20VC: WTF Is Going On? 3 Outcomes for What Could Happen From Here; What Needs to Happen To Avoid Recession? Why Stagnation is Most Likely and What This Means for Startups and Venture & Why Catastrophe is More Likely Than Ever and Switzerland Could Be a "H

Fabrice Grinda is the Founding Partner @ FJ Labs, with over 700 investments, Fabrice has had over 250 exits and built a portfolio including Alibaba, Coupang, Airbnb, Instacart, Flexport, and Delivery Hero, and many more. Prior to FJ Labs, Fabrice served as CEO for three multinational companies; including OLX, one of the largest websites in the world with over 300 million unique visitors per month. As a result of his incredible investing success, Fabrice was named the #1 Angel Investor in the world by Forbes. In Today's Episode with Fabrice Grinda: 1.) Everything Great Starts Small: How did Fabrice make his way into the world of investing from founding 3 companies? How does Fabrice feel about founders raising funds with external LPs? Why does Fabrice feel that investing as an angel made him a better CEO? 2.) WTF is Going On: The Market Today How does Fabrice assess what is happening in the market today? What is causing the massive public market drops we are seeing? How do inflation rates and interest rates have such an impact on where we are? How much of this is a result of COVID, the shift to goods from services and supply chains? 3.) The Optimistic Case: How does Fabrice think things could get better from here? What needs to happen? What could the Fed do to enable this optimistic outcome to take place? What would need to happen in geo-politics and Russia for this to happen? What is the probability today of this optimistic case happening? 4.) The Great Stagnation: How does Fabrice think the economy could go sideways from here? What are the core drivers of this? Why is this the most likely outcome of all? What is the probability of this happening? 5.) The Catastrophe: How could this market get so much worse? What level of interest rate change would cause this outcome to occur? Why does Fabrice think that Switzerland is a "House of Cards"? What would this mean if Switzerland fell? What other European countries does Fabrice think are vulnerable? 6.) What this Means for Venture: How will LPs respond to these differing situations? How does this impact how Fabrice thinks about his rate of deployment? What segment of the market is Fabrice most excited for; early or growth? Mentioned in Today's Episode with Fabrice Grinda: Fabrice's Favourite Book: Sapiens: A Brief History of Humankind

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  Welcome back to 20 VC. The markets are changing fast and stay with our guests. We dig into where we are today and then outline three different cases for where it could go from here. The good, the bad, and the stagnant. And then we attach probabilities to each, always a dangerous exercise. But this is a masterclass in macro and broader economics. It really was such a joy for me to do. And so I'm thrilled to welcome Fabrice Grinda, founding partner at FJ Labs. With over 700 investments, Fabrice has had over 250 exits and built a portfolio including Alibaba, Kuipang, Airbnb, Instacart, and Delivery Hero, to name a few. Prior to FJ Labs, Fabrice served as CEO for three multinational companies, including OLX, one of the largest websites in the world with over 300 million unique visitors per month.

• 0:44Harry Stebbings?

  As a result of his incredible investing success, Fabrice was named as the number one angel ambassador in the world by Forbes. But before we dive into the show with Fabrice today. Harvard Management Company is constantly seeking out the next generation of great investors and entrepreneurs. HMC has managed Harvard University's endowment for nearly 50 years and was one of the first institutional investors in venture capital. Their experience and long-term investment horizon makes them ideal partners to get world-changing ideas on a path to viability and success. They work as a true partner, providing insightful perspectives to help managers succeed. I personally have had the pleasure of working with the HMC team and can say that they're truly exceptional partners, people, and incredibly savvy investors.

• 1:25Harry Stebbings?

  Whether you are launching your first fund or your fifth, HMC welcomes the opportunity to partner with both developing and established managers. Have an idea you want to share with the team? Just send it to [email protected]. And speaking of amazing partners with HMC there, Mercury is building full-stack banking for startups. Apply in under 10 minutes from anywhere for FDIC insured bank accounts, physical and virtual debit cards, domestic and international wires, and integrations with Gusto, Stripe, QuickBooks, Plaid, and basically every other tool your startup uses. They also offer unusual features like API access, custom team management, and their newly launched Mercury Treasury, a cash management product for high-growth startups. They'll even help you build your startup with Mercury.

• 2:10Harry Stebbings?

  Raise, a program to connect you to Silicon Valley's top investors. Head over to mercury.com forward slash sign up to apply. And until 2020, automated investing strategies, they were only available to millionaires. And now the bots platform has made the most successful strategies available for everyone using their superior bots technology. In the bots store in the app, you can choose from a number of automated trading bots. These trading bots grow your portfolio by buying low and selling high, making informed decisions based on data, mathematics and science 24/7. Join the 1 million people who've already downloaded the easy to use bots app and discover this new way of investing. Bots is already available on Google Play and in the App Store in 35 countries in Europe and will be expanding to more than 100 by the end of the year.

• 2:54Harry Stebbings?

  Go to bots.io forward slash 20 VC. Try the bots app now and let the bots do the work for you. But that is enough from me. So now I'm so excited to hand over to the one and only Fabrice Grinda.

• 3:11Speaker 01

  You have now arrived at your destination.

• 3:14Harry Stebbings?

  Fabrice, it has been seven years since our last show. I cannot believe I said to you five, you corrected me seven. I am horrified, but thank you so much for joining me after all this time.

• 3:24Speaker 02

  Thank you so much for having me.

• 3:26Harry Stebbings?

  Not at all, but I want to start. And for those that missed our first episode, which to be fair, I'm sure many did. Hit me, how did you make your foray into the world of investing? And how did you come to found FJ Labs most recently?

• 3:37Speaker 02

  So I made my foray into the world of investing through being a tech founder. By virtue of being a visible consumer internet facing CEO, a lot of like other founders started approaching me. So when I built my first company, I was 23 back in 98. It was an eBay of Europe called Auckland. I was like one of the public faces in the internet revolution of France especially. And so all the other like young founders were looking up to me. It was like, said, hey, can you invest? And at that point in time, I thought long and hard, is it a distraction for my core mandate as founder CEO to be investing in other startups? Upon reflection, decided that if I can articulate lessons learned to others, it means I've internalized them, making me a better founder. And at the same time, meeting all these other extraordinary founders to help their dreams.

• 4:20Speaker 02

  Come true, kept my fingers in the pulse of the market, also maybe a better founder. And so back in 98, when I first started out as a CEO founder of tech startups, I'm like, okay, I'm going to be an angel investor at the same time. At that time, I had very little capital and that continued throughout my life. Oh, relax in 2013 and left it, I'd already had made over 150 investments. And so basically I've always had the dual track founder investor. Because I was so busy as a tech founder, I was like, okay, I need to only invest in things I understand innately. And I was building marketplaces and thinking about marketplace of like only get to do marketplaces. And because I cannot be distracted, I set up back then the same heuristics I did to apply to my own companies I would pick to others, adding of course, the variable of the team evaluation and deal terms.

• 5:03Speaker 02

  And so I created a setup for a process for deciding in a one hour meeting if I would invest or not in a startup. Essentially one that we still use to this day. So I've basically been a tech investor since 1998.

• 5:15Harry Stebbings?

  I'm out, I have so many questions. And first off, when you look back at how you invested in 1998, when you started, what would you say is the biggest change to how you invest today?

• 5:25Speaker 02

  So funnily enough, not that much has changed. It's always been the same four criteria. Do I like the team, which for me are the extraordinary storytellers who know how to execute? Do I like the business, you know, economics and total addressable market size? Do I like the deal terms, nothing's cheap, but is it fair? And does it mean my thesis where the world is heading now? That what's funnily different is it used to just be me over the years, kind of like randomly, I don't know if it lucked into, but like ended up creating a structure that became a venture fund. And so today there's 31 of us, there's a higher back office team. I mean, actually probably for 15 years, every document that was ever sent to me, legal document that was sent to me, SPA, anything like company selling, etc., I auto signed. Or actually my virtual assistant in the Philippines, who had my signature,

• 6:09Speaker 02

  would auto sign for me all the docs that I never even read. I would take the call, the founder would agree on the valuation, the terms, how much I would invest. And that is the last thing I would ever do. I would never read any docs ever sent to me ever. And as far as I can tell, I never got screwed because people are well intentioned. Today, we actually have a team and people are actually doing legal reviews. And have a back office system. And so there's processes and structure. And instead of one one hour meeting, today, we have two one hour meetings. So usually the inbound deals that we get about 200 a week, they go to someone else first and the team reviews takes the first call. And I take the second call. So we went from one hour decision making process to two one hour meeting decision making process over the course of a week.

• 6:50Speaker 02

  And with a full team, and now we actually have a back office, whereas before I auto signed every legal doc ever sent to me.

• 6:56Harry Stebbings?

  When someone comes to repossess your house, you have no grounds to push back.

• 7:01Speaker 02

  It'll be worse than that. I might have signed away. I give you everything I own.

• 7:07Harry Stebbings?

  I have a question for you. I have no problem with you as a successful CEO investing your own money. What I do have a problem with is hyper growth founders raising 10, 20 million dollar funds from external LPs and investing that. When you take money from someone, it is a very big responsibility and you owe them your time and dedication. How do you feel about these external LP funded founder funds?

• 7:30Speaker 02

  So it's a question of how people are allocating their time, right? Like to the extent it's like their name and someone else is doing the day to day. And maybe people investing, they're sending their deal flow. I think it's okay. Like I think Orin often did one recently. And I know that Orin's day life is 100% dedicated to a startup. Even though his name is on the fund, there's a full team, there's an investment committee. So I think if you look at his time allocation to this external LP funded funds, it's like a couple hours a week. But that's also the deal that he set with the LPs. He goes to the LPs and he says, look, I'm getting this deal flow. I think a couple hours a week, I can help decide, I can be in the investment committee, I can help make decisions. I'm not the one running it. If you're comfortable with that, that's fine. And I think it's the sales pitch put to the LPs and it's internally consistent.

• 8:13Speaker 02

  It is also the sales pitch to the VCs, his VCs, because he's raised 10s of millions of capital. Now that said, if you're completely distracted and you're not delivering on your underlying mandate and you're splitting your time between the two, I don't think that's appropriate. I think on a keys by keys basis, I would evaluate whether you should do it or not. Look, in general, I would just say focus, right? Like it's so hard to do one thing well in life, let alone do two. But I have seen people make it work. And frankly, I was a counter example of that because even though I didn't have any external. Capital, I did have tens of millions of dollars of VC money and I was building my own company. And so you could argue me angel investing is a distraction. And there was a period of time where I was doing like multiple investments for a week, which is multiple hours for a week. But I actually always felt that being an angel investor may be a better founder.

• 8:55Speaker 02

  Really, I understood what the latest trends were, what the latest approaches were. Everything from SEO to SCM to verticalization. I was running a horizontal marketplace and I was seeing all the verticals emerge. And I had to think through, okay, which ones should we be verticalizing or acquiring? I really thought it may be a better founder. And so in my case, I thought it was, there wasn't a conflict between the two. And I always, of course, disclosed it to my VCs that I was doing that.

• 9:18Harry Stebbings?

  Ed, do you want to move into the meat of the show though? Cause you wrote the most brilliant piece in terms of where we're at today and then multiple different kind of outcome scenario plans. And so I want to start on where we are today. Let's start with that. So where are we now and how do you analyze the current situation for Bruce?

• 9:32Speaker 02

  So this is a macroeconomic piece we're talking about. So here we're talking about like, where do we send and the macro cycle? What are implications and conclusions? And the piece is called the great unknown. And by the way, I probably should mention, I'm kind of an armchair economist. I studied economics and I've been writing and thinking about macro for fun. But the reason I think today is the great unknown is there were periods in history where I think it was pretty obvious where we were. The late nineties, to most observers, it was obvious we were in a tech bubble. At some point would burst, so it was unclear when that would be, but it still laid the foundations for the great to come. In the mid 2000s, I was, I wrote a few articles explaining that real estate prices were too high, that at some point we were in a bubble, at some point it would burst and that led to the great recession.

• 10:14Speaker 02

  A year ago, I wrote a piece called, uh, Welcome to the Everything Bubble. And I made the argument, and so that was in March 2021, a combination of extraordinarily loose monetary and fiscal policy was fueling an asset bubble in every asset class simultaneously. Bonds, stocks, crypto, SPACs, which was a full on bubble, frothiness across the board. I mean, definitely in tech and in our sector. And that at some point it was at an end. And there were a lot of things suggesting that we were near or at the top. We were seeing a bubble in SPACs, which of course since then has blown. This weird volatility and crazy retail. Short squeezes, yeah, as you may remember. And so it was kind of obvious we were in this everything bubble extraordinary frothy environment.

• 10:57Speaker 02

  Now, today, the reason I call it the great unknown is I can make a reasonably compelling argument or case that we have three outcomes ahead of us and I can make a good argument for all three of them. Actually, there is an optimistic case scenario. By the way, in our world today, no one believes that. We're not quite peak uncertainty and peak end of the world. No one can believe in an optimistic outcome here. Number two, I guess, the great stagnation where we have a big sideways move and I could explain how and why we get that. It's probably the most probabilistic case. And number three, why actually a lot more pain could yet come. And again, all of these have double digit percentage probabilities assigned to them. So I think of the world in probabilistic terms. And whereas historically, I would have said last year, oh, we're in like every asset class kind of bubble. There's going to be a correction.

• 11:43Speaker 02

  Today, in my probabilistic terms, I say there is a 20% scenario that we probability that we end up with a optimistic outcome from where we are, and I can explain why. Maybe a 60% scenario of what I call the great stagnation. And another 20% scenario of like the worst is yet to come and things can get a lot worse.

• 12:01Harry Stebbings?

  So I want to break this down. I'll break it down in order. I think it's nice to start with the positive, then we can go to stagnation, then we can go to where truly shit hits the fan and we're coming to you for a job. So let's start with the optimistic case. What is the optimistic case? How do you look at this and argue that we will return to good times?

• 12:17Speaker 02

  So let's look at what is causing a lot of the issues that we're facing today. And what is leading to an asset price correction is an expected increase in interest rates. So the increase has not even happened yet. It's an expected increase in interest rates. And of course, when interest rates are extraordinarily low, it means that expected long term future cash flows are valued highly, right? Imagine you're in a zero rate environment and you have a company that is expected to throw a billion in cash flow in 10 years. Well, that will add a billion in the value of the company. And so for these high growth startups where cash flows are way into the future, very low rates fuel extraordinarily large valuations. You can justify extraordinarily large valuations. Now imagine we're in a 10% discount rate environment, that same billion in

• 13:00Speaker 02

  Cash flow in 10 years is going to only be worth 386 million. It doesn't take a very large movement in interest rates to actually justify much lower valuations. And so as interest rate expectations have gone up, inflation's multiples have compressed. So risk assets, and that's especially tech stocks and crypto. And by the way, this goes to show that crypto is not an inflation hedge. It's still a risk asset, have been marked down dramatically. And why do we have these expectation of increases in rates? And it's because of inflation. So inflation, which is basically at 8%, is at a 40-year-high from a one-year-on price-on-price increase. The last time it happened in 1981, Volcker increased rates to 20%. I mean, people forget.

• 13:41Speaker 02

  And right now, we're talking about rates going to 1.5% and it's scaring people a lot. Now, what needs to happen for things to be okay? Basically, we need that currently, what is priced in? What's priced in is five raises by the Fed this year to 1.5%. And for the reason going-forward basis where people are expecting 2% to 3% interest rates. Now, imagine that instead of inflation spiking in the remaining 8%, we get a return to the status quo ante of 2% to 3% inflation. And I think that is actually a possible outcome. Not saying it's the most likely outcome, just saying it's possible. So what has driven inflation is really two things. When COVID happened and there was a massive lockdown,

• 14:21Speaker 02

  we saw an unprecedented shift from a percentage GDP allocated to goods over services. And our underlying infrastructure is just not flexible. The number of truckers, the number of ships, the number of people working at docks, the number of slots for the ships to line are all not flexible. And so that unprecedented shift put massive pressure on our supply chains, which has led to massive increase in shipping costs and all the underlying raw materials that go into the making of all the things that we order. So people have been buying goods at a crazy unprecedented level because they cannot travel, they cannot go to restaurants, they can go to the gym, they can go to the movies. And by the way, we're not going to fix these supply chain constraints. It's kind of the way the system is designed. So I don't expect that to shift.

• 15:05Speaker 02

  But COVID is perhaps on the way out, right? People were triple vaxxed or have all gotten And restrictions are loosening. People are starting to travel again. I mean, not maybe it quickly enough, but if all the restrictions end by the summer, like you still need like a COVID test into the US when me that goes away as it has in many other countries, you can make a case that we're going to go back to the scenario of the same level of consumption of services, which was given before. It's going to remove all the pressure on the supply chains and will abate inflationary pressure. At the same time, if we reach some level of status quo in Ukraine, and I'm not saying it's a good one or a bad one, but I'm just saying if the geopolitical uncertainty of Ukraine ends in some way, shape

• 15:45Speaker 02

  or form, maybe we see a return to lower energy prices, which have exacerbated inflationary pressures. Now, you put these two into play, and at the same time, perhaps Xi Jinping will be less, and given the difficulties Putin is at in Ukraine, will say, okay, maybe Taiwan is not on the cards. And so we regain a level of geopolitical stability. We go back to the XNT status quo order of services and goods, which removes deflationary pressure, while at the same time, we start getting the benefits of the productivity revolution that technology is bringing to the fore in categories here, therefore to untouched by the technology. So before COVID, people were healthcare, education, public services, none of these were being touched with technology

• 16:28Speaker 02

  revolution, and technology is actually extraordinarily deflationary. And so you have economists like Tyler Cohen, who had called the great stagnation, saying, we are going to see an extraordinary deflationary productivity revolution by technology. And so if all these things happen, and of course, it's a lot of like stars aligning, I could make a case that in that world, interest rates don't need to rise nearly as much as we expect, and it's about the expectation of interest rate that matters, in which case the good times can keep on rolling, because then we're less likely to have a recession that's caused by higher interest rates. And you need to remember that the underlying situation is actually pretty good. We're at full employment. We're at 3.8% unemployment, which is full employment. You have company balance sheets that are pretty strong. You have corporate

• 17:11Speaker 02

  profits that are pretty strong. Things are actually reasonably good if you remove the inflation, the increasing interest rates, and the geopolitical overhang. And at the same time, right now, you have not near peak uncertainty, but you have so much negativity that the contrarian to me suggests, and when everyone thinks like the world is about to end, is actually the time that you should start being, thinking about like, hey, it's now the time to start making investments, because it's not the case.

• 17:36Harry Stebbings?

  Do we continue to see unprecedented capital flows into crypto and Web 3?

• 17:40Speaker 02

  So that actually is also interesting, because the capital flows into Web 3 are continuing, and they were maybe unprecedented last year, but if you think about like the long-term vision, will there be, do we think Web 3 and crypto will be higher as a total percentage of asset allocation in two decades, given that everyone from family offices to social investors, to maybe even central banks, want some allocation there, capital flows are going to continue. And by the way, Web 3 is probably the better moniker, because crypto, I mean, they're not currencies. Most of them actually have a use case as just a decentralized web, and their applications benefit from decentralization. Doesn't mean that you can't see a massive correction in the price of crypto assets, especially NFTs, which have been in a full-on bubble for the last year or so, especially the art-related

• 18:25Speaker 02

  NFTs. I mean, I'm a much big believer in like utility or gaming NFTs at lower prices. But I suspect that capital continues to go into the category, and we're actually seeing capital flows to be continuing despite the correction in pricing. And so I'm reasonably optimistic here as well. I mean, look, it could go down 90%, I don't think it matters. I care about like, in 10 or 20 years, will we have laid the foundations for the next decentralized internet? And I think the answer is yes.

• 18:51Harry Stebbings?

  So we're going to talk about stagnation. Before we do that, probability-wise, remind me, what would you peg on the optimistic?

• 18:58Speaker 02

  Herein lies the issue, is if you'd asked me last October, pre Putin invading Ukraine, and oil prices going above 100, I thought Omnicron was going to be good, because it was so light, like it affected everyone, but no one really got sick. That was like, hey, we're going to have herd immunity, it's going to be the end of this. So if you'd asked me in December, I would have told you 50%. Now I'm at 20% and declining. But it's not 0%, right? If you look at the sentiment in VC today, I was looking at like tweets like Keith Rabois and a few others, it's like the end of the world, like. People think we're in like free but either rip good times in Sequoia presentation 2007 or like dot com bubble crash type territory because the public market correction has been real.

• 19:41Speaker 02

  I mean, you don't see it in the Nasdaq so much because dominated by the big tech stocks, which haven't fallen too much. But if you look at like all the smaller market cap companies, they're all down like 50 to 80% across the board. I mean, it's been a bloodbath if you're a tech investor.

• 19:56Harry Stebbings?

  A total bloodbath. I think one thing that's really interesting that's different this time compared to 2008 and any other prior recession is actually the proliferation and speed of news delivery through Twitter. Now, Keith Rabo, David Sacks, you name it, can tweet anything and thousands and millions and millions see it. Before in 2008, where you maybe had BBM groups with BlackBreeze, but Twitter was not taking off. You speak in the papers or on TV, but it's not as real time. It's more polished. It's very different now.

• 20:23Speaker 02

  Yeah, but look, it's sentiments. And to me, it's interesting, like the more the sentiment goes negative, the more intuitively I'm like, this is good. And by the way, I don't know if I should make the point now or later, but like history trumps macro, right? Like the last 200 years have been a history of technological progress that has led innovation, that has led improvements in the human condition. And over the last 200 years, despite world wars, the Great Depression, and frankly, even the last 40 years of like Black Monday, the massive recession of 81, 82, a recession in 92, a recession in 2001, well, but the dot com bubble imploding, the 2001 post 9/11 recession, the great recession of 07, 09, the recession of April of 2020.

• 21:05Speaker 02

  Despite all of that, if you bet on technology, both financially and as something to deliver good for the world, you would have won. I spend some time thinking of the macro in terms of like what to do with the existing portfolio companies, how to do capital allocation. But as an early stage investor, like pre CC to A, it doesn't really impact me too much because the macro I care about is the macro seven, 10 years in the future. So for new investments, current negative macro, it's not too bad, except that you need to think about like making sure you have follow on capital. You want to make sure the valuation you commit is reasonable, but it's not hugely impactful. The most interesting companies of the last decade were all All created in the 07 09 recession, Uber, Airbnb. Okay, you disagree?

• 21:44Harry Stebbings?

  No, I agree, but I think people conflate the reasoning around why the timing. The timing was because of the platform shift to mobile and the rise of the app store and the consumer.

• 21:52Speaker 02

  Correct.

• 21:52Harry Stebbings?

  Dominance of Uber, Instagram, Snapchat, you name the incredible companies. It was not predicated around the recession. It was conveniently timed around that.

• 22:01Speaker 02

  Correct.

• 22:01Harry Stebbings?

  So the prices were better.

• 22:02Speaker 02

  But that's the point I'm trying to make right now. It's like the current macro we're in has very little bearing on whether or not those companies will do well in the coming decade relative to, or are they solving the problems that humanity faces in a meaningful new way? You know, so the tide of decentralization, web three, I think, is unstoppable. I think the fact that we need to deal with climate change and decarbonizing our economy is unstoppable and will have to happen. And we need to address the inequality of opportunity and social injustices of the modern system. And I think most of the startups that we're backing are addressing these fundamental problems. And so these opportunities are there.

• 22:36Harry Stebbings?

  I do worry about the follow on capital element, though. I have seen a complete exodus from the As and the Bs. I mean, pullback like I've never seen before. That worries me.

• 22:44Speaker 02

  You could argue too much capital was being deployed before. How many startups were used to be funded? There used to be 5,000 seed funded startups per year in the US that would raise 500K or more. And last two years, it was over 15,000. It was between 15 and 20,000. So we tripled or quadrupled the number of startups created and we had more capital. It used to be venture capital was 50 billion a year. It all of a sudden became 150 billion a year, right? We tripled also the capital available. What is the correct number? Are we going to see a return to the median, the long term? Or is this a new status quo of people are more entrepreneurial? Now attacking categories that were not previously attackable because of rules, regulation, history, et cetera. And I don't know what the answer is yet.

• 23:27Speaker 02

  And so actually I'm keeping an eye on it because it'll dramatically impact whether I make 100 investments a year, which has been my long term average, or 300, which has been last year's number, on a go forward basis. Then will impact how big my fund should be. If we go back to the earlier numbers, my fund should be 300 to 500 million. If we were at the current numbers, my fund should be a billion five. But I don't know the answer to that yet and I think we're going to know the answer the next two years.

• 23:48Harry Stebbings?

  How do you feel about insight at the A and the B? They've got 20 billion, they've got 20 billion that they raised last year. They can essentially dominate the market like no one's ever dominated the market before.

• 23:58Speaker 02

  People have said that of others before, right? People said that of SoftBank, people said that of Tiger and many of the crossover funds. I mean, there is a lot of capital on the sidelines. The thing is, do I really think that Insights bread and butter is going to be Series As? No, I mean, you had the conversation with Harley, I think, a week ago or a few weeks ago. If you're deploying 20 billion, you really don't get out of bed and write a $10 million A check very often because it just doesn't move the needle. Like, you're not deploying enough capital, is I could return enough capital that you can make a dent? And so they're going to have to write much larger checks. Frankly, even the Bs are going to be, other than the very large Bs, are going to be too early for them. They're going to have to write much larger checks than the Cs, Ds, Es, Fs, et cetera. And they're going to be able to keep the companies thriving for a long time. That said, the companies are becoming bigger than ever before.

• 24:43Speaker 02

  You can deploy more capital for longer than ever before. And frankly, as a founder, I used to dream as a kid, I mean, because I was crazy. I wanted to be a public internet CEO. Today, I don't know there's a, well, maybe there is some amount of money, but like, that would not be my ambition, rather be a private internet CEO than a public one. You have to be insane and want to be in the public eye. And so I don't think they're going to screw up the A and B market and asset class because they're going to play. It's not going to be the bread and butter.

• 25:07Harry Stebbings?

  Fascinating to hear. I think you're probably right. I do want to talk about the case for stagnation, though. So if we think about the case for stagnation, you mentioned it's probably the most likely. What would cause the case for stagnation here for Breeze?

• 25:18Speaker 02

  So to have the case, the optimistic case, right? Like, you need inflation expectations to not get entrenched. Last year, we saw a 5.1 increase in wages and a 7.9% increase in inflation. And as long as people perceive it to be transient, they don't negotiate automatic 7% wage increases every year, then we're okay. But if all of a sudden the expectation is, oh, we have this inflation, therefore we need to get 7, 8, 9% wage increases every year, you've started entrenching inflation expectations. And then it becomes really, really hard to deal with. And because we don't have the political courage to do a Volcker II and go to 20% interest rate, not that we necessarily should, but I suspect that what happens is we have an unprecedented large

• 26:00Speaker 02

  Level of public debt, right? Like, so we have, global debt is now at all time high of 250% of GDP. And it's actually rather sensitive to rates, to nominal rates. And so there's a really strong temptation not to increase rates as much as they should be increased, and to accept higher long-term inflation. And so I could see a world where we end up with 5, 6, 7, 8, and 9% inflation, kind of forever, which has a lot of downside, but one of the upsides, if you keep interest rates low enough, is that you're eroding your overall debt level, if you have negative real rates. And there are enough historical precedents for this. So if you look in times of war, World War I, World War II, the Vietnam War, states writ large, in the US especially, were willing to tolerate higher inflation.

• 26:44Speaker 02

  Higher inflation than the expectations of price stability at like 2, 3% set by the Fed. In light of what's going on in Ukraine, in light of the fact that we have super high debt loads right now, where the US debt to GDP is over 100%. Could I see a world where we have 5, 6, 7, 8% inflation on a go-forward basis, with rates that remain at 3, 4, 5%, so below the rates? Absolutely. And at the same time, imagine you have continued geopolitical uncertainty because the Ukraine conflict drags on, which I could see dragging on kind of forever, given the quackmire that the Russian forces are in. I mean, not necessarily forever, but for years to continue. And so in that world, the US and a lot of the West are kind of looking like many of the Latin American countries,

• 27:29Speaker 02

  where historically they have reasonably high nominal inflation, mid, lower rates that are lower than probably should be. Maybe you don't see nominal falls in asset prices, especially things like real estate, etc. But in light of the fact that we have high inflation, it'll be real decreases in asset values. And that rate stagnation is different from the great stagnation that Japan has gone through, in this case it will be inflationary, but it'll be pretty similar, and it will not feel great. You will see your purchasing power eroded as employees from reasonably higher inflation. You will not see asset prices recover, it will basically go sideways on a nominal basis, but that means real decreases. It'll kind of suck, it won't be great, it won't be bad, but it'll be sideways, and it'll kind of suck.

• 28:10Speaker 02

  I suspect that that's the high most likely scenario today because for the optimistic scenario to happen, you need things to reopen pretty quickly. So we see inflation actually don't get a reset and political forces move reasonably slowly. They're more reactive than proactive. And I think you need the end of the geopolitical insurgency in Ukraine, which we don't see happening anytime soon. So I suspect the sideways move where we increase rates, but not enough. We still have too much more inflation than we probably should is the fault likely most likely outcome.

• 28:41Harry Stebbings?

  Tell me, if you were in the government seat, if you were in the seat of the Fed or Bank of England, how should they act? What would you do then?

• 28:48Speaker 02

  Well, the problem is I wouldn't have gone into where we are today, right? Like, and also there's a problem of being the head of the Fed. What led to the everything bubble is a combination of overly loose monetary policy and fiscal policy. We were pushing the pedal of the metal at the same time. You would have needed a more responsible fiscal policy and monetary policy simultaneously. Now, at this point, you need to raise rates carefully, but I would try to find ways to remove the inflationary pressures that would that needing to push on the brakes too much. And that means changing the rules at a lot of our harbors, right? Like the fact that in Long Bay, you could only stack containers too high, right? Like, there's a lot of productivity improvements to be had that could be deflationary that I would try to unleash. Now, these are way harder, right?

• 29:30Speaker 02

  Like, you have so much NIMBYism, you can't really build in the US, which has led to real estate being massively inflationary because we don't have enough increased supply. And all these problems take a lot of time to fix. But I would actually try to do the structural changes that would lead to deflation in the underlying economy while slowly tapering off. I would definitely remove all the COVID restrictions instantaneously by the way, like everything from mask mandates to probably even vaccine requirements and COVID test requirements and entry at this point should like really accelerate the shift back to services. Now, the Fed, you don't have a choice at this point about to raise rates. The thing is, it's going to be a very fine balancing act to make sure it happens without causing the next recession. I mean, right now, more likely than not, we are going to have a recession, right?

• 30:12Speaker 02

  Like, consumer and business sentiment is going down dramatically. Every time in the past that oil prices have gone over $100, we've had a recession post that. Slowing down the overheating of the economy without causing recession is extremely hard. I think only three of the seven times that we've increased rates have we been able to avoid a recession. So I think more likely than not, we're going to have a recession. And the thing is, to prevent it from happening, the delicate balancing hack that you need between municipal, state, federal governments and the Fed, it just doesn't happen, right? Like, they're all driven by different political forces that have completely different incentives. So it's really, really hard.

• 30:47Harry Stebbings?

  What probability would you assign to this case happening?

• 30:50Speaker 02

  Oh, 60%. It's by far the most likely scenario. We're going to have higher inflation for years and rates that will be higher than they are today, but lower than they would need to be to tame inflation. And because it'll be kind of be what's built into the system, it'll be like sideways movements, if you want, on nominal prices. It'll probably mean negative real decrease in real asset prices for many years. And the economy is just going to feel yucky. Nothing great, nothing bad.

• 31:16Harry Stebbings?

  If this is 60% likely, I have to ask, this just being purely self-interest, what does this stagnation yucky mean for our business in the startup market?

• 31:25Speaker 02

  You have to think, in that world, where would you rather be? What asset classes do you want to be in? And the reality is, you want to be in the asset classes that are gaining share and relative to the rest of the economy. And so I think tech remains the place to be. My asset allocation, my personal net worth is still 60% basically early-stage startups, because they can grow very dramatically. And I think tech companies have pricing power. When inflation first appeared, people were like, oh, that impacts tech companies more because their cash flows are in the future. To some extent, that's true, obviously. Higher rates definitely decreases the value of future cash flows. But I think higher inflation in itself, not necessarily so, because tech companies have pricing power. I think for us, it doesn't really change anything. It means we have fewer exits in the next few

• 32:07Speaker 02

  years. It means the valuations at which these exits happen are lower, which means that the IRR we get are lower. But there's no place I would rather be other than tech. And frankly, being in tech is not even, I don't even do it for selfish financial monetary reasons. It's like, how do we make the world a better place, given the challenges that we face? And we do face massive challenges, right? We face a climate crisis. We have an inequality of opportunity and social injustice. Crisis and we have a mental and physical well being crisis. Politics and politicians are structurally incapable of addressing the world, the problems of our day. And the only way I think rise up to the challenge, and by the way, the degrowth movement is bullshit. Like no one wants to go back to being a farmer and having a life expectancy of 29, starving multiple times a year.

• 32:47Speaker 02

  The only way we solve the problem is actually through technology led productivity growth and deflation. And that solves the solution. And so the reason I do what I do is because I want to bring technological solutions to the world's problems. And I think that's what drives frankly, most technologists and investors of the day. Like the bigger the problem, the bigger the opportunity. This is the place to be. And frankly, it's the place to be in all three scenarios. It's just the day to day life in all three is rather different. And I'd rather live in the optimistic scenario than the stagnation or the pessimistic one where it will be extraordinarily unpleasant.

• 33:20Harry Stebbings?

  Well, let's touch on that before we leave. Let's touch on the unpleasant, which is very non-British of me. But what are the one or two scenarios that could lead to catastrophic outcomes? What is the oh shit for Breeze?

• 33:32Speaker 02

  So first of all, everyone today in the world is preparing for a world of 3% interest rates. No one's really thinking of like 8% interest rates, but they're actually very possible. But if you start thinking like, what are the asset prices that you can justify? And the investments you can justify in the 8% interest rate world? They're very fundamentally different from a lot of things that people are underwriting today. And you could justify another 50% fall in current asset prices. But to me, that's one of many scenarios that could lead to something way worse. I could see a massive flight of safety driven by the fact that because of COVID, states have become more indebted than ever before. Look at debt to GDP of Italy, right? It went from 100%, 150%. So in Greece in 08, 09, the crisis of confidence in the debt of Greece almost brought down the entire financial system.

• 34:17Speaker 02

  Crashing down and like almost brought down the EU. Imagine that Italy, which is 10x the size of Greece, there's a crisis of confidence on Italian debt. I actually think that you could see the entire euro blow up and the eurozone blow up and the financial crisis the likes we've never seen. And all it takes is people starting to wonder, hey, these governments have been accumulating so much debt. They're all running deficit. How do they intend to resolve that problem? And do they have the political willpower to deal with it? I think of the public's attention and the press as like the Eye of Sauron. They can only deal with one issue at a time. For a long time, it was like Trump, then it became Covid, now it's like the Ukraine. But maybe at some point, it becomes the sustainability of government debt. And when that happens, I could see a massive flight of safety.

• 35:00Speaker 02

  Now ironically, in a way, would like help prolong the the dollar hegemony for a while, because people, one of the assets that is deemed safe would probably be the US dollar. But it would be massively bad, like for the banks that own all the debt of these countries. And I'm using Italy, but it could be an emerging market. And frankly, one of my bear case scenarios, last year, as I was thinking through, what are safe havens for cash? I was thinking of putting a lot of my cash in Swiss francs in Switzerland. And I did an analysis and I realized, and I actually came to the conclusion that's the opposite. I think Switzerland is a house of cards. I think Switzerland could default. When I say that, people were like, are you completely insane? It has like very low debt to GDP, a stable homogeneous population. They're extraordinarily wealthy, they're politically stable. They are the safe haven of all safe havens. And if you look at the credit default swaps, they're priced accordingly.

• 35:43Speaker 02

  The issue is, I think it's, they're a house of cards. In 2006, if you looked at Iceland, the Iceland looked like an amazing, an IMF, World Bank, like, oh, amazing example of the way you should run your economies, doing well, etc. But what people had not realized is that there are banks that accumulated 10x of GDP in assets that ultimately proved to be bad assets in the 08, 09 crisis. And the default of the banks basically made the country default. And like the stock market made, fell 90%, the kroner fell 35%. And there are two big banks in Switzerland, UBS and Credit Suisse, that have been at the center of every one of the bad underwriting crises of the last like decade, like Archegos, Greensill, Luton Coffee, you name it.

• 36:26Speaker 02

  I think just on paper, I think they have foreign currency demonetized loans of like 400% GDP. And I think it's probably, if you include off balance sheet, it's like 9, 10x GDP. And imagine that you have, for whatever reason, a massive crisis of confidence in those, and maybe repricing these assets, like defaults of some of their underlying assets. They're too big to bail. So it's not too big to fail. They're too big to bail. They're so big. The Swiss government does not have the underwriting power to underwrite it. And I could see them failing and bringing down Switzerland with them. I suspect most people would not want to go and save Switzerland. It would lead one of the biggest financial crises of all times.

• 37:01Harry Stebbings?

  Would that not be where super national organizations like the IMF?

• 37:05Speaker 02

  Yeah, but the amount of money required to save is so much. Look, and I think there are a lot of people would be dancing on like Switzerland burning. But look, imagine what's going on right now. We have all the bank earnings that have not been announced, but like the decoupling from Russia. There's going to be massive write offs of assets there of like Russian debt. So I think there's a massive wave of corporate profit decreases that will be impacted by the exit from Russia and from Russian assets. I think there's a bank defaults that are possible, if not likely. I think you have a sovereign debt crisis that's looming. And that's even before we consider Putin going nuclear, using a tactical nuclear nuke. If that happens, I think all bets are off. And I don't mean global thermal nuclear war. I mean, that would be obviously awful.

• 37:45Speaker 02

  I actually just mean even a technical nuke used or chemical weapon used could be completely terrific or horrible. Not to mention whatever Xi Jinping deciding to use this distraction of Ukraine to go after Taiwan. And all of these are possible. And frankly, eight percent interest rates, 10% interest rates, which no one is underwriting is also highly possible. And would lead, I think, to asset price falling another 50% from where we are at the very least. Plus, I think a massive global recession where unemployment bites. And that scenario, I think, percentage probability is increasing by the day. In December, it's at 5%. Now I'm at 20%.

• 38:20Harry Stebbings?

  And one thing I find interesting here, I would love your thoughts on this. You know, Howard Mark said about the alignment between labor productivity and GDP in terms of when one increases, the other increases historically.

• 38:30Speaker 02

  Technologies always increase labor productivity and humans plus machines working together has always led. When you just told me the Luddite argument, like all the jobs being replaced by machines, there'd be no jobs in the future and productivity doesn't increase. If you look at like every period of history, that has been proven wrong. Like, let me take you back to 24 years in the back in the past. And I'll use not 2019, so pre-COVID numbers by Harrison. In 1999 to 2019, in 1999, I go to you and I'm like, in 20 years, the top four job categories will have been destroyed. by technology. You will have no more bank tellers, 500 billion of retail that will have been destroyed by online commerce. You'll have all of car manufacturing that will have been automated and all the travel agents will have been displaced by automation.

• 39:11Speaker 02

  And these are the top four job categories in the world in that time. Please now describe the economic conditions of 2019. Most people would have been, oh my God, the end of the world, 20% unemployment, Great Depression, etc. Instead, we had lower unemployment than we ever had. We had best economic conditions we had in like 50 or 60 years. I think it's too easy for people to imagine the jobs that are going to be destroyed by automation and too hard to imagine the jobs that are being created. A lot of jobs being destroyed, by the way, are like not meant for humans. Humans should not be flipping burgers. Humans should not be like putting a cog in a machine or doing something repetitive. These are meant to be automated. Humans are meant to be more creative and work in conjunction with machines to do something extraordinary.

• 39:51Speaker 02

  And we have the ability to do that. And think of the jobs of today, like the influencers, the Twitch streamers, the social media managers. I mean, no one could have even imagined they could exist back in 1999. So technology will lead to productivity growth, which will lead to labor productivity growth.

• 40:06Harry Stebbings?

  While we were talking, the Bank of England just confirmed, I got a ping, literally a push notification on my iMac. Bank of England confirmed that interest rates will rise to 1%, the highest in 13 years.

• 40:17Speaker 02

  So yes, and by the way, I think the Fed is expecting a 50-bips raise in the coming days or weeks. And it will still be way below lower historical average, right? Like the last time I think we were at like 5% was like 2007. People have not seen quote unquote "normal" interest rate levels in a long, long time.

• 40:34Harry Stebbings?

  Okay, I have to ask, on the negative side, how probable are we here? Is this 20%? Is this 15%?

• 40:39Speaker 02

  Yeah, 20%, double digit sadly. We do have a massive debt overhang from COVID and from running deficits for the forever that we need to deal with at some point. And before we have a crisis that forces us to deal with it, we may have more inflation partly because of geopolitical uncertainty. And we still have this massive geopolitical uncertainty overhang over us. So no, sadly, it's high. So I actually think there's a real risk of recession and a real risk that we need to raise rates to the point that will cause a recession.

• 41:06Harry Stebbings?

  I have two questions, bringing it back to our market before a quick fire. Number one. Given all the above, how do you approach your own velocity of deployment? Is now the time to be aggressive, completely pulled back, neutral? How do you approach this?

• 41:18Speaker 02

  So because velocity should be capital deployment and the amount of capital. So because the number of startups we invested in, because the number of startups that was created what tripled from 5,000 to 15,000, we tripled the number of deals we did from 100 to 300 essentially. And so I've had to divide my check sizes by three to not run out of money. You do not want to be going to your LPs right now asking for more money. You do not want to go to market, so you want to be careful during your capital deployment. So make sure if you're one who's leads and has a large quantity of capital in the startups, which is not our case, you should probably have capital for saving the companies' portfolio that are going to need the cash in the future. So make sure you have capital reserves. Be on the lookout for deals. I have my shopping list of companies that are extraordinary

• 42:01Speaker 02

  in the later stages that should there be big discounts, I would go and buy in the secondary markets. So I have my shopping list, so I'm keeping cash on hand for that. But other than that, at the seed, pre-seed and A, anything I see that I like, I'm still deploying. So I'm way more careful, but I'm more price sensitive and I make sure that they raise enough cash. We've always been careful in unit economics, but I want to make sure they don't raise too high a price. I recommend they raise a bit more than they need and that they're careful in unit economics, such that they're in a position to raise in the future. So we're still deploying, but very careful in the late stages. I mean, last year, we didn't do a single deal C and beyond, just because prices were too high. I think that will change, but we haven't seen discounts yet.

• 42:37Harry Stebbings?

  How do you think we'll see LP markets react? LPs do react quite fast, actually. I've been surprised by the speed of reaction from LP markets.

• 42:44Speaker 02

  Yeah, I mean, look, we saw it in April 2020. In April 2020, I think all of our LPs said, even though we've committed, don't do a capital call. Please, don't do a capital call we can't fulfill. It's happening now, by the way. What's happening is they have these models where they can only have X percent of the capital that, let's say, venture. The thing is, the public market's repriced very quickly. So if your public market portfolio is at 50%, but your VC portfolio has not repriced yet, which it hasn't, then your allocation of venture just doubled. And so that's a problem if we went from 5 to 10%. And so they don't want to allocate more capital and they'll tell you, don't go raise any fund, don't make capital calls. So you need to be thoughtful, be careful with the LPs one.

• 43:20Harry Stebbings?

  And on top of that, you had Sequoia, you had Paradigm, you had GC, you had Katie Horn's new fund, you had Electric, you have all these billion dollar funds.

• 43:28Speaker 02

  Yep.

• 43:28Harry Stebbings?

  Suck up all excess capital. Budgets were spent for 22 and 21.

• 43:33Speaker 02

  Absolutely. So we're raising our fund right now. Most LPs, new LP relationships that we're trying to have are like, look, we've already fully allocated for this year. So we're happy to chat. Maybe it'll be for the next month.

• 43:42Harry Stebbings?

  Final, final one, I promise for the quick fire. What are you most excited for? Like pre-seed, where actually what the pricing is very much as it was and the earliest of early, or actually you'll be in beyond where we're going to see a complete retreat from the traditionals and real price compression.

• 43:58Speaker 02

  So I remain extremely excited about seed because like everything remains to be built. Now, we do pre-seed, but it's not our bread and butter because what happens is you end up having 20 companies going after the same category. And do we really want to place a bet right now and maybe on the wrong horse? And so seed is really, seed A is really more of our bread and butter and everything remains to be built. We're still at the very beginning of the technology revolution. If you think at all of the major categories, education, healthcare, public services, B2B, we're still like sub 5% penetration in many of these. So I still think the tech revolution remains to be built. And so we're still investing aggressively in seed, but where I'm most excited about opportunities to deploy a lot of capital

• 44:37Speaker 02

  at good prices in the coming 12 months. Yes, it is the B and beyond or C and beyond because I think we're going to see major repricing. We're going to see LPs, we're going to want to decrease their exposure to some assets and hopefully we're going to see big discounts in in secondaries of these extraordinary leaders. And if I can invest in whatever Stripe or SpaceX at a 50% discount in the last round, I will. I'm not saying it'll happen, but I think should it happen, I'm using two examples that are so obvious, but obviously the companies we look at are more the one to 20 billion valuation in that range of the obvious winners.

• 45:10Harry Stebbings?

  Yeah. By the way, anyone wanting to sell Stripe, you know where to go.

• 45:14Harry Stebbings?

  I want to move into my favorite there, which is a quick fire. So I say a short statement, you give me your immediate thoughts. Does that sound okay?

• 45:19Speaker 02

  Go for it.

• 45:20Harry Stebbings?

  Okay. So what's the favorite book and why?

• 45:22Speaker 02

  Favorite book is Sapiens. I don't read many books that are business-y. I love the way he covers the history of humanity and the concepts that we've created. It's the book to me, explain the way the world was better than most. How agriculture domesticated us, or we domesticated us, that led to the agricultural revolution, that led to property rights, that led to the way society is structured today, that led ultimately to the revolution we're currently living. And so it was so well argued and construed. It made most interesting book I've read in the last decade. Now, most interesting book on venture capital I'm reading right now is called Power Law by Malaby. It's the history of venture capital, amazing book.

• 46:00Harry Stebbings?

  What have you recently changed your mind on?

• 46:02Speaker 02

  Kind of something we talked about earlier, like I hate bureaucracy. You cannot imagine to the extent I abort, which is why I auto-docu-signed documents for 15 years without ever reading them, which is okay when you're deploying your own capital. But if you want to be a manager of other party people's capital, you actually need to dot the i's and cross the t's. So FJ Labs today's 31 people. We have a massive back office team. We have like processes that are well ironed. And now that we do a lot of crypto, the rules and regulations around it, you know, they're tight and you have to migrate chagrin, right? Like in life, my intuition is like ask for forgiveness, not permission. But there are some cases, and I think financial regulations is one of them,

• 46:44Speaker 02

  where you actually want to do the right thing. And so actually having the structure to be able to execute the way we want to execute, I see the value in that.

• 46:52Harry Stebbings?

  What's your biggest miss and how did it impact your mindset?

• 46:55Speaker 02

  I'll give you four misses because they impacted all my mindset differently. And by the way, if you've been in venture as long as I have as an investor and entrepreneur, the number of misses is countless, right? Like I have more misses than I have wins, right? Like every year, we're seeing 200 deals a week, right? Like we're seeing a thousand deals a month. So we're seeing like 10,000 plus deals a year. So misses, I think I told Mark Pincus, no to invest in Zynga, had like 50K out of 1 million pre. Because even though I'm a gamer, I'm a gamer, I love gaming. I saw that it was Facebook is going to be a big platform for gaming. It was going to be big. It made a lot of sense, but I'm like, you know,

• 47:34Speaker 02

  I like marketplaces. I think at the end of the day, it's head driven. Other people are going to copy you. Profit is going to decline. People are going to churn and and all this is true, but in the meantime, you could build a 10 billion dollar company. There's just kind of the same reason. I think I passed on Twitch at 2 million pre. Again, I'm a gamer, but it's a media company. I don't want to do, I don't do media, even though kind of it's a kind of marketplace, but I didn't see it that way. Being too close minded of like, oh, I only do marketplaces. Like, these are amazing founders that I knew and loved and wanted to work with in categories that I personally pursued. And so like that being so narrow focus and even when my thesis was correct, yes, gaming is a hit driven and the capital requirements increase and the CACs increase, etc. You can still build extraordinary businesses along the way, especially when you commit at one pre.

• 48:17Harry Stebbings?

  Is your takeaway from that, what someone told me the other day, when you have the feeling that no matter what this entrepreneur would do, I would back them.

• 48:24Speaker 02

  Yeah.

• 48:24Harry Stebbings?

  Like he said, with Pincus or with any others, you never lose money on.

• 48:28Speaker 02

  Yeah. Yeah, okay. In similar example, I said before, like at 2 billion pre, I wrote in my debrief of the call, I'm going to regret this decision the rest of my life, but having looked at the numbers where they're doing 100 million and GM 18 million burn per month, and they're on 18 million net revenue per month, it makes the numbers like, I can't just buy 2 billion valuation, I'm passing. When you start the statement with, this is a foundational generational company and the founder is extraordinary and I'm going to regret this decision the rest of your life, you are. If you write that, make the investment. So yes, I was a total idiot because I actually wrote my own conclusion that I was going to regret it in my debrief.

• 49:08Harry Stebbings?

  Tell me, what was the other one? You said there were four.

• 49:09Speaker 02

  A different lesson. I sold 10 cents at the IPO because I'm like, it's fully baked in, fully priced. It's like worth 400 million at the time. I think it was like, at that time, it was only QQ, it was ICQ of China or AIM of China. And I'm like, AIM didn't really get big. Basically, my logic was I'm a private market investor. I don't follow public markets. Once it's public, I sell no matter what. No matter the price, whatever luck up ends, I sell. I should have looked at it somewhat differently, which is like.

• 49:33Speaker 02

  China is 6%. There's a way ways to go. Going public is not the end of the journey. It's just another stepping side along the way. And by the way, having been an investor in the company for years, knowing the management team is an extraordinary privileged access to the company, I should know better than most whether or not this is a good investment or not. So it used to be the second the lockups expired, we would sell 100%. And now it's more discretionary. Now, of course, in last year, I kind of regret that discretion of keeping the companies that I love. I mean, we kept all our shares in Kuipang and Palantir and Open Door and many others that now I wish I'd sold, but we're way more thoughtful and diligent. Like Sequoia kind of made that decision right when they decided to become an RIA and have big public market positions and not just sell. And so I kind of like now when things go public, sometimes sell, but I mean, after the lockup, but we evaluate it as like, okay, is there a 10x still from here?

• 50:22Speaker 02

  Is there still a venture outcome possible in the public markets? And if the answer is yes, we keep going. I see myself as a capital allocator. So as a capital allocator, where is capital going to compound faster? I've had 300 exits or so, I don't know the exact number, in the last 24 years, and I've a realized IR 45% a year. And then in the unrealized, we have like 650 companies or so, it's like also 45% implied IR. So I'm compounding at 45% a year. When a company goes public, do I think that capital can continue to compound at 45% or more per year? And if the answer is yes, I should hold. Do I think there's a 10x from here or not? And if the answer is no, then I reallocate. And by the way, I do the same thing in the private market. My company is at Series E or G or F or whatever, and there's a secondary opportunity, I look at it. Last year especially, especially after I wrote the everything, welcome to the everything bubble, we did a lot of secondaries.

• 51:09Speaker 02

  And it's not that I didn't love the companies. I love the companies. I love the Fandres. It's just like the prices are too insane that I want to increase the cash buffer for the rainy days that I thought were coming. And so we did.

• 51:21Harry Stebbings?

  How do you determine the weighting to sell? Is it 50%? Is it 70%? Is it 30%?

• 51:25Speaker 02

  50%. Like if it's 50%, you have Schmuck insurance in case it goes to the moon, and you sold enough that you do okay. Now, there are a few cases where we'll sell 25 or 75%, and there needs to be a really good argument for it. Like, it's way too much. I mean, some of our positions, venture of power law, some of our positions became just too worth. Way too much and the valuations were way too high. And so there we sold 75% and the remaining position continued to be ginormous. So those we'd sell 75%, but most often rule of thumb easiest, you split it into 50% sell. And then you run the rest, you ride the rest.

• 51:59Harry Stebbings?

  Tell me, what's your biggest insecurity as an investor today, Fabrice?

• 52:02Speaker 02

  I'm writing tiny checks. I should be a billion dollar five fund and I'm like, and instead I'm like writing out a 300 million dollar check. I mean, part of the problem is what I said earlier is like the number of deals we did tripled. And so I've had to divide by three my check size. So my series A check size is 325K. My series B onwards is 725K because otherwise I'd run out of money in a year. I should be writing million dollar As and two million Bs, the four million Cs. And even my seed and pre seed check sizes are too small. So my check sizes are too small.

• 52:32Harry Stebbings?

  You must be able to get into anything that you want with those check sizes.

• 52:36Speaker 02

  Some founders don't want you to write such little checks. They think it's not enough capital committed to them, that you're not paying enough attention to it. So I mean, there's a plus side and a downside. The plus side is like you're not competing for allocation. But my entire fund is predicated with not competing for allocation with other VCs. I should be able to write the biggest check possible without competing for allocation or requiring a board seat or leading, et cetera. And they're much bigger than what I'm writing and I'm undercapitalized. It annoys me, but it also makes me insecure because it sounds ridiculous when I get these founders and they're raising a 300 million dollar round at a two billion pre and I'm like, yes, I'm in for 725K. And I want to write a 20 million dollar check. It like really annoys me.

• 53:16Harry Stebbings?

  I totally get you. But listen, we're going to have a round two where we're going to dive into portfolio construction in detail. And hopefully also round up a billion and a half for that. But I do want to finish on what was the most recent publicly announced investment or one that is most recent? You do a lot, but what's the one that comes to mind and why did you get so excited?

• 53:32Speaker 02

  So Top Sort just announced their series A, they just raised it like 110 million valuation. Top Sort is a product for marketplaces to sell advertising, basically like monetize their placements. And obviously our portfolio is like 600 marketplaces. So all of them are a customer of us. But basically if you look at Amazon P and L, when they start Selling advertising, it's 95% gross margin product. And so for many marketplaces beyond the rate they can take, beyond listing fees, et cetera, putting like selling placement and bump up, et cetera, which is a pure margin product, can increase your effective take rate and improve your unit economics dramatically. So that company, I think, is genius because they're basically a tool for helping marketplaces monetize better. And it's like such a no brainer.

• 54:15Speaker 02

  And the team is so smart and articulate about like, how do you get perfect pricing strategy? How do you do the right BD deals? And so, yeah, amazing company, amazing team, amazing product, and they just raised it. We invested earlier than that and we just reinvested in the last round.

• 54:28Harry Stebbings?

  Fabrice, listen, I've loved this, my friend. It's so lovely to do. I can't believe it's been seven years, but really, thank you so much. As I said, we're going to do a round two, but I so appreciate the time today.

• 54:38Speaker 02

  Perfect. Thank you.

• 54:41Harry Stebbings?

  I love that discussion. Love a good chat on macro. Fabrice could not have been more brilliant there. So thank you so much, Fabrice, for giving the time today for that. If you'd like to see more from us behind the scenes, of course, you can on 20vc.com. But before we leave you today. Harvard Management Company is constantly seeking out the next generation of great investors and entrepreneurs. HMC has managed Harvard University's endowment for nearly 50 years and was one of the first institutional investors in venture capital. Their experience and long-term investment horizon makes them ideal partners to get world-changing ideas on a path to viability and success. They work as a true partner, providing insightful perspectives to help managers succeed. I personally have had the pleasure of working with the HMC team

• 55:22Harry Stebbings?

  and can say that they're truly exceptional partners, people, and incredibly savvy investors. Whether you are launching your first fund or your fifth, HMC welcomes the opportunity to partner with both developing and established managers. Have an idea you want to share with the team? Just send it to [email protected]. And speaking of amazing partners with HMC there, Mercury is building full-stack banking for startups. Apply in under 10 minutes from anywhere for FDIC insured bank accounts, physical and virtual debit cards, domestic and international wires, and integrations with Gusto, Stripe, QuickBooks, Plaid, and basically every other tool your startup uses. They also offer unusual features like API access. Custom team management and their newly launched Mercury Treasury,

• 56:07Harry Stebbings?

  a cash management product for high growth startups. They'll even help you build your startup with Mercury Raise, a program to connect you to Silicon Valley's top investors. Head over to mercury.com/signup to apply. And until 2020, automated investing strategies, they were only available to millionaires. And now the BOTS platform has made the most successful strategies available for everyone using their superior BOTS technology. In the BOTS store in the app, you can choose from a number of automated trading bots. These trading bots grow your portfolio by buying low and selling high, making informed decisions based on data, mathematics and science 24/7. Join the 1 million people who've already downloaded the easy to use BOTS app and discover this new way of investing. BOTS is already available on Google Play

• 56:52Harry Stebbings?

  and in the App Store in 35 countries in Europe and will be expanding to more than 100 by the end of the year. Go to bots.io/20vc. Try the BOTS app now and let the BOTS do the work for you. As always, I so appreciate all your support and I cannot wait to bring you an incredible episode with Tony Fadell for 20 product on Wednesday.