a company, go
00:31:51
public, you think you're smart because you invested early, and
00:31:55
therefore your, you want to invest more and that the
00:31:58
opposite True. So the lack of liquidity either
00:32:02
descend back to your limited partners or the ability to think
00:32:05
that you're really good at this and therefore you should do it a
00:32:07
lot more that that decreases investor confidence and
00:32:11
decreases LP confidence and that slows down the whole machine,
00:32:14
right? Keep thinking Katie back to your
00:32:16
question. I'm like what the next implosion
00:32:18
is going to be and using the analogies to Madoff or, or Enron
00:32:22
and Worldcom what connects all of those to me was the fact that
00:32:26
everyone who cover the space knew that These companies were
00:32:30
not sustainable, right? It was sort of like an Open
00:32:33
Secret. I mean maybe made off slightly
00:32:34
differently although I feel like it's a little different but I
00:32:36
think bear Stearns was probably a better because like taking
00:32:40
criminal like you know. Yeah but like people knew that
00:32:44
bear was over-leveraged. They knew that LeMans real
00:32:47
estate portfolio is over leveraged.
00:32:49
You know there was a sense that something was wrong but saying
00:32:53
that something's wrong when everything's going up.
00:32:55
As we know as reporters is the most thankless task ever because
00:32:58
nobody believes you And they make fun of you.
00:33:00
Okay? So like my guess is that it's
00:33:02
going to be a company or a group of companies that we all sort of
00:33:06
knew, were not sustainable that we all could tell as they were
00:33:10
raising money and more and more leveraged ways was a possible.
00:33:14
You know, like it had a clock ticking next to them, but
00:33:18
because things get getting pushed further and further out
00:33:20
during quantitative easing and this easy access to Capital, no
00:33:23
one really was concerned about it, but when it dies when it
00:33:26
implodes, when it becomes, you know, the next whatever.
00:33:29
Worldcom it will have been so obvious to all of us.
00:33:32
Yeah. And we will be embarrassed that
00:33:34
that was not the stories that we've been writing for the last.
00:33:36
I mean, if you have a lot of my coverage and when I was trying
00:33:38
to show in the piece yesterday, is that these companies got so
00:33:42
big people made so much money, they exited like they got away.
00:33:46
It's just like, the money has been made and not, I'm just
00:33:49
what's my point? Like, I guess in the case, where
00:33:51
Uber like, say, Uber is the test case or, you know, I think it's
00:33:56
Uber, could be, you know, like a five billion dollar company
00:33:58
instead of a You know our company today, that doesn't mean
00:34:00
it goes bankrupt or anything, but like if that, if that would
00:34:04
be the case, I still, I think they're all be.
00:34:07
These people will be like, I knew it, we were always like,
00:34:10
like a crock the whole time but it's like what.
00:34:13
But you didn't know that people would make a whole Fortune.
00:34:15
I mean, how long do companies stay humongous valuable
00:34:19
companies, you know, you understand the point I'm making
00:34:22
like, well I'm a guest in Bolt and bull markets though.
00:34:25
The rules home was always in the last 18 months of Above a
00:34:29
10-year bull market. Most of the money is made, so
00:34:33
that's why people are always afraid to get off the get off
00:34:36
the tread, right? You guys are an investor and
00:34:39
Postmates, right? We were so young.
00:34:41
Are you happy right now? Three billion sale?
00:34:44
It's an interesting. I mean, somebody was making the
00:34:46
point on totally different company slack, the slack sales
00:34:50
looking great. Now, there are these sales where
00:34:53
it's all American. A lot of things last year were
00:34:55
software, companies were selling at 50 to 250 times Revenue.
00:34:58
You feel Really good about that mean.
00:35:00
We Postmates, we sold to Ubers. We got a talk so we were able to
00:35:03
ride that up and then pick our exit point.
00:35:06
So that was quite nice. But I yeah, I would say that
00:35:09
you're right. The company is where you, you
00:35:11
know, you talk to people outside of our Echo chamber and they're
00:35:14
like, I don't understand how I could get a bar of soap,
00:35:16
delivered to me cheaper than going to Walgreens or CVS by a
00:35:20
guy who's going to drive here in 15 minutes and then you explain
00:35:24
what you do for a living in their life.
00:35:41
All over the streets of New York, the Joker's, the Getters
00:35:45
that you know, all those things are going to be like, oh, you
00:35:48
know, we saw Cosmo, we saw it didn't work and then we just did
00:35:53
the same thing with another right?
00:35:54
And the 10 billion dollars. Yeah, I mean that's been sort of
00:35:57
like the core of every story that The mainstream pubs write
00:36:00
about them is like, yes, all of these companies were
00:36:03
embarrassments during the early.com era, but this time
00:36:07
it's different. Yes.
00:36:08
Why we saw, we saw this movie, everybody died at the end.
00:36:12
And now, we're gonna, now, we're wondering why in the sequel?
00:36:15
No. Beings.
00:36:15
We give me a happy ending. This time.
00:36:17
Venture Capital firms, have more axis liquidity for longer
00:36:20
periods of time. They have a far so that right
00:36:22
helpful to the point like, you know, there's people who made
00:36:25
money at we work. They rode that up and said,
00:36:27
well, you know, I do Management and people made money there and
00:36:32
therefore it's fine or people made money and in some of the
00:36:36
ride sharing things and then we're going to see how much, how
00:36:39
many if you have to pay somebody to go get that bar of soap for
00:36:42
you. Someone has to pay for that or
00:36:45
you know, it's not going to work, right?
00:36:47
And I guess it gets down to the intrinsic value of the service,
00:36:50
right? If this truly is something that
00:36:52
a broad number, people want to do at an elevated price point,
00:36:55
then it's a good thing then I think there actually is some,
00:36:58
some larger value to it. It's just purely about it being
00:37:01
cheap and the second the price goes up, you are basically not
00:37:05
interested in it. Then it wasn't a great service
00:37:06
to begin with. It was just free money
00:37:08
essentially or a free service. I think that's kind of the
00:37:11
perfect storm here to write seeing at a moment.
00:37:14
Where the price for the bar of soap has to hit 14 dollars or
00:37:17
whatever and the consumers willingness to pay $14 go down
00:37:21
at literally the same moment when consumers might have been
00:37:26
happy to do it five years ago, like that seeing that At those
00:37:29
two Trends come together, I find really fascinating.
00:37:32
The funny thing we haven't talked about is crypto which in
00:37:35
Venture world has been sort of the the thing that still doing.
00:37:39
Well, you know, crypto funds have been raising.
00:37:41
There's been a lot of money made Bitcoin is down.
00:37:45
I think it's 20 plus percent so far this year, but but yeah,
00:37:50
it's funny that I don't know, right.
00:37:52
Now, people don't know whether there's a totally different
00:37:55
world where we say. Cruel this tends to be the last,
00:37:58
the last To go, right? Because the first the tends to
00:38:01
be the first ones, first people you tend to evacuate the
00:38:04
Tactical things, right? So you're able to say, you know,
00:38:06
software is a service. We know how this Stacks up, we
00:38:10
know how Revenue grows and therefore I could pencil out a
00:38:13
way to this type of exit in that period of time.
00:38:16
And if everybody rates, we know what someone's paying for it.
00:38:19
The things that are completely asymmetric crypto where you're
00:38:23
not, you can't pencil out what you think that crypto is going
00:38:26
to be worth or what nft is going to be worth.
00:38:29
People are still willing to take a symmetric risks on because no
00:38:32
one could pencil out that they're wrong.
00:38:34
So you're seeing, you know, people with risk Capital shift
00:38:38
to a symmetric risks or things that could still be big because
00:38:43
there's a lot of confidence in a space.
00:38:44
Do you have a piece of advice or like I guess if maybe, you know,
00:38:49
if I'm a sort of tech worker looking up for my next job?
00:38:53
I don't know. What, what advice would you give
00:38:55
them, right? Yeah, I was gonna say the
00:38:56
audience could be Tech, CEO Tech worker.
00:38:59
Our young BC, probably all different advice.
00:39:02
So, you know, the advice were giving around borders.
00:39:05
Now, you know, we had thought that 2020 and then obviously
00:39:09
2021 who's great times to raise money, wasn't, you know?
00:39:13
And I've been investing since the mid-90s, if, you know, if it
00:39:16
wasn't 1999, it was pretty close as, you know, an a, if not 8 +
00:39:20
time to raise Capital. So we advise people to, you
00:39:23
know, to people, react, to three rounds.
00:39:25
Some of them. Yeah.
00:39:26
Take the money of its Very, very cheap insurance.
00:39:31
So you take that money and then we talk about having a fortress
00:39:34
balance sheet that can withstand a lot of external turmoil.
00:39:37
If you have a fortress balance sheet, and have you been a not
00:39:40
necessarily having fortress on your balance sheet, should be
00:39:43
terrified, the exact opposite? Yes, you don't want that.
00:39:48
The, so you have a fortress balance sheet, you can withstand
00:39:51
Market turmoil and you eliminate Financial Risk.
00:39:54
And, you know, having been an entrepreneur in the early aughts
00:39:56
where there was no financing elimination of financing risk is
00:39:59
Thing that I think about a lot. And then being able to say, all
00:40:04
right, now you have a fortress balance sheet, how could you
00:40:07
make sure your team is great and you increasingly your hearing
00:40:11
very quietly? That folks are saying,
00:40:13
especially as returned to office is showing up that are the is my
00:40:17
team, great. If my team is not great, how do
00:40:20
I turn over the folks who aren't great?
00:40:22
And then I, how do I go out to people in the market and say,
00:40:25
hey I have a fortress Bounty, I have four hundred million
00:40:27
dollars in cash. I have A million dollars of
00:40:30
Revenue. I don't care.
00:40:31
If I can't get public next year, I'm going to get public and I'm
00:40:34
going to be one of the great companies that survive this.
00:40:36
You should be on my team with the All-Stars and they're
00:40:39
starting to do selective kind of rifle.
00:40:42
Shot hires of All-Stars from from companies where might have
00:40:47
been hard to take them out of because that All-Star might have
00:40:49
had a significant Found the courage to read between the
00:40:52
lines a little bit. Lot of poaching, a lot of work.
00:40:55
Well there, you know on Twitter know what he's going to say like
00:40:57
layoffs are good and You know, I don't want to be the person to
00:41:00
say that but there is a degree to which when everything's going
00:41:03
great, your company wants to be happy, your employees don't want
00:41:06
you to fire anybody but then kind of liars and during a
00:41:08
pandemic right? And but you know you you need to
00:41:12
be able good companies. Don't just keep everybody they
00:41:16
ever hired and they make mistakes and people don't work
00:41:18
out. And so this is an excuse to sort
00:41:21
of say who are the people that we want the company and that can
00:41:24
be good, good for companies and bad for.
00:41:28
So just what they're seeing. Be who they want to be on
00:41:29
companies and then so they're saying, hey, I'm going to build
00:41:32
an A Team. I'm gonna call the herd and
00:41:34
maybe do a layoff where different maybe in the past.
00:41:37
The strong companies are doing a layoff because they feel like
00:41:40
that they have a provision position of strength, either be
00:41:43
a strong, balance sheet or Market position.
00:41:46
And then you know we're saying wait until maybe the second half
00:41:49
of the year and then you could be aggressive on the acquisition
00:41:52
side because you're going to start to see we're already
00:41:54
starting to see a lot of companies have extra cash,
00:41:57
right? Because it was so easy to raise.
00:41:58
Some Will raise twice last year, but maybe only are now getting
00:42:02
the memo of hey unit Economics, work, and they're not going to
00:42:05
be able to refactor their business in time to do another
00:42:08
raise. We're seeing a lot of duress
00:42:10
distress sales already but there's going to be a lot more
00:42:13
in the second half of the year. You think sort of superteam
00:42:16
startups like merge with each other to try.
00:42:18
Or you think it's more when the challenge with Acquisitions has
00:42:22
been the antitrust situation and that there are a couple dominant
00:42:25
tech companies that can't buy and I'm saying less like know,
00:42:29
Less Google, buying something for tens of billions of dollars.
00:42:33
This is more. This is you know a Deca corn or
00:42:36
you know unicorn type startup who's able to pull in teams or
00:42:39
able to pull and product functionality, like, hey, we
00:42:42
always like this team but they said they wanted 150 times
00:42:46
revenue and now they're willing to take two times rope, right?
00:42:49
And because they don't have a whole lot of truth.
00:42:51
They're not into independently financeable.
00:42:54
And those teams that which, you know, create a fortress balance
00:42:57
sheet, build an A-Plus, Audi team and then go out and say,
00:43:01
hey, it's going to be two times Revenue.
00:43:02
I know that's not what you expected, but you could join
00:43:05
this team. We have all the capital we need.
00:43:08
We have a great team that you could be a key player on.
00:43:11
And when this thing all clears in two years, them IPO Market
00:43:14
opens, we're going to be a decided winner.
00:43:17
Do you think also there's going to be a shift towards more
00:43:19
salary based comp rather than equity-based if we're in a
00:43:23
market where it might take a couple of years for you know
00:43:26
shares to appreciate in a big way or there to be a strong?
00:43:29
Kind of exit opportunity. Oh, that's not what's happened
00:43:31
in the past. And frankly, you know, in other
00:43:34
downturns you've seen salaries that rear the remain relatively
00:43:38
flat but Equity comp, be go down just because, you know, Equity
00:43:43
cash comp is gone up a lot. And if you see a renormalization
00:43:47
in the, in the labor market, everyone's getting laid off
00:43:50
employees have left less bar. Just let her so they're going to
00:43:52
get paid less. Yeah, so I think people are
00:43:54
going to say, I'm going to keep my same salary bands which are
00:43:56
up 30% from two years ago. And you know, people are just
00:44:00
going to make less money if they don't believe in the equity
00:44:02
portion here. But if you join the super team
00:44:05
that's going to go public, you have a better chance of making
00:44:08
money as opposed to this company, which seems like you're
00:44:10
going to run out of money and so many instacart resetting
00:44:12
valuations. You think you'll see startups,
00:44:15
just try to artificially reset the valuation.
00:44:18
They give to employees. It depends mean that's a very
00:44:21
unique situation with a very high price and their whole comp
00:44:24
set of, you know, is was down in 7580 percent.
00:44:27
So that was It's a very specific.
00:44:30
Hey, I'm close to IPO every one of my Common Sense down
00:44:33
tremendously. It's going to be really hard to
00:44:36
recruit especially with a ton of preference ahead of me.
00:44:39
If people are bearish on the sector, we haven't seen, we've
00:44:42
seen that in the past that people have reset 49 out.
00:44:45
Maybe valuations, especially if the company has raised a lot of
00:44:47
money and has a lot of preference ahead of the
00:44:49
employees. We haven't seen any investors,
00:44:52
don't root for it. Well, no, we generally do
00:44:56
because we think the team, you know, if the team Is the most
00:44:59
important thing in a start-up and you think you're not going
00:45:02
to be able to recruit a great team, or you're going to lose
00:45:04
people because they don't think their Equity is going to be
00:45:07
worth that much. You know, you'd rather you'd
00:45:10
rather keep your best, your best players and you'd rather recruit
00:45:13
the best team. So, you know, most good
00:45:15
investors were actually route for a loaf or on any
00:45:18
presidential publicly. We want the most Fair
00:45:22
third-party value for an a price, but as a director, I'm
00:45:25
looking for that price to be low.
00:45:27
So people get excited about the equity.
00:45:29
The opportunity. What would you see?
00:45:31
If you could name a couple of companies as winners that out of
00:45:34
this period companies that you think are slightly under the
00:45:37
radar but because of their capital structure or you know
00:45:41
they're having a more sustainable business model could
00:45:44
surprise people and end up looking very strong in the next
00:45:47
two years. I still think that Healthcare is
00:45:51
an industry. It's going to change
00:45:52
tremendously and I think, you know, companies that are coming
00:45:55
at it and a holistic approach and Going to be winners in the
00:46:00
space. That can there's a glaring
00:46:02
consolidators in the space are going to be really important.
00:46:04
Now, one example is row or Roman Health that, you know, came out
00:46:08
of the gate, strong grew very quickly has an excellent team
00:46:12
and even in the last year, where there was less consolidation,
00:46:16
they bought a handful of companies that failed product
00:46:19
needs. As they brought build out their
00:46:20
full portfolio both in terms of delivery ecosystems as well as
00:46:25
and use your products. And you know I think that's a
00:46:28
good kind of case. Study or an example of you have
00:46:31
a big balance sheet, you're in a big Market, you've gotten to
00:46:35
millions of customers and now you're going to be able to use
00:46:38
that balance sheet. Not only defensively, but
00:46:40
offensive ly to build a really because that's what the market
00:46:43
reopen. How many, right?
00:46:44
Yes. Have full disclosure it spoil
00:46:46
their, their male fertility company, right?
00:46:50
They have male and female, that is proof.
00:46:59
Is generally recession-proof we also like we think the reopening
00:47:02
is going to be real. We'd like to travel sector are
00:47:05
being do as a form or folio company.
00:47:07
That put up, great numbers, everything around travel.
00:47:11
As consumers ships from people are traditionally 70% of
00:47:16
consumer spending is on services and that could be restaurants or
00:47:19
travel, or whatever it is. 30% is on hard Goods or home that
00:47:23
shifted during the pandemic. And I think there's a lot of
00:47:26
pent-up demand for that to shift back.
00:47:28
So, so, you know, we believe in, you know, restaurants reopening
00:47:31
travel reopening, etc, etc. Nice.
00:47:33
I like that, it's sort of like digital, you know, telemedicine,
00:47:36
but also travel. So it's like seeing people
00:47:38
remotely and also actually going and going to places.
00:47:42
Yeah, I think there's going to be a mix.
00:47:43
I think some of the IRL is obviously coming back and that's
00:47:45
great. And some of the things I think
00:47:48
wall still have zoom accounts forever.
00:47:50
Rick, thanks so much for coming on.
00:47:51
We really appreciate it. Awesome, saying everybody, thank
00:47:54
you for having me. Thank you.
00:48:08
Goodbye. Goodbye.
00:48:09
Goodbye, goodbye, goodbye. Goodbye.