E62: Elizabeth Holmes verdict, fraud origins & takeaways, navigating "The Great Markdown" & more

0:00 Bestie intro and poker recap 3:14 Elizabeth Holmes verdict, origins of the fraud, breakdown of the Theranos promise 17:51 Lessons for founders and investors from the Theranos debacle, bad behavior a sign of the top 26:09 Implications of "The Great Markdown" on public and private markets, confusing FED decisions 45:56 Advice for founders on navigating a downturn 1:00:01 a16z's new mega funds; should they go public? How does that change partner dynamics? Follow the besties: https://twitter.com/chamath https://linktr.ee/calacanis https://twitter.com/DavidSacks https://twitter.com/friedberg Follow the pod: https://twitter.com/theallinpod https://linktr.ee/allinpodcast Intro Music Credit: https://rb.gy/tppkzl https://twitter.com/yung_spielburg Intro Video Credit: https://twitter.com/TheZachEffect Referenced in the show: https://www.wsj.com/articles/the-elizabeth-holmes-verdict-theranos-founder-is-guilty-on-four-of-11-charges-in-fraud-trial-11641255705 https://www.bbc.com/news/technology-58469882 https://www.nytimes.com/2022/01/04/technology/elizabeth-holmes-verdict.html https://www.wsj.com/articles/the-theranos-fraud-elizabeth-holmes-convicted-trial-blood-testing-start-up-11641330471 https://www.businessinsider.com/bill-maris-explains-why-gv-didnt-invest-in-theranos-2015-10 https://www.skadden.com/insights/publications/2021/06/insights-the-delaware-edition/delaware-courts-expand-plaintiffs-rights https://www.cnbc.com/2022/01/05/fed-minutes-december-2021.html https://fred.stlouisfed.org/series/T10YIE http://www.paulgraham.com/aord.html https://www.socialcapital.com/annual-letters/2019 https://medium.com/craft-ventures/the-burn-multiple-51a7e43cb200 https://www.statista.com/statistics/266206/googles-annual-global-revenue https://techcrunch.com/2022/01/07/andreessen-horowitz-raises-9b-in-new-capital-for-venture-growth-bio-funds

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

• 0:00Chamath Palihapitiya?

  Happy New Year.

• 0:01David Friedberg?

  Happy New Year.

• 0:02Chamath Palihapitiya?

  Happy New Year. Guys, listen, look at this. It's now, it's candle season.

• 0:08David Friedberg?

  Oh, God. Look at the equanimity. Look at his equanimity.

• 0:12Chamath Palihapitiya?

  This candle costs $24,000. It is extremely rare Brazilian sandalwood. You literally have to go into the Amazon and like, you know, you, you basically have to like, I mean,

• 0:26David Friedberg?

  Find extinct trees.

• 0:27Chamath Palihapitiya?

  No, bro, you gotta, you gotta tear out like two acres of rainforest and then you find this one tree completely, you know, sacred, and then you chop it down.

• 0:38Chamath Palihapitiya?

  You make this delicious.

• 0:39David Friedberg?

  Produce it and it lasts for a full 45 minutes.

• 0:42Chamath Palihapitiya?

  How do you like that sweater, Karen?

• 0:43David Friedberg?

  Oh, candle Karens are gonna be calling it. Candle Karens are calling it right now. The DMs are coming. You guys want to hear about poker last night? Oh, did you go? So I go down, I take my eight hour drive down south to Chamath's house. And I pull in and, uh, you know, the security guard greets me nicely as always. I walk in and I walk towards the poker room and everyone's in there with the door open, like someone just got shot, masks on, freaking out. And Chamath is inside the house and I wave and he's like, get in here. And then I go in, he's like, Oh, who was positive? Max, the dealer, tested positive and everyone been hanging out in the poker room with no masks on. Uh oh. And so, you know,

• 1:27Chamath Palihapitiya?

  No, wait, wait, but the only, the only two people that were exposed to Max we sent home.

• 1:31David Friedberg?

  Yeah. So everyone starts freaking out, shuts the, shuts the poker game down. Chamath kicks everyone out, sends everyone home. And then he's like, all right, let's go have dinner inside. You know, we're, we're not, we're gonna, we open up all the doors. We're gonna kind of lice all the room tomorrow. We all go in and have dinner. Or, you know, Chamath and I go in and have dinner with Matt and the kids. And then Chamath starts thinking, you know what? It's okay. They were only exposed for a few seconds. Let's call Phil back. Okay, let's call Shivel back. Let's call Keating back. And then they all come back for dinner. And at this point, it's become like a dinner party. And then a couple of glasses of wine in and then it's like, you know what? The room's probably safe. We should go.

• 2:08David Friedberg?

  I mean, the whole poker night went through the entire cycle of psychology of COVID. The whole pandemic is like, oh, my God, get everyone out, lock up. And then by the end of the night, it was like, you know what? Let's go in the room and just play poker and give each other COVID.

• 2:21David Sacks?

  They got to acceptance.

• 2:22David Friedberg?

  They got to acceptance. They went through the whole emotional cycle of the pandemic in one hour.

• 2:26David Sacks?

  Does anyone know anyone who's a serious case of Omicron?

• 2:28David Friedberg?

  No.

• 2:29David Sacks?

  I mean, I know dozens of people at this point, and they all say it was a cold.

• 2:32David Friedberg?

  Yeah, dozens of people, and that's just from your holiday party.

• 2:34David Sacks?

  Was on social media.

• 2:36David Friedberg?

  Except for your holiday party.

• 2:38David Sacks?

  Jake was on social media giving everyone the update like, oh, I sneezed today. I'm, oh, I still tested positive. He's like showing his positive test.

• 2:49David Friedberg?

  My super fans, my fans were concerned. It's the only good test result Jake has ever had.

• 2:54David Sacks?

  Yeah, exactly.

• 2:56David Friedberg?

  It's the only positive. That's true.

• 3:14Jason Calacanis?

  Elizabeth Holmes has been found guilty on four counts of fraud. Faces 20 years in prison for each guilty count. They would be, I understand, served concurrently. Most people I hear speculating four to 10 years. And then I think you can get 15% off for good behavior. Again, I'm no expert on that, but that's what I read. Guilty counts were two counts of wire fraud and two counts of conspiracy to commit fraud. She was originally in charge with a total of 11 counts of fraud. Four were guilty, four were not guilty, three were a split verdict. The jury said they were unable to come to a unanimous verdict on three of the counts. After more than 45 hours of deliberation, quote from the Wall Street Journal article, juries were persuaded that Ms. Holmes conspired to defraud investors.

• 3:57Jason Calacanis?

  This outcome could be significant because it means hundreds of millions of dollars of Theranos investors, that Theranos investors' loss could be taken into consideration during her sentencing. It's big numbers. The jury was split, however, on which of the six investors who testified were defrauded. The jurors convicted Ms. Holmes on three counts. These included $100 million from the family office of former educator, education secretary.

• 4:20David Sacks?

  Details Jake has.

• 4:21David Friedberg?

  I was like doing it for the audience.

• 4:24Chamath Palihapitiya?

  So anyway, thoughts on the legal technicalities of the case, counselor sex?

• 4:32David Sacks?

  Well, we've talked about this before. I mean, I think so. At the end of the day, she was convicted on the counts related to deceiving investors. She was not on the counts related to patients. I think that makes sense in that her obligations to investors are very clear. Whereas I think the patient related duties are, I mean, she had them, but it's a little bit less clear. So, I mean, look, it's what we've always said here. As a founder, you can be as messianic as you want to be. You can promise, you know, anything about your vision and what you intended to the future. But what you must do is be accurate about the current state of your business.

• 5:11David Sacks?

  You cannot lie about the deals that you've made, about the current capabilities of your product. And she was putting, you know, logos of customers she didn't have in her deck. She was lying about the military being a customer. So she simply misrepresented where she was at that time at the, when these investors invested. And that was the red line she should not have crossed. And I think in that sense, it's a pretty simple case. I think, you know, the, the, the part of this, again, you know, the, the, the piece of this that's interesting is not the case itself, but really the media coverage. Because the media wants to portray this case as an indictment of Silicon Valley.

• 5:55David Sacks?

  And the thing you keep hearing over and over again.

• 5:58Chamath Palihapitiya?

  None of us were involved.

• 6:00David Sacks?

  Well, just factually, yes, exactly. We weren't involved, but what?

• 6:03Chamath Palihapitiya?

  Like, there's not a single person in Silicon Valley, I think, who put in a single shekel into this thing, who actually does this as a real job.

• 6:11David Friedberg?

  Tim Draper.

• 6:12David Sacks?

  Well, she, he doesn't see investment.

• 6:13Chamath Palihapitiya?

  Put in a little bit of money as an angel and then he, he didn't put a single dollar in after that. I'm saying, you know, you didn't come to social capital or to Graff Ventures or to Sequoia or to TPB or to Google to raise money for this thing. None of that happened. You know, Sax is right, like, the summary of the Wall Street Journal, Nick, you can post it, because I put it in the group chat, basically summarized the fraud, and is exactly what Sax said. She affixed a logo of specifically, I think it was Pfizer, that had not validated Theron's technology in materials she presented to investors. So she's basically like Pfizer said, this is a go. And apparently, that wasn't true. She gave the false impression that the devices were used by the US military. That's what got all these military folks to sign on board and support it. That wasn't true. And then,

• 6:57Chamath Palihapitiya?

  and then she, the biggest coup was that she signed a deal with Walgreens and Safeway to include its devices in hundreds of stores. And then many investors saw these contracts as an endorsement of the technology and growth potential. But basically, those folks did no diligence and bought the hype. And so it was just a whole cycle of this thing that basically fell apart because the tests didn't work.

• 7:18Jason Calacanis?

  Friedberg, what are your thoughts as our life science guru?

• 7:21David Friedberg?

  What's most interesting to me is how does this get to this point? If you're Elizabeth Holmes, you're 19 years old, and you start telling your story, and the more grandiose the story you tell is, the better the reaction you get is, it becomes reinforcing, and the behavior extends a little bit further and a little bit further. Every time she told a story about how incredible this tech was, it's just one drop, you take one drop, it can measure everything. When she simplified it and reduced it to that, and it was such an incredible statement, and she saw the reaction from people, she's like, wow, that works. Let me repeat it. It's like any good salesperson, they figure out what sells, and then they sell it, and then they repeat. And what's interesting to me that, you know,

• 8:04David Friedberg?

  you talk about the media, but when she went out and told her story, and got incredible press coverage, because she was a young female, doing something that was gonna save lives, there was this altruistic Steve Jobs-esque kind of combination here, the media wrote a glowing review of her. And then she said, wow, look, they said something great, let me go do that again. And she got a bigger media piece written, and a bigger media piece. And the more she said, the bigger she said it, the more she claimed she could do, the bigger the story got, the more coverage she got. And the whole thing became this kind of reinforcing cycle. And I do think that the press coverage that she got, as she was building this business, which helped her raise capital, helped her attract employees,

• 8:46David Friedberg?

  helped her get Walgreens and Safeway to the table, allowed her-

• 8:50Chamath Palihapitiya?

  That was her downfall.

• 8:51David Friedberg?

  It allowed her to build the business, but it's exactly what created the narrative that wasn't true. And so the coverage that the press gave her, and we see this every day. You guys all see these top 50 companies, and we all know, having met a lot of these companies, as you go down that list, this 20 companies are total scam companies, they're fraud, they're not going to work, they're grifters, all the stuff that you guys might say about the quality of those businesses. But the press reporter isn't doing diligence. They're not a, you know, it turns out all the diligence was done after the fact. And then it's like, well, maybe we should go do some diligence. Oh, wait a second. Because the press coverage has now created this hyped story about who and what she is, the diligence actually pays off because you have something to take apart. If she was just a nobody

• 9:36David Friedberg?

  startup that raised $30 million and is still trying to figure out their way, there would be no value in any reporter doing diligence on her and trying to figure out what was actually there. It was because the story got big that it gave everyone, including John Kerry, an incentive, he's the Wall Street Journal reporter who broke all this, an incentive to go in and take this thing apart. And so it's really unfortunate, and it's really self reinforcing, that the press coverage that created the circumstance here ultimately also enabled them, the press, to take the thing apart and, you know, land this woman in jail. And I'm not saying she did nothing wrong, but I'm just saying that there's a system here, and the system is set up in such a way. Yeah, but she manipulated the press.

• 10:13Jason Calacanis?

  Yeah, let me ask one question to you, Friedberg, and then I got a question for Sacks and Chamath. Her basic premise, that one drop of blood could get you hundreds of results. Let me just ask you a question, Friedberg. At what point would one drop of blood, or so, a nanotube, be able to, at our current technological, you know, ramp, be able to give us 100 different data points on a person?

• 10:37David Friedberg?

  Every time you're generating a data point, you're running what's called an assay, which is a measurement of something. The question is, how much of a molecule are you measuring against what volume? Is there enough of that molecule in that volume to give you a statistically good reading? And that is a function of how precisely you can measure that thing. So there are, there are great advances happening right now in a, in a domain in life sciences of hardware technology called microfluidics. This is the manipulation of picoliter, you know, very, very small volumes of liquid. And then being able to run chemical assays using biochemical techniques, which we now have all these amazing new kind of tools like CRISPR and other things that would allow

• 11:19David Friedberg?

  us to get a much more precise measurement with a much smaller volume than has ever been possible. So we can manipulate small fluids, we can measure them. So there's nothing today that would physically say, we cannot do many of the things that she claimed to have been able to do. But there are, there's a stacking of technology assets that need to be done to make that happen in reality.

• 11:39Chamath Palihapitiya?

  Take a guess.

• 11:40David Friedberg?

  And each of those assets are very different. So, look, you could do it with cholesterol right now. You could do it with blood sugar right now.

• 11:46Chamath Palihapitiya?

  But you couldn't do both.

• 11:47David Friedberg?

  You could theoretically, you could put them into a device and do that.

• 11:50Chamath Palihapitiya?

  No, the reason, the reason why lipids work.

• 11:52David Friedberg?

  Can you do 400 things with?

• 11:54Chamath Palihapitiya?

  You cannot. You cannot. I've, I've actually funded three of these businesses and I've poured almost a hundred million dollars of money into it and they've all failed. And the reason is exactly what he said. You can do cholesterol because lipids are big enough, you know, and so you can basically build an assay that can pick that off with a drop of blood. You can do a reasonably good job with pretty large air bars and sugar. But all of this other stuff where you're going to replace like a, you know, a CBC or these broad, you know, profile panels that we all get once a year to assess our health. Today, I don't think that that's necessarily within reach. It's not within technological reach and it's not because people aren't, you know, smart enough. It's just that not enough of this investment is happening because then you go back to this whole idea where

• 12:36Chamath Palihapitiya?

  the funding cycle needs to see a big payoff for the capitalists to want to get involved in this thing. And there really isn't. You know, it's not as if like Quest and LabCorp are printing $400 billion of revenue and profits. And so it's not like there's a massive economic incentive to run in. And so even when, you know, we have tried on multiple occasions with completely different teams of incredible people, every single time we have failed.

• 13:02Jason Calacanis?

  So there's a physics law here that's just not physically possible. She made this claim, Sax.

• 13:07David Friedberg?

  Remember, and don't, don't make it broad. There are things, there are molecules, there are pathogens, there are things you can absolutely detect, small molecules.

• 13:16Chamath Palihapitiya?

  Small molecules.

• 13:17David Friedberg?

  You can, you can detect with a drop of blood. You know, magic, counting how many blood cells you have in your whole body, you know, using an estimate from a single droplet of blood, because, you know, we have these machines called flow cytometry machines where we sort blood cells. And then it'll tell you how many red blood cells you have and how many different kinds of white blood cells, that's a big part of your annual checkup that you'll typically get. You know, you need a good amount of blood to get an accurate reading on how many blood cells there are, using, even just using lasers and, and, you know, these sophisticated machines. Can you reduce that down to a droplet? Physically, probably not, right? And so there's some, it's not universal to say this is possible, it's not possible. There are elements that are absolutely possible, some of which are being done today. And there are some things that are going to be very hard to pull off.

• 13:58Jason Calacanis?

  Got it. And she was making these claims as early as 2003 when it was founded. So we're talking about 19 years ago and we're saying here it's not going to be possible to do hundreds of these things, maybe in our lifetime. We're talking about decades from there. We need to be some significant breakthrough. Sax, let me ask you a legal question.

• 14:15Jason Calacanis?

  I was on a podcast and I said to them, why haven't the prosecutors had Bill Maris, who is a friend of Friedberg's, who helped me get him on the podcast, he was great, thank you for that, David, on this week in startups.

• 14:27Chamath Palihapitiya?

  Very smart guy.

• 14:28Jason Calacanis?

  Very smart guy. And he came out publicly when he was running Google Ventures. And he said, we looked at it a couple of times, he's referring to Theranos, but there was so much hand waving, like, look over here, that we couldn't figure it out. So we just had someone from our life science investment team go into Walgreens and take the test. And it wasn't that difficult for anyone to determine that things may not have been, not be what they seem here. Now Sax, I was on this podcast, The Dropout, which I think is an ABC News one, and I said, why didn't the prosecution bring up, you know, GV, let's assume Sequoia and Dracian, and, you know, the 20 top firms in the valley, who said no. And they all said no because she wouldn't show them due diligence.

• 15:10Jason Calacanis?

  And I asked them, why didn't the prosecutors bring up those 20 firms and compel them to testify about why they didn't invest, to give the counter example? And she said, I don't know. Wouldn't that have been a much better strategy to say, here are the credible people who didn't invest?

• 15:25David Sacks?

  I'm not sure I see the relevance of that because Elizabeth Holmes' crime was not promising something that she couldn't ultimately deliver on. It's okay to fail in Silicon Valley. One of the best things about Silicon Valley is that we don't punish failure. Her mistake was in making misrepresentations to the people who did invest.

• 15:46Jason Calacanis?

  Right.

• 15:47David Sacks?

  If anything, if anything, actually, what Elizabeth Holmes maybe should have done was call up some of those firms and they could have said how easy it was for them to figure out that they shouldn't have invested. Maybe that would have been a way to kind of muddy the waters on her side.

• 16:02Jason Calacanis?

  I was thinking that they would have said, hey, she wouldn't show us the technology. And when we did our independent diligence, she wouldn't let us diligence. We did outside backdoor diligence. It failed.

• 16:12David Sacks?

  There were red flags all over this thing. We had talked about it in our poker games way before this thing went off the rails. The fact that there were no major VC firms involved who could, who had expertise in biotech, who could do the diligence. It was all sort of, it was basically family office money of people who weren't in Silicon Valley, you know, writing big checks, whether it was Rupert Murdoch or the DeVos family or what have you. There were, there were just red flags coming off this thing, which is why Silicon Valley was not by and large duped by it. The people who were duped by it were the people that Elizabeth Holmes was able to sell the patina of Silicon Valley to and the media.

• 16:54David Sacks?

  Because the media, what we've seen over and over again is they don't fact check stories when they fit their priors. The prior here is that, you know, what the media want to believe is that the next Steve Jobs is going to be a woman. And so when Elizabeth Holmes served that up to them wearing the black turtleneck, it was too good a story for them to fact check too heavily. And so they ran with it.

• 17:17Jason Calacanis?

  It fit the narrative.

• 17:18David Sacks?

  In the same way, in the same way that, you know, the ivermectin hoax that Rolling Stone ran with was too good a story to be fact checked because they want to believe that the MAGA people in Oklahoma were eating horse paste. I mean.

• 17:31David Friedberg?

  No, there's, there's 100 better examples of just, I mean, just to be generic sacks of other startups that we all know are total nonsense and.

• 17:38Chamath Palihapitiya?

  Total nonsense.

• 17:39David Friedberg?

  And the reporters write up about them.

• 17:41Chamath Palihapitiya?

  There's a, there's a fraud in biotech going on right now that David and I, David and I saw upfront. I mean, it's like, this stuff is crazy. It's really, really crazy.

• 17:51David Sacks?

  So, look, I mean, I think the moral of the story for entrepreneurs, I mean, I think there's a couple of takeaways here. Number one, you gotta be really clear with the present state of your business. It's okay to talk about your grand vision of what you're gonna do in the future, but you cannot be inaccurate in any way with respect to your current numbers and partnerships and deals and current capabilities. I think, number two, I think when you start working with the media in this way to promote your company, you're playing with fire. Because the media really has two kinds of stories. They build up and they tear down. And when they're done building you up, they're gonna tear you down because that's the only story left to write. So, if you're gonna go court the media in that way to try and get publicity, you better be really careful

• 18:34David Sacks?

  how you do it, and you better be really accurate, and you better not give them cause to later regret pumping you up because they will tear you down even harder if you do that.

• 18:43David Friedberg?

  I think, I think the more important danger that I'd just like to speak generally to for a second is to not let other people do your thinking for you. The investors that came into this business came in under the assumption that this was a real business because the press had written about it. And the press wrote about it because the general had joined the board. And the general joined the board because his buddy, George Schultz, said, hey, you should meet this lady. And the whole thing ended up becoming this roundabout where no one actually did any original thinking and no one did any actual diligence.

• 19:12Chamath Palihapitiya?

  Stop, stop.

• 19:13David Friedberg?

  And the whole thing ended up being this-

• 19:14Chamath Palihapitiya?

  I'm sorry. Now you're talking about actually how Silicon Valley works. So, that's fucking bullshit.

• 19:18David Friedberg?

  Yeah.

• 19:19Chamath Palihapitiya?

  Okay, you don't think these dopes run around thinking, oh, Sequoia, Benchmark, Social Capital, Kraft Invest, I'm just plowing the money in? Of course they do. They don't even think-

• 19:28David Sacks?

  Social proof.

• 19:29Chamath Palihapitiya?

  They assume that we've done our diligence.

• 19:30David Friedberg?

  No, Shama, I'm not-

• 19:31Chamath Palihapitiya?

  You think they're doing principal diligence, these guys, like the Silicon Valley ecosystem?

• 19:35David Friedberg?

  This is also how the Bernie Madoff scandal, you know, got so far ahead of itself. No one actually went in and did the audits of those financials. Everyone assumed that because someone else has, is in this thing, and because someone else is involved, or someone else, something nice has been written about it or said about it, it's worth backing. And like, the lack of original thinking in business, in life in general, I think is, you know, one of the biggest, you know, risks that each of us takes. And it's why it's really important to learn how to think your way yourself.

• 20:01Chamath Palihapitiya?

  I, I have a deep respect for early-stage investors because they have to get in and make some critical decisions. Some people make those decisions about the team, right? The psychology of the co-founders. Sometimes it's about the end market and sometimes it's about a deep analysis of the traction. But you have to, let's be honest, there is a valley of funding between the Series A and maybe the D or the E where I really think a lot of folks just look for signaling value based on who the Series A investors were. They make blind bets. I'm not sure, they're making, I'm not sure that those family offices were any worse or any better. Like, maybe the DeVos family looked at Rupert Murdoch and said, "He's smart, so I'm in." Yeah, that's exactly what happened.

• 20:46Chamath Palihapitiya?

  That's so different than all these Series B and C firms that say, "Oh, benchmarks in, I'm in." Totally. It's the exact same thing. Totally.

• 20:52Jason Calacanis?

  I literally had a situation, and I think I brought it up in a previous episode, where I was working on a deal. It wasn't like a major check for us. It was, you know, a six-figure check. And they said, "None of the other firms are asking for diligence. Why should we give it to you?" And I was like, "How much are they putting in?"

• 21:08Chamath Palihapitiya?

  That's crazy.

• 21:08Jason Calacanis?

  And they were putting in more money than I would. They were putting seven figures in.

• 21:11Chamath Palihapitiya?

  Crazy.

• 21:11Jason Calacanis?

  And I said, "Because I have LPs."

• 21:12Chamath Palihapitiya?

  When you ask for diligence, now, some of these founders look at you like, "How dare you?"

• 21:16Jason Calacanis?

  Exactly. They were, no, in this case, they were insulted and they said, "We're not giving you diligence." And they, and we walked away.

• 21:23Chamath Palihapitiya?

  It's like buying a house without visiting the house.

• 21:25Jason Calacanis?

  Yeah, they're like, "Buy it without..."

• 21:27Chamath Palihapitiya?

  This company that David and I called, you know, well, David was calling it, there are no 2.0, but this company couldn't even explain gross revenue. They couldn't, they didn't, it was like gross revenue asterix. And it's like, if there's one metric on a P and L that can never have an asterix, ever. The top line. The top line. It's like gross revenue. The money that came into your bank account. How much customers pay you? I get adjusted EBITDA, I get EBITDA, I get GAAP, I get it, okay? But gross revenue asterix? How much money's in the register? Open the register, count the money. And so I just remember asking the simple question like, Can you just take the asterisks away and just tell me?

• 22:10David Friedberg?

  This is a company the two of you were looking at together?

• 22:13Chamath Palihapitiya?

  That you and I have talked about many times.

• 22:16David Friedberg?

  Oh, really?

• 22:16Chamath Palihapitiya?

  You're Theranos 2.0, sir. That's what this company is.

• 22:19Jason Calacanis?

  And I learned a lot about Delaware law. I don't know if you guys have had-

• 22:23David Friedberg?

  Wait, I've talked about this company?

• 22:25Jason Calacanis?

  Yeah, yeah.

• 22:25Chamath Palihapitiya?

  Bro, in the text, you were like, "I'm shorting this company."

• 22:28Jason Calacanis?

  Yeah, we'll tell you in a minute. We'll tell you in a minute.

• 22:29David Friedberg?

  Oh, right.

• 22:29Jason Calacanis?

  Yeah, you know what it is. But anyway, I've been getting a big, um, a lesson here about Delaware law. There's something called a Section 220. Have any of you ever had to file one of these?

• 22:38David Friedberg?

  Oh, by the way, I did short it. It worked out really well. Sorry, go ahead.

• 22:41Jason Calacanis?

  Are any of you aware of what a-

• 22:45Jason Calacanis?

  Oh, you're trying. Any of you aware of what a Section 220 is or heard of this before? Basically, in a Delaware corporation, if you're a shareholder of any size, not just like a board member with 10% or whatever, if you feel there's malfeasance going on, you can file this 220 in Delaware. And according to this, a great Scat and Arps article on this, the Delaware courts are taking it very seriously that if there's any accusation of any kind of malfeasance, especially financial, any shareholder, even tiny, can get all of the books and in detail, not board minutes, not top level P and L, like detailed financials. And so for people who are running companies and if you're involved-

• 23:25Chamath Palihapitiya?

  This is private companies, too, or?

• 23:26Jason Calacanis?

  This is in private companies. Look up Section 220 of the Delaware General Corporate Law.

• 23:30Chamath Palihapitiya?

  I remember at Facebook is because we had these vagaries of having to control shareholder count or stuff like that in information rights.

• 23:37Jason Calacanis?

  Yes.

• 23:37Chamath Palihapitiya?

  We actually kept the financials on a physical computer that was not connected to the internet. So the people that wanted it would actually have to come to our office and then we would put them in like a windowless room without their phone or something. Is that? I think that's how-

• 23:51Jason Calacanis?

  That's how they avoided people filing 220 requests. And so it's just something for people to be aware of on both sides of the table, that if there's shenanigans going on at a company, founders think, "Well, I don't have to give any information to my shareholders."

• 24:04Chamath Palihapitiya?

  That is not true.

• 24:04Jason Calacanis?

  And it's not true. Whatever you have in information rights, whatever your lawyers wrote, is not- Above section 220 in Delaware. So just keep that in mind.

• 24:14David Sacks?

  I got a case like that right now going on where.

• 24:17Jason Calacanis?

  A founder won't give you information?

• 24:18David Sacks?

  Well, it's not the founder, but there's a company that just sold and they won't tell the shareholders like the terms of the deal.

• 24:29Jason Calacanis?

  What?

• 24:29David Sacks?

  Yeah.

• 24:30Chamath Palihapitiya?

  How's that even possible?

• 24:32David Sacks?

  Good question, but it's it just reeks of fraud. I'm not going to say the name yet because I'm hoping that they're going to start acting in a more kosher way, but it's the most egregious thing I've ever seen.

• 24:44Jason Calacanis?

  All you have to do is talk to your attorney at Wilson Fenwick or whatever one of the cohort of Silicon Valley.

• 24:50David Sacks?

  You literally have a management of the company. They've engaged in a sale. The sale's been publicly announced. We have reason to believe it's in the hundreds of millions and they won't tell anybody the terms.

• 25:01Jason Calacanis?

  Yeah, file a 220, file a 220. And you know what? They're public. So then the crazy thing about these 220s is it used to be that all of the information had to be private. You had to sign like nondisclosures, whatever. And now in certain circumstances, I think it's in the best interest of all shareholders, the 220 information can be public. And so that is just like a sniper shot to anybody who is doing any kind of shenanigans. We had a company in the same situation who wouldn't tell us about a sale. And then I have a call with the board because I own 7% of the company. This is years ago. And I said, can you explain to me what happened here? And they're they're like, yeah, well, we're doing the sale and blah, blah, blah. And it turned out the bankers were taking 40% of the sale, whatever. And I was like, okay, well, I'm not going to approve this and it you need my approval. Let's let's talk about how we can make this work because we have outside funding that

• 25:46Jason Calacanis?

  the company's turning down to do a sale that everybody's losing their money on. It doesn't make any sense. And they said, well, we can't really do that because we've already sent the eight employees over to the new company that's buying it. I was like, what do you mean? Like, well, we ran out of money to pay them. So they all moved over to the payroll of the new company. I'm like, you haven't closed the transaction yet.

• 26:03Chamath Palihapitiya?

  Wow.

• 26:05Jason Calacanis?

  It was crazy. Like, there's some weird stuff that happens in private companies.

• 26:08David Sacks?

  Yeah.

• 26:09Chamath Palihapitiya?

  This stuff is always at the peak of when there's a correction, right? I mean, this may be a good segue to talk about what's going on.

• 26:14Jason Calacanis?

  It's a great segue.

• 26:16Chamath Palihapitiya?

  But it's like that level of grift happens right before. You know, basically, we have to re-rate valuations.

• 26:23Jason Calacanis?

  You know, because entrepreneurs, entrepreneurs just take so much.

• 26:27Chamath Palihapitiya?

  Well, there's just a small, small percentage of them, but they just take so much leeway in pushing the boundary.

• 26:33Jason Calacanis?

  And sometimes it's other board members who are acting their own interest, but I solved this problem really easy. I called the CEO of the public company that was buying them and explained the situation. He's like, talk to my CFO, I'm a fan of the pod, whatever. And they said, how do we solve this with you? I said, well, this is how much money I have in. This is the value of your company. How would you like me to be an advisor to your company for the same amount of that value in shares?

• 26:53Chamath Palihapitiya?

  Oh, so you grifted.

• 26:54Jason Calacanis?

  So, no.

• 26:55Chamath Palihapitiya?

  That's great. So basically you got bamboozled and so you bamboozled everybody else by letting them be the bank holder.

• 27:01Jason Calacanis?

  And then they said, okay, we'll make you an advisor. Then I took the advisor shares and I wrote a letter and pledged them to my investors. And my investors are now 3X their original investment. And I said, I'm not letting it go. I'm not signing the paper until I get the 250K that my investors put in, period. And then they, they did it. Now I'm, I'm up. All right, let's segue. Crazy market pullback, the great write down has occurred. Charts from Altimeter, our friend Brad Gerson, I assume, show a major regression to the mean for tech stocks, SaaS index, median enterprise value, next 12 months, expected revenue, yada, yada. This includes people like Adobe, Datadog, Shopify, Twilio, Workday. And as you can see here on the chart, which we'll pull up, Saks, explain to us what's happening here.

• 27:44David Sacks?

  Well, it's a major regression to the mean on value, on public company valuations in both SaaS, but also more generally. The, the high growth stocks have corrected more than the indices. So that would imply that there might be more correction to come against the indexes. I think the growth stocks already taken the bulk of the hit. But what triggered it this week, you know, I predicted, and you guys had similar predictions on just a few weeks ago, that this would be, the 2022 would be the year of the correction. It really began in November, you had the Fed. You had Fed governors make some hawkish statements about inflation not being transitory, about the need to raise rates. Then we had the Fed Open Market Committee meeting. This

• 28:27David Sacks?

  was in, I think, around December 15th, and they announced what they were going to do on rates. And now, this week, the minutes of that meeting were released, and it basically, it said something that was completely different than what they announced to us just three weeks ago. And so the market basically just seized up and went to convulsions. And specifically, what they said, you know, in mid-December was that they were going to taper faster, they were going to end QE at the end of Q1 instead of Q2, and then we're going to have quarter-point rate hikes in Q2, Q3, Q4. That was the plan for 2022. And then there was additional guidance that they were expecting three more quarter-point rate hikes in 2023 and two in

• 29:12David Sacks?

  2024. So that was sort of the three-year plan that was laid out. Then we find out from these minutes, and I guess these minutes weren't leaked or anything. They published them after like a three-week revise and extend remarks-type period. But what we find out is what they were talking about was having a rate hike as soon as Q1, and not just ending QE, but actually shedding assets, which is like the opposite of QE. So instead of basically going out there and creating money- Shrinking the balance- Yeah, shrinking their balance sheet. So instead of going out and buying bonds, they're going to sell their bonds, which will reduce the money supply. So, look, if that was their view three weeks ago, why didn't they announce it? I mean, my problem with this

• 29:54David Sacks?

  is it makes the Fed look like they don't know what they're doing, because they announced something just three, three and a half weeks ago that's completely at odds with the statement they just put out. So either something changed in the last three weeks, and there's been no data, or they don't know what they're doing.

• 30:09Chamath Palihapitiya?

  Just so you know, they have a little bit of a track record of this. So in 2018, it looked like there was going to be inflation. And Powell tried to get ahead of it and he raised rates and the market completely collapsed. And they were looking, I think, at Chinese data at the time. And it looked like, you know, China was turning, you know, going crazy. Then China completely turned over. It was a complete head fake. The economy wasn't rip roaring. Inflation didn't exist. And they basically just curtailed a lot of investment and destroyed a bunch of value. So this time around, I think they're very sensitive to not correcting too quickly. But then the opposite thing happened, which is they probably waited a little too long.

• 30:51Chamath Palihapitiya?

  And now, you know, we're correcting too slowly, too late into the cycle. And we're just sort of digesting that reality. And so I think that, you know, we're probably, to be honest with you, like, actually, like, we've puked it all out for the most part, in my opinion. You have to remember, right? Like, the big difference between now and even 10, and frankly, more importantly, 20, 30, 40, 50 years ago, is how many computers are involved that trade? How much passive money is involved that owns assets? And how much of this stuff is sitting on the sidelines still in money market accounts and munis? So if you look at those markets, there is a ton, trillions of dollars, waiting to find a home.

• 31:36Chamath Palihapitiya?

  And what we've now done, and Brad's charts show this, is we've basically chopped the head off of all of these fast-growing growth multiples. The underlying companies have not changed once until, right? These companies are still growing by crazy amounts. Like, Snowflake is still an incredible business.

• 31:53Jason Calacanis?

  Unbelievable.

• 31:54Chamath Palihapitiya?

  But the multiple that one was willing to pay has been very much rerated, as is a bunch of other companies.

• 31:59Jason Calacanis?

  So let me ask you a question, Shama. If we've gone from these 50, 60, 70 multiples, times sales, and now it goes back down to 20, is that, dare I say, a buy signal? And will those trillions of dollars start moving back in? Because who wants to be in a money market?

• 32:13Chamath Palihapitiya?

  I don't know. And I can't really call these things. But one, a really smart person that I talked to this week, you know, he actually liquidated everything in October and November.

• 32:27Chamath Palihapitiya?

  And you know, and I don't, we talked about this on the pod, but you know, I was feeling so much tension at the end of last year. I actually, when I look back on Q4, it was probably the most difficult quarter of my professional life in just trying to manage risk. And I exited a ton of positions. All my pipes, you know, my third-party pipes, I basically sold off except for one. You know, I generated some liquidity in other places as well. And I was glad that I did that, in part because I saw, you know, what he was doing, and in part because, you know, Jeff and Elon were selling. And I thought, I mean, this is just, this is crazy to sit on the sidelines and, you know,

• 33:08Chamath Palihapitiya?

  be the bag holder here. Going into Q1, I talked to the same guys. And what he said to me, which I think is very smart, is you have to really look at the first and second derivative of the 10-year bond. Because when that stops moving, like, the 10-year bond is this beautiful barometer of the collective wisdom of every single investor in the world about what they think about long-term growth and inflation. And it's a really important market. You know, we've talked many times. Look at the 10-year breakeven if you want to understand where inflation is going. We started to talk about that seven months ago. And if you look at that, the rate of change, so the volatility in the 10-year

• 33:48Chamath Palihapitiya?

  yield is slowing way down. And if that continues to hold, that means that people are really saying there's a small amount of real inflation, a reasonable amount of transitory inflation, and we're about to kind of wash most of it through the system with, you know, 100 basis points of rate hikes. And if that's the case, then you may see a quick pullback, you know, in Q1, and we're back to the races again, because of all this other money that's going to say, I gotta get back in. And if you look at all these corrections, in the world of computer-traded algorithms, and ETFs, and passive money, and it's all, the snapbacks are so fast, you correct 20%

• 34:28Chamath Palihapitiya?

  and then whoop, you whip it back and you go. So, I don't know. I mean, that's one view based on the past, but who knows?

• 34:35David Friedberg?

  When you have these big swings, remember, it's not that every...

• 34:41David Friedberg?

  Issue moves perfectly in sync with every other issue. So there are these, call it over, adjustments that happen within a cohort. So within a group of companies, some of them will trade down much farther than others. The multiple will compress much further than others. And there's certainly opportunities within, as there is in any market that's moving quickly, to find businesses that now are priced as mature, non-growth value businesses, and they're profitable and growing. And there's a bunch of those out there now. And that wasn't the case a month ago.

• 35:13Chamath Palihapitiya?

  I don't think a single thing in the last quarter has changed in the underlying fundamentals of the majority of businesses that are public. And I actually think, for the most part, nothing has really materially changed for the majority of private companies. All that's changed is what you're willing to pay in the future for it. And the one thing that hasn't changed is what you're willing to pay in the future for the private businesses. So the real question, you know, for Saks and, you know, for the active investors in the private markets, which I don't know what to think about is, will the haircut that we've all taken in the public markets spill into the privates?

• 35:50David Friedberg?

  Well, it's starting. It's starting. But it feels to me, it's not just about what's going to happen with new emerging growth companies. But, I mean, you guys, correct me if I'm wrong, but there are hundreds of companies that have raised billions of dollars at valuations that if they look in the public markets now, they are never actually going to achieve if they were to go public in the next three, four, or five years, based on their projections.

• 36:14Chamath Palihapitiya?

  So to your point, there are nine?

• 36:16David Friedberg?

  Yeah.

• 36:17Chamath Palihapitiya?

  There are 900 unicorns right now, 900. And so, once you get to, look, it's one thing to be a $200 million company and sell to Microsoft or whatever, but when you're a billion-dollar company, there are very few buyers.

• 36:29David Friedberg?

  And I just want to point out, there's a huge disincentive. For an investor or shareholder of VC or a private equity firm to take a big write down on a company like that. And so there is always this push to what do we do next? And it creates this certain, certainly, I mean, I'd love your point of view, but you're this really like unhealthy tension, because to take a write down on 900 unicorns is going to cause a write down of hundreds of billions of dollars across all VC portfolios in aggregate, because they're not going to end up going public.

• 37:04Chamath Palihapitiya?

  Well, I'm sorry, just to finish your thought, because the end market is only to go public.

• 37:08David Friedberg?

  There are very few companies. There are no M and A exits.

• 37:10Chamath Palihapitiya?

  Yeah, there are no, and not in the billions of dollars, because you have to think big tech, big tech is off the sidelines. Okay. You know, even if you look at like Visa and Mastercard, there, nobody's allowed to buy these big companies.

• 37:22David Friedberg?

  They'll be mid tier. I mean, I have an example that I could tell you.

• 37:24Chamath Palihapitiya?

  Mid tier maybe, but my point is when you have 900 companies worth a billion dollars and plus.

• 37:28David Friedberg?

  They have to go public.

• 37:30Chamath Palihapitiya?

  They have to go public. And so you can't go public into a valuation framework that values you at 30 to 40% less of your last private mark.

• 37:38David Friedberg?

  Right.

• 37:38Chamath Palihapitiya?

  Yeah.

• 37:38David Friedberg?

  It doesn't work.

• 37:39Chamath Palihapitiya?

  You did have.

• 37:40David Friedberg?

  Or do you, Chabat?

• 37:41Chamath Palihapitiya?

  You actually do.

• 37:42David Friedberg?

  So this is an important question, because isn't that going to be the case that all these VCs with the 2015, 2016, 2017, 2018, 2019 vintage are going to end up having, they've all got these great marked books right now. You know, the books are all marked to 3X, you know, multiple on invested capital. And now they're going to end up having these liquidity events that are going to come in at shockingly low valuations. And there's going to be this great write down and retrenchment.

• 38:09Jason Calacanis?

  I can tell you, there's a couple of examples. One is The Athletic yesterday, which had raised money at 500 million just two years ago, just sold for about 500 million to The New York Times. And those investors basically put money in and they got their money back. It's a push. So I think you're going to see a lot of these pushes. No, I'm agreeing with you. Yes, I'm going to give you the examples. Then there's also.

• 38:27Chamath Palihapitiya?

  It's a mid tier acquisition by a mid tier acquirer.

• 38:30Jason Calacanis?

  And so there'll be plenty of those that occur. So there'll be a lot of pushes, I think, is my prediction of those 900 unicorns. And then for a lot of these SaaS companies.

• 38:37David Friedberg?

  So you're saying you're, you think that a bunch of them are going to sell for under a billion dollars and the VCs, because they have. Preference, they're gonna get their money back.

• 38:44Jason Calacanis?

  Correct. Correct. I think it's gonna be a lot of these pushes where I don't, what is it in Blackjack, David, when you're playing those three hands and you get a push like, and it's like, okay, I'm gonna live to, to fight another hand, now which we've seen Sacks do a number of times. And then for the SaaS is where Sacks, I'm interested in your position, because we saw in SaaS, all of a sudden, the private market, thirty, forty, fifty, sixty, seventy times top line, and now it's gone back down to twenty, thirty, forty. So those companies now basically have three-

• 39:10Chamath Palihapitiya?

  The, the public markets have, but I don't think the private markets-

• 39:13Jason Calacanis?

  It has happened already. Everybody's pausing. And so for the people who raised that fifty X, congratulations, you did the right thing. If you have enough money to fill in that valuation-

• 39:21David Friedberg?

  Is it a congratulations, though? I mean, it seems like they're in a pretty-

• 39:24Jason Calacanis?

  I would say it is.

• 39:24David Friedberg?

  Pretty tough position now.

• 39:26Jason Calacanis?

  Yeah, you know, that's-

• 39:27David Friedberg?

  You just raised money, you just raised money at a billion dollar valuation with ten million of revenue. You're like, uh-

• 39:32Jason Calacanis?

  Four twenty, let's say, let's say twenty would be the more likely.

• 39:34David Friedberg?

  I mean, like, what are you gonna do, what are you gonna do in your next round? Cause you're burning a hundred million a year now, or forty million, or whatever it is you're burning.

• 39:40Jason Calacanis?

  Almost all the companies I've seen in this exact situation you're talking about have that twenty million, they got a billion, they raised a hundred million or two hundred million, and they're basically now saying, okay, we gotta make this last until we can catch up to that valuation and get to fifty to seventy-five million. So I think you, I would take that deal as a founder and as an investor, because it takes out the downside, and now you just have to worry about catching up to the valuation, and you have four years of runway. They're not gonna-

• 40:05Chamath Palihapitiya?

  No, no, no, no, no, no, no. Those companies do not, those, those companies absolutely do not have four years of runway. I will bet dollars to donuts, they have two years or less, and most of these companies have eighteen months.

• 40:16David Friedberg?

  Which means they gotta be raising in six to nine.

• 40:18Jason Calacanis?

  No, no, they're changing, they're changing their spend, and they're changing their target-

• 40:23Chamath Palihapitiya?

  How are they changing their spend? They're not firing anybody. You're not hearing about layoffs at startups.

• 40:27Jason Calacanis?

  Okay, all right. You're not hearing about it, but maybe they're changing their forward-looking growth plans. What are you seeing, Sacks? I'm telling you what I'm seeing. What are you seeing, Sacks?

• 40:36David Sacks?

  I think that the trickle-down effect is inevitable, but I'm not sure it's fully kicked in yet. It's gonna take a few high-profile deals to land at, say, fifty times ARR instead of a hundred times ARR in order for everybody to know that there's a new valuation level.

• 40:58David Sacks?

  So if you look at the altimeter chart on public SaaS multiples, let's see, I mean, Nick can pull it up. It basically, it's the SaaS index that shows median, median expected value to next 12 months revenue. And during this sort of late 2020, early 21 period, it got as high as about 15 times the historical average. Next year. Yeah, for, well, for next 12 months revenue. The, which is sort of, that kind of makes sense. So, so historically, it's around eight, right? So basically, all the valuation levels doubled, and now they've come down to about 10 times. So you could

• 41:40David Sacks?

  say that if it fully reverts to the mean, we still got like another negative 20% to go. I don't know if that's going to happen. I mean, I think there has been a greater recognition that SaaS businesses are some of the best businesses to own, right? It's, they are subscription software businesses, great gross margins, they just keep compounding. So maybe it will stabilize at 10 times. But I think what we can say with 2020 hindsight is that the record price levels we got to in the public markets in 20 and 21 were sort of unusual and unique, and probably a result of this incredibly expansionary fiscal and monetary policy that was coming out of Washington. Now, has it trickled down to the, again, VC

• 42:24David Sacks?

  markets yet? I mean, the way that that has to happen is that the latest stage investors, the crossover investors who invest in both public markets and private markets, they have to pay, they have to start paying less for the latest stage growth companies. And then, you know, all the downstream VCs are going to start paying less as well, because, you know, if you know the markups are lower, you have to take that into account. So, look, all of this is underway right now. I mean, I gave a Bloomberg interview in December, and I think I went on Maria Baromo's show around that time as well, and I kind of warned that all of this was coming. And yeah, we're in the midst of a giant rerating, because

• 43:05David Sacks?

  we're realizing that so much of the peak values we are seeing in 2020 and 21 were the result of artificial liquidity. And it's what you guys predicted, you know, it's one of our big, you know, I guess my big prediction for business losers this year were asset classes that were highly dependent on liquidity. You guys predicted crypto would be one of those. Clearly it's taken a massive hit. I mean, have you seen how much the crypto markets are off just in the last week? So it's, um,

• 43:36Jason Calacanis?

  So much for them being uncorrelated.

• 43:39David Sacks?

  No, it's highly correlated. Look,

• 43:40Jason Calacanis?

  Yeah, everybody's saying Bitcoin's gonna be uncorrelated, so the market's gonna be down.

• 43:43David Sacks?

  No, the crypto markets are like a sponge for liquidity and the more liquidity there is out there, the more money can flow into a more speculative asset class. But look, my, my, my objection to this, I mean, is that if you look at the Fed's actions, I mean, I think Chamath is right that they waited way too long to react. And during the crisis, they overreacted. I mean, they pumped, I mean, we, we, on a previous pod, we showed the assets on the

• 44:08Chamath Palihapitiya?

  They vacillate between underreaction and overreaction.

• 44:10David Sacks?

  Yes, exactly. And, and now they're, I think they're in, they're going into overreacting again. I actually think they nailed it. In, in mid-December, they nailed it by giving us business certainty around what the new rate environment was gonna be. And just three weeks later, in the minutes to that very meeting, they completely undermined the certainty or the the greater level of certainty and predict, predictability that they had provided markets. They've now introduced massive uncertainty. So it's just, it's unbelievable.

• 44:39Jason Calacanis?

  It's like their pilots and like, they stalled the plane and then they're like, oh, let's pull back.

• 44:44Chamath Palihapitiya?

  Well, no, they're, they're They're kind of pulling out the manual and learning in real time.

• 44:49Jason Calacanis?

  Yeah. And it's like, you need to just point the nose down a bit and add a little bit of speed so you get some lift. Like, it's, it really is tragic.

• 44:55David Sacks?

  The, the performance of our government at every level over since COVID at the last, you know, since 2020. I mean, it's been abysmal. I mean, first you have the self-inflicted wound of lockdowns. I mean, the economy is gonna take a hit no matter what because highly at-risk people would have stayed home and reduced their economic activity. But instead of just protecting the at-risk people, we had to lock down the entire economy. We padlocked Elon's factories and on and on. So we basically shut down the whole economy for no reason and states like California kept it going way longer than they had to. So then the government just prints like five, six trillion and the Fed doubles the size of its balance sheet. And then now they're abruptly getting off drugs. I mean, look, they put us on drugs and now they're going cold turkey.

• 45:41David Sacks?

  And so I think there's actually like a much greater risk now of the economy going into recession this year because of the Fed's overreaction this week. I mean, they had, they had the Goldilocks scenario down about three weeks ago, and I think they're going to tank the thing now, or there's a much greater risk of that.

• 45:56Jason Calacanis?

  Best advice for founders, private companies in this turmoil? What's your best advice, fam? You're a founder, you got, I don't know, 18 months of runway right now, you're going into this, you know, slush, and you want to know, what should I do? What should I do?

• 46:12Chamath Palihapitiya?

  I think Paul Graham's advice makes the most sense here. You need to focus on being default alive.

• 46:19Jason Calacanis?

  Define what that is, just for people who don't know.

• 46:20Chamath Palihapitiya?

  Yeah, so, you know, Paul Graham wrote this great essay, he's a founder of Y Combinator, and, you know, he has this very simple, you know, framework of looking at companies, which is your default dead or your default alive. And when you're losing money as a company and you're burning enormous amounts of cash, you're default dead. Now, if you're growing fast enough, default dead is a great strategy for value creation. But at some point, everybody around you will expect you to be default alive. And what that means is that the cost of what you do are less than the revenues you bring in when the result are profits. And even then, that's not good enough. I don't know if you guys saw, but, you know, if you look inside of big tech, I was shocked

• 47:02Chamath Palihapitiya?

  to find out that, you know, for example, you know, companies like Microsoft specifically and Apple, you know, these guys trade at huge forward multiples, right? For enormous profitability. But companies like Facebook and Google, for the same level of profitability, you know, trade almost a third less in terms of multiple. So even when you're that good, it's not good enough to be default alive. That's how hard this game is over very long periods of time. And so when you have a moment to really understand how to be default alive, and you don't take it, I think it's a huge disservice because we don't do enough of that kind of coaching that really inflicts that kind of discipline and expectation setting. I remember I have a large climate investment.

• 47:47Chamath Palihapitiya?

  It's actually the single largest investment I've ever done. And so I swept the details pretty significantly. And you know, I was with the team in

• 47:58Chamath Palihapitiya?

  in November, December for a board meeting and setting up 2022. And my whole thing was, guys, you have to get default alive. You have to get contribution margins to be in a certain band. We are going to target this level of free cash flow generation this year, and there's no if, ands, or buts about it. And what's great is the entire team embraced it and we're marching towards that. But if they didn't, and they're like, no, we're just going to grow at all costs again. Oh, my God, I would be freaking out right now.

• 48:26Jason Calacanis?

  Friedberg, what do you have to add to that as advice to founders who have not been through this before?

• 48:30David Friedberg?

  I built my business, my Climate Corp. We raised a round in November of 2007. We raised 12 and a half million dollars, and then the financial crisis hit in 2008. And I'd say two things were really important. Number one was just keep building. So if you're building a great business, it doesn't matter what the market perturbations are. You know, the market will value you at what they're going to value you at. And if you're a good business, there's going to be money available to you. The second piece of advice is one that I know has been said over and over again, but you know, never raise at a valuation beyond, you know, what you're reasonably going to be able to kind of deliver returns on at some point in the

• 49:15David Friedberg?

  future. Because otherwise, those nasty dynamics emerge. You know, you could raise money at some crazy high valuation. That's not always the best thing to do, because then the expectation of the investors coming in at that valuation, or they want to make three times that money, or four times that money. And it pushes you to do something unhealthy, like spend more than you otherwise would, stretch for a bigger outcome, and put your entire company at risk. So, you know, two things to me have always been just stay focused on building your business. Don't let, you know, kind of market conditions drive your decision making. And second,

• 49:46Jason Calacanis?

  Define what, for you, is the best practice of staying focused on your business, because that is a very general term. What is Friedberg, if you're going to say the top three things of focused on your business tactically means?

• 49:58David Friedberg?

  I have a simple rubric for value creation and Business, you know, number one is can you make a product? Number two is do people want to buy your product? Number three is can you make a positive gross margin selling that product to those people? Number four is can you make a return on the marketing dollars you have to spend to generate that gross profit? Meaning, you know, can LTV exceed CAC? And number five is can you scale the amount of money you deploy to grow your business? Such that as you grow, the return goes up, not down. If those are the five kind of things you can accomplish in that order, you can build the next Google. And so, and then the sixth thing is can you be a platform, which is meaning, can you transition to being a multi-product company? That gets leverage out of the, the user base or the technology that you've built.

• 50:41Chamath Palihapitiya?

  Got it.

• 50:41David Friedberg?

  And so, you know, if you

• 50:42Chamath Palihapitiya?

  Multiple revenue streams more

• 50:44David Friedberg?

  Multiple revenue streams using the same customer base or multiple products or, you know, whatever. Um, and so if you can achieve those six things. Um, in that order, every step of the way, every increment you can make across that spectrum drives significant value as a business. Ultimately, what the multiple on your business will be is purely going to be a function of what else is going on in the world, things that you cannot control. And so if you're driving your decisions about building your business using that first rubric. Good for you. You're going to succeed. You're going to have money available to you. Awesome. If you're driving your decisions based on what the market is telling you to do and what the market is saying is available to you and money and all that sort of stuff. You know, you're setting yourself up to basically be, you know,

• 51:24Chamath Palihapitiya?

  But are you also saying to be independent of, of valuation?

• 51:29David Friedberg?

  Yeah, I, I'm always of the opinion that you shouldn't raise money beyond your, um, into a valuation. That you're not comfortable saying in different market conditions or what have you, I can return multiple

• 51:40Chamath Palihapitiya?

  Well, I don't think any founder has ever, you know, most of these founders were not around in 2000 and they

• 51:46David Friedberg?

  Or 2008.

• 51:47Chamath Palihapitiya?

  Or two, but even 2008 was less important in my mind because it was, it was, it was fast. And again, we had government stimulus. So, you know, like I think 2008 was an aberrational moment. I was, I was in the middle, you know, inside of Facebook when, and I was like, what the hell is going on here? The government's going to step in and, you know, with TARP printing a trillion dollars or whatever it was.

• 52:07David Friedberg?

  It didn't affect you guys.

• 52:09Chamath Palihapitiya?

  It didn't affect us at all.

• 52:10Jason Calacanis?

  Yeah, but you were the most powerful company.

• 52:12Chamath Palihapitiya?

  No, not at that time, not in 2008.

• 52:15Jason Calacanis?

  Wow.

• 52:15Chamath Palihapitiya?

  You were in 2007, 8, we were not.

• 52:17Jason Calacanis?

  You guys were surging, had a lot of cash, right?

• 52:18Chamath Palihapitiya?

  No, no, but we were profitable. We were, here's the thing that people don't realize with Facebook.

• 52:23David Friedberg?

  Google was profitable from day one, too.

• 52:24Chamath Palihapitiya?

  Yep, we, we were always default alive. I want every single person listening to this to understand this, okay? We sold poker ads for party poker in big banner ads on Facebook and we made money.

• 52:36Jason Calacanis?

  You got the bag.

• 52:37David Friedberg?

  You got yourself independent.

• 52:38Chamath Palihapitiya?

  We were profitable, okay? So I don't buy this argument. That argument of unprofitable growth is a vestige of fund dynamics and VCs who want to raise larger and larger funds to blind their pockets with fees.

• 52:52David Friedberg?

  It's a function of what I mentioned before, which is if you can think about the context of a portfolio of those bets, it makes sense. But if you think about your business, it doesn't make sense.

• 53:02Chamath Palihapitiya?

  In 2000, that didn't make sense. You could not run an unprofitable growth business. The money would not have been there.

• 53:07David Friedberg?

  Right.

• 53:07Chamath Palihapitiya?

  And the real reason is that was a, a market check, meaning you had people reallocating capital because risk rates were different. You know, you could put money at 6% in the, in US 10-year bonds. Now, obviously, you can't do that today, so maybe this cycle is just the new normal. And so, you know, maybe you can always be default debt and be able to raise money because the incentives exist, but I wonder when that stops. And so, I don't know.

• 53:33Jason Calacanis?

  Google was an incredibly cash-efficient business. I think they raised under 50 million as a private company.

• 53:38David Friedberg?

  They never used any of it because Google, the first, the first thing Google did is they did a massive search syndication deal with AOL that paid them hundreds of millions of dollars and that funded the business. If you can sell ahead of your customers in terms of delivering the service or the product to them, you've got the most beautiful business in the world. That's the definition of bootstrapping. Google, even though they raised venture capital, effectively bootstrapped the business by getting customers to prepay.

• 53:59Jason Calacanis?

  Like Elon, getting people to prepay for cars.

• 54:02Chamath Palihapitiya?

  I wrote this in my annual letter like two years ago, but Facebook, Google, Apple, Microsoft and Amazon raised collectively less than 250 million dollars.

• 54:09Jason Calacanis?

  Yeah, I mean, what?

• 54:10David Sacks?

  Yeah, so I mean, I, I agree with a, a, a lot of what you guys have said. Um, I mean, so I agree with Friedberg that recessions or downturns are actually great times to build startups because innovation doesn't stop. And, you know, so PayPal was predominantly built after the dot-com crash. Yammer was prominently built after the 2008 sort of great recession. So it's absolutely doable and some things actually get easier in a downturn. There's like way fewer startups getting funded. And so like talent gets easier to recruit. So, you know, things loosen up in, you know, in terms of the company building side. The only thing that really gets harder in a downturn is fundraising, right? This is, and by the way, I think it's a good practice for founders not to care what happens in the public markets, the NAS, to early-stage founders, right?

• 54:55David Sacks?

  Because the only time that really touches you is when you need to access the capital markets, right? And then you will be subject to the downstream impact on VCs of what's happening in the market. So, so the only thing that really gets harder is fundraising. And this is where I think Chamath' advice comes in. I, I personally think that trying to achieve default alive status is too high a bar. I mean, it's a wonderful thing if you can do it. I mean, Facebook did it, Google did it, the very best companies did it. But I know very few SaaS companies that could continue to grow if they had to be cash flow positive, I mean, at an early stage. So the metric I use is burn multiple, I wrote a blog about this once.

• 55:35David Sacks?

  It's basically just how much are you burning for every dollar of net new ARR you're adding? So in other words, like if you're burning a million dollars, you know, over whatever period of time, a month, quarter, year to add a million dollars of net new ARR, that's actually pretty good. So a burn multiple of like one or less is amazing. I'd say even up to two is good. So in other words, like if a SaaS company can say add 10 million of net new ARR in a year and burn 20, I think VCs will fund that all day long, even in a recession.

• 56:08Jason Calacanis?

  Because you have a two-year payback.

• 56:09David Sacks?

  Yes, but when you start getting to burn multiples of three, four, five, six and up, that's when like VCs are gonna go, wait a second. Yeah, you're, that growth is.

• 56:17Jason Calacanis?

  Not efficient, right? You're not efficient.

• 56:18David Sacks?

  It's not just efficient, but it starts to raise questions about your product market fit because you're effectively spending too much money to grow. So like, why is a growth that hard, right?

• 56:28Jason Calacanis?

  No market pull, yeah, no market.

• 56:29David Sacks?

  Yeah, exactly, no market pull, I think that's a good way of putting it. So I do think you have to, like in a downturn or in choppy waters, you have to sharpen the pencil, get more efficient about your burn, look at your burn multiple. And then I think, you know, if you have the opportunity to top off your war chest, like that's smart, you know, and don't wait too long.

• 56:45Jason Calacanis?

  And be frugal. I mean, God, the amount of like. Crazy spending I'm seeing in some startups and unnecessary spending. If you're spending something and it's not going into product, it's not going into marketing, you know, it's not going into sales and it's not, you know, just you really have to ask yourself, why am I spending money on going to this conference, going to that conference, on this office space? Like really be frugal. I know that it's when you have all this money sloshing around, you're looking for things to spend it on, but stay focused.

• 57:10David Sacks?

  Like the old summit?

• 57:12Jason Calacanis?

  Yeah, I mean, yeah, don't, don't spend 7,500 on that unless you've got tons of cash laying around. And we will be getting back to the people who applied, we're going to go through and somebody's gonna approve you.

• 57:24David Sacks?

  Let me just add, let's add one other thing to this, which is you're right that like most founders have never even seen a downturn because the last big one was a great recession of 2008, 2009. So how many founders were even around back then?

• 57:34Chamath Palihapitiya?

  No, the most, the most real, the real one was 2000.

• 57:36David Sacks?

  That's right. That was the big, that was a big crash.

• 57:38Jason Calacanis?

  It froze, I would say it froze to that. 2008 was what, like 12 to 18 months of choppiness? And I would say a lot of companies couldn't raise money, had to do down rounds, had to do multiple liquidation preferences. It was gnarly on some cap tables during that period. And if you don't know what multiple liquidation preferences are, ask your attorney.

• 57:56Chamath Palihapitiya?

  I understand, but there was no real market check. The market check was really in 2000 and you saw it was a multi-year slog.

• 58:03Jason Calacanis?

  It was a bloodbath.

• 58:04Chamath Palihapitiya?

  You had to be default alive.

• 58:05David Sacks?

  And wealth got vaporized.

• 58:06Chamath Palihapitiya?

  Yes.

• 58:06David Sacks?

  People who-

• 58:07Chamath Palihapitiya?

  Where you had to be default alive.

• 58:08Jason Calacanis?

  Absolutely, absolutely. Yeah. But I would say a third of the startups went away in 2008.

• 58:13David Friedberg?

  I don't think we're running into that again. So, you know, let's not create a Sequoia graveyard kind of story here, but-

• 58:19Jason Calacanis?

  But you could. Nobody knows is the point.

• 58:21David Friedberg?

  Look, it's a, it's a probability of getting your business funded, right? And, and that's kind of lower. It's, it's not like-

• 58:28Chamath Palihapitiya?

  But here's the thing, what I, what's shocking to me, it's like, I don't understand why people think you can grow infinitely forever. It's just not true. Even the best businesses in the world after 15 or 20 years are barely growing at 20%. People forecast Facebook and Google. Those are the two best businesses in the world.

• 58:48David Sacks?

  But isn't the question what kind of growth VCs are willing to finance?

• 58:51Chamath Palihapitiya?

  No, what I'm saying is if you know that your terminal growth rate, if you are one of the best companies ever created ever, is 20% in 20 years, it doesn't take a genius to do a line of best fit between now where you're at 100% in 20 and realize that at some point, if you don't figure out how to make money by selling what you're selling, there's a lot of people who will be smart enough after enough historical data has come through the transom or come over the past to realize that these things are not that fundable. And this is what's shocking to me. It's like that data is hiding in plain sight for anybody to look at. It doesn't make sense unless you believe that those growth rates of 40, 50, 60% are sustainable for 30 years or 40 years. We've seen zero examples.

• 59:35Chamath Palihapitiya?

  And you have to look at these canaries in the coal mine because if, if the best companies in the world can't do it, you're, you have to really scratch your head here or ignore it, whatever.

• 59:46Chamath Palihapitiya?

  That's fine.

• 59:47Jason Calacanis?

  Just wing it. Yeah, it'll all work out.

• 59:49Chamath Palihapitiya?

  Don't even worry about it. Don't worry.

• 59:51Jason Calacanis?

  Just add like

• 59:54Jason Calacanis?

  one of those features will work and save the day. There's some magical feature.

• 59:58David Friedberg?

  Did you see Andreessen announced that they raised $9 billion or something today across a bunch of funds?

• 1:00:03Chamath Palihapitiya?

  Congratulations to those guys. They're building a colossus.

• 1:00:07David Friedberg?

  Yeah. I mean, there's gonna, Silicon Valley in terms of capital is, um, you know, seeing kind of power returns itself, right? There's going to be a few firms that are gonna, you know, control 80% of the

• 1:00:18Chamath Palihapitiya?

  Andreessen should go public.

• 1:00:20David Friedberg?

  Andreessen, Tiger, Tiger Global, you know, whatever happens. I don't know if SoftBank Vision 2. I mean, there's a few.

• 1:00:27Jason Calacanis?

  That's a market.

• 1:00:28David Friedberg?

  I don't know about them going public, but I'm just saying like, if you look at the aggregate capital that's being deployed into private markets right now, in, in probably two years, 80% of it's going to come from three firms or four firms.

• 1:00:37Chamath Palihapitiya?

  The problem is if you're running that much money, you're insane to not take your GP public because it's the only way, like you're not really generating carry at that point because you're generating a market beta return. So you'll do okay, but when you're sitting on 20, 30, 40 billion of imputed wealth by being the owner Of the GP of Tiger or Andreessen, you'd be insane to not go public.

• 1:00:59David Friedberg?

  I think the odds are going to be pretty high that Andreessen will go public, right? I mean, they're certainly setting themselves up to be a lot more than just a capital allocator.

• 1:01:06Jason Calacanis?

  Though, right? It's never happened.

• 1:01:07Chamath Palihapitiya?

  Well, TPG just filed to go public, they're going out, KKR's public, Apollo's public.

• 1:01:14David Friedberg?

  No, but I mean, like, ventures never scaled up to the point that private equity has until now. And now that they have, it's very likely, it's very likely that you'll see Andreessen be the first. I don't know them, you know, very well, but.

• 1:01:25Jason Calacanis?

  Sax, you were gonna say something.

• 1:01:26David Sacks?

  Well, no, I think it's a super interesting point because if you talk to the previous generation of VCs, what they will tell you, eh, who retired, right? Is when you ask them, well, did you get anything for your partnership share in the firm? Not just in a fund, but in the firm, they'll tell you, no, they basically just gave it way to the next generation of partners, even though they, they built the firm. And it's because of what, historically, the belief on the part of VCs was that there were, there was no value to VC firms other than just their interest in each particular fund. But you're right, like, if they do achieve a much greater level of scale and they can go public, then there is actually value in the firm itself.

• 1:02:04Chamath Palihapitiya?

  If you look at the terminal valuation of Blackstone as indexed to AUM, you know, eh, once, once you've passed a couple hundred billion of AUM, you can trade.

• 1:02:13David Friedberg?

  Point two.

• 1:02:13Chamath Palihapitiya?

  Towards point one, point two times. And so, you know, if you have 50 billion of AUM, there's 10 billion dollar market cap there. And if you, you know, if you're Andreessen or, Andreessen or Horowitz, I mean, that's 5 billion dollars that just appeared out of nowhere. Why would you not do it?

• 1:02:29David Sacks?

  Right. It's a little bit like Goldman Sachs. They always said that we're a partnership, we're never going to IPO because.

• 1:02:34Chamath Palihapitiya?

  And then they did.

• 1:02:35David Sacks?

  And then they did. And, and, and same thing, did CAA do it too? No, I guess they're.

• 1:02:40Jason Calacanis?

  No, what happened with CNA was Ovitz, eh, sold his position to go to Disney so there wouldn't be a conflict. But he could have kept it and the, like, residuals they were getting from projects they packaged were incredible.

• 1:02:50David Friedberg?

  Didn't the Ari Emanuel one?

• 1:02:53Jason Calacanis?

  It did, Endeavor did.

• 1:02:54David Friedberg?

  Endeavor. How are they trading? I haven't even looked at. Endeavor.

• 1:02:57Jason Calacanis?

  I'm not sure.

• 1:02:58David Sacks?

  But let me tell you, like, it's actually, but think about if you're not like the current, like, partner owners of the firm, but you're like on a partnership track there and you're working your way up to partner. Like, by the time you get to partner, it's gonna be a very different economic equation, because instead of getting your one-over-n share of the pie, when you eventually become partner with N being the number of partners, or some version of that, now the company is owned by the public, and the public or the board of directors is determining your salary, and maybe you get a salary and bonus and some, you know, essentially, options or equity participation, but you're not gonna be a true owner anymore, because the firm is gonna be owned by the public.

• 1:03:37Jason Calacanis?

  Wait a second. What if we take each of our businesses, put them together, and then take them public as all-in capital, and then we get the bag?

• 1:03:46David Friedberg?

  I'm good. I'm good.

• 1:03:46Chamath Palihapitiya?

  I'm good.

• 1:03:47Jason Calacanis?

  We got the startup studio, we got the accelerator.

• 1:03:50David Sacks?

  We can't even agree on a conference, so I don't think we're recombining.

• 1:03:53Jason Calacanis?

  Flower, is that a conference?

• 1:03:54David Friedberg?

  We can't agree on the decor and food for a one-day event in Miami.

• 1:03:58Jason Calacanis?

  That's because the amount of work you guys want to do is slagging me in a chatroom.

• 1:04:02David Friedberg?

  No, what we want is someone to do the work.

• 1:04:04David Sacks?

  We want to hire a professional.

• 1:04:06Jason Calacanis?

  I have been doing conferences for 25 years. Stop slagging my people.

• 1:04:10David Sacks?

  I know, and you know what's gonna-

• 1:04:10Jason Calacanis?

  Thank you for tuning in.

• 1:04:12David Sacks?

  You know what's gonna happen?

• 1:04:12Jason Calacanis?

  You launched Yammer at my conference, and I put the fix in for you to win.

• 1:04:17David Sacks?

  Thank you. TechCrunch was a beautiful conference, but for All In Summit, is it just the case that we want people to show up, and there's gonna be a stage and people talking on stage in this whole conference, or do we want to create a more magical experience, ala Davos or a Sun Valley?

• 1:04:32Jason Calacanis?

  We're in agreement. We're in agreement. All right, everybody. Thanks for tuning in to episode 62 of the All In Podcast. We'll see you at the All In Summit, and if you want to do us a favor, please go ahead and subscribe and rate us on Apple. We could really use that. And thanks to Spotify for including Daniel. Shout out to Daniel.

• 1:04:52Chamath Palihapitiya?

  Thanks, Daniel.

• 1:04:53Jason Calacanis?

  He included us in their video. So now, if you're on Spotify and you're listening to the pod, you can click a button as of this week and watch the video, or you can watch the video on YouTube.

• 1:05:01Chamath Palihapitiya?

  Hey!

• 1:05:01Jason Calacanis?

  Yeah, it was nice. He emailed us and his team, and then I CC'd him on the email.

• 1:05:04Chamath Palihapitiya?

  He's the best.

• 1:05:05Jason Calacanis?

  Yeah, I think, would he be good for, what do you think about having him and Mr. Beast?

• 1:05:10Chamath Palihapitiya?

  He's super, super, super legit.

• 1:05:11Jason Calacanis?

  Here's my idea for a trio. Him, Mr. Beast. And then one other person to do a media trio. Future of Media. What is your, what is your idea? What is your idea? You don't even know the third person. I mean. Well, I'm putting it out there, asking for a suggestion for a third person. You really do just say shit. You just throw the shit out there.

• 1:05:27Speaker 04

  This is our conference impresario.

• 1:05:29Jason Calacanis?

  Oh my gosh. Well, those are two great guests on the stage at the same time.

• 1:05:32David Friedberg?

  Let's figure out who besides J. K. is going to produce the conference. Okay.

• 1:05:35Jason Calacanis?

  You guys are unbelievably. Bye bye. Insufferable. Bye bye.

• 1:05:44Jason Calacanis?

  Rain Man David Sacks.

• 1:05:48Speaker 04

  And it said, we open sourced it to the fans and they've just gone crazy with it.

• 1:05:52Jason Calacanis?

  Love you, Wes. I'm the queen of Kinoah.

• 1:06:01Jason Calacanis?

  Besties are gone.

• 1:06:04Speaker 04

  That's my dog taking a piss in your driveway.

• 1:06:09Speaker 04

  Oh, man.

• 1:06:12Chamath Palihapitiya?

  We should all just get a room and just have one big huge door because they're all just pissed. It's like this like sexual tension that they just need to release somehow.

• 1:06:20Jason Calacanis?

  What? You're the bee. What? You're a bee. Bee. What? We need to get merch. Besties are back.