Big Tech's Comeback And The Spillover to VCs and Startups — With Eliot Brown

Eliot Brown is a reporter at the Wall Street Journal and co-author of The Cult of We: WeWork, Adam Neumann, and the Great Startup Delusion. He joins Big Technology Podcast this week to talk about Big Tech's remarkable stock market comeback and how that's spilling over to VCs, startups, and IPOs. Stay tuned for the second half where we discuss the risks in the commercial real estate market, looking into examples Brown has reported on. We end discussing Evan Gershkovich, a friend and colleague of Brown who is currently imprisoned in Russia. --- Enjoying Big Technology Podcast? Please rate us five stars ⭐⭐⭐⭐⭐ in your podcast app of choice. For weekly updates on the show, sign up for the pod newsletter on LinkedIn: https://www.linkedin.com/newsletters/6901970121829801984/ Questions? Feedback? Write to: [email protected] Learn more about your ad choices. Visit megaphone.fm/adchoices

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

• 0:04Alex Kantrowitz?

  Welcome to Big Technology Podcast, a show for cool-headed nuanced conversation of the tech world and beyond. We are joined today by Eliot Brown. He is a reporter at the Wall Street Journal and the co-author of The Cult of We, WeWork, Adam Neumann, and The Great Startup Delusion. He's a terrific reporter. We have so much to cover today. We're going to talk about public market valuations of big tech companies and then get deep into Eliot's reporting about how that's spilling over into the private investment world, including SoftBank. Eliot, so glad to have you here. Welcome to the show.

• 0:34Speaker 01

  Happy to be here.

• 0:35Alex Kantrowitz?

  Great to have you. We had you around New Year's and one of the things I said I love speaking with you about is froth because you have this internal radar. When you see something not really makes sense in the numbers, you're very good at saying, hey, wait, let's double check here. That being said, let me read you some statistics. Okay, year to date, right? So since we spoke last, here's what big tech is doing. Apple is up 53%. Meta is up 129%. Amazon is up 51%. Microsoft is up 41%. Alphabet is up 34%. And Nvidia is up, this is unbelievable,

• 1:12Alex Kantrowitz?

  a whopping 196% and valued at $1.05 trillion. Wait a second. You know, this was supposed to be a moment where there's higher interest rates, tech has a pullback on its valuations, and then, of course, there were drawbacks last year. But what's happening this year is somewhat mind-boggling. Are we seeing another sort of case of market hysteria? Or are these numbers actually legitimate? Did the market unnecessarily pull back?

• 1:41Speaker 01

  Yeah, what were all these people doing? Did they not realize we've got a high-interest-rate environment? What's going on?

• 1:48Alex Kantrowitz?

  Yeah.

• 1:49Speaker 01

  Yeah, I don't have, I don't have the answer. I mean, basically, if you look at, yeah, like the NASDAQ overall is, is up like 30% year-to-date and is now only like 10 to 15% below its 2021 highs when we had like zero-interest-rate environment. So, you know, what's actually happened? Like, as you sort of pointed out, it's actually really just a few stocks. It is these giant incumbents. And you know, the market is betting that they are like, you know, essentially AI is

• 2:27Speaker 01

  going to power these companies to sort of at a new profitable level. So is it irrational? I think in the broad sense, you know, AI is actually as a concept or generative AI is like makes a lot more sense as something that would be transformative than basically anything else we've heard out of like the venture capital sector in the past 15 years. You can sort of see how it actually would be, you know, could lead to just extraordinary new efficiencies and profit, you know, centers within businesses by eliminating jobs and

• 3:07Speaker 01

  replacing it with, you know, code robots. That said, you know, you look at Nvidia's valuation and, you know, I'm not actually here to really enlighten with any numbers and more just broad sweep these statements, but you know, it's trading at something like 30 times revenue, which is means like, you know, the value of the whole company is 30 times a year's revenue, let's say, you know, that means profits are sort of minuscule. So it would just take years upon years at sort of a normal company valuation of profit

• 3:48Speaker 01

  or growth for Nvidia to sort of pay that back. So that's a long way of saying like, you know, even if Nvidia just gobbles the entire AI chip market, you know, how do you justify a $1 billion chip company? That's probably harder, but who knows?

• 4:09Alex Kantrowitz?

  Right. So here's some concrete numbers. I mean, Nvidia had doubled the sales of AMD, right? AMD is the comp, not exactly the same company, but double the sales. AMD's market cap is in the 100. Uh, ninety billion range.

• 4:23Speaker 01

  And, and that's a frothy market cap, right?

• 4:25Alex Kantrowitz?

  Right.

• 4:26Speaker 01

  AMD, yeah, yeah, that, that's a good one.

• 4:28Alex Kantrowitz?

  And so basically Nvidia doubled the sales of its most comparable competitor? Five times, more than five times the market cap. How do you, I mean, is that ex?

• 4:38Speaker 01

  No, I mean, it, it, you know, Nvidia is a meme stock. Like in the same way that Tesla's a meme stock like that, that's. Um, so what's, and it, it's actually Nvidia has sort of always been that way. It's, it's, it's gotten like the gamers got really behind it. And then the crypto people really liked it because their chips were used for crypto. So it's got a lot of retail sort of pushing up this, this cult. View about the thing, so.

• 5:05Speaker 01

  Look, my job isn't to sort of like rate the stock as buy or sell, but it's like. If, if, if you're wondering what, what is up with Nvidia's valuation and does it completely reflect? Like a everything is normal environment. It's like, no, that's the result of, of sort of market hysteria. Um, and a frenzy, but in terms of Facebook, uh, Meta, Google in general, this sort of like big.

• 5:29Speaker 01

  You know, surge in, in, in the past six months, I think that is reflective of something that's. At least there's a lot more potential to be real than, you know, like crypto or. And if the other like 12 waves we've seen in the past, in the venture capital world in the past. You know, decade like scooters and fake meat and, and.

• 5:50Alex Kantrowitz?

  What grilled cheese as a service?

• 5:52Speaker 01

  The grilled cheese, yeah, gas.

• 5:56Speaker 01

  G Chas.

• 5:57Alex Kantrowitz?

  Grilled grilled cheese as a service, yeah. G Chas, yeah, definitely. It's a hot new category. You actually do have an example in your book that talks about basically grilled cheese companies becoming. Tech company evaluations, so are commanding tech company val- valuations, so. We're not just spitballing here, this did happen. So let's talk a little bit though, about like how this now impacts the startup market and private capital. Because. You know, there was a moment where, you know, it seemed like, okay, startup investors didn't really see exits, M and A was down, the public market was unwelcoming for IPOs. And you looked at where tech company valuations were plummeting. So it's not like you're like pushing towards this exit and you realize that you might need more runway than you did previously.

• 6:42Alex Kantrowitz?

  But now, holy crap, there's a real opportunity here, right? Where like companies are getting started on AI programs and you can see the public market is really rewarding the faith. So I'm not as deep into it as you are, but I would imagine that this is going to lead or is leading right now to a reinvigoration of venture capital and the private investment space.

• 7:03Speaker 01

  Oh, totally. I mean, it's, it's, it's really happened and it's kind of, it's almost frustrating in that it's impossible to talk to these venture capitalists a lot of the time because, you know, you actually had a moment for one year out of the past 10 where, where the, you know, essentially the bubble had been pierced and maybe they could be interest speculative about, you know, sort of just why the, the, the sector as a whole just is so prone to being frothy and, and sort of running like a herd and, and kind of all these crazy things because it's like overall and through 2022, I mean, you know, the sector did pretty terrible, even if, if like venture funds were able to produce good returns here,

• 7:48Speaker 01

  you know, at isolated times. So, you know, that's a long way of saying, yeah, I mean, things have gotten completely off to the races and people are sort of like forgetting like, you know, all that, that crap that we invested in and put hundreds of billions of dollars into, you know, forget about that. It is an AI frenzy. And again, like that as a concept is, is, is probably more rational than getting really excited about mattresses or scooters as some sort of, you know, huge new category, which, which is what VCs were doing.

• 8:26Speaker 01

  But because like the thing that really does unlock, you know, venture capital and venture capital returns is are when you have like an iPhone or the internet and you open up what they call a platform change, like you you get this whole new category that that you can do. So that that is you could see how AI has the potential to do that. The VCs all really see that. And so valuations have been surging. You know, you have these startups with with nothing. They're just starting like there's a French startup that raised one hundred eighteen million last month and it had been around for for like five or six weeks.

• 9:04Alex Kantrowitz?

  A week.

• 9:04Speaker 01

  Yeah, exactly.

• 9:05Alex Kantrowitz?

  Like overnight.

• 9:07Speaker 01

  Right. I mean, it essentially was just like a dude or three dudes and and, you know, they get one hundred eighteen million to go build a company. So, you know, that is the sort of peak level of froth. And so then suddenly, like, you know, people are rebranding to be all about AI when when but if you ask them how Web three is going, they probably would not appreciate the question.

• 9:29Alex Kantrowitz?

  Right. And so, you know, it's interesting because I said this on CNBC last week and I got a little gruff from it from the commenters, but I'm willing to repeat it here, where I said that there's, you know, an iPhone moment feels like an iPhone moment for generative AI. There's hasn't been an iPhone product yet. Like, actually, when you think about concrete products that we've seen with this stuff, you have Chat GPT, which actually the interest in Chat GPT is declining if you look at Google search trends, which is, you know, it's not it's not a perfect predictor, but it's roughly interesting. It's it's an interesting data point. And then, you know,

• 10:04Speaker 01

  I'm certainly not using it for as many limericks anymore.

• 10:06Alex Kantrowitz?

  Right, exactly. It's almost like it. It seems like there is a chance that the novelty has worn off and now we're really waiting for what's gonna happen. I mean, Character AI, you know, is another startup that raised at a billion dollar valuation that you could like to speak with Thomas Jefferson or like historical figures. And I really haven't seen anybody using their their product at all. And it's not charting as far as I can tell.

• 10:29Speaker 01

  Thomas Jefferson is not that popular these days, in case you haven't been paying attention.

• 10:34Alex Kantrowitz?

  Right, no, we have to obviously cancel him. But, um, but, but seriously, so we're, do, uh, do you think I'm off base here saying like it's a kind of this iPhone moment without the iPhone product? Or am I being impatient?

• 10:45Speaker 01

  Yeah, I mean, I, I don't, you know, I'm, I'm bad at sort of predicting the future for sure. Yeah, I, I think that like the, the jury kind of, or you know, what smart people seem to say is like the jury is out on whether or not this. Uh, let, let's even assume that generative AI does become a huge thing. Um, and, and put aside the question of whether we're all just getting too excited by a chatbot.

• 11:09Alex Kantrowitz?

  That's a good question, though.

• 11:10Speaker 01

  Oh, yeah, it's definitely a good question. Like, I mean, it's, it's, uh, you know, it, it can't be used for, for very much specifically. Like, it, it gives you, you ask like, how many CEOs of credit or UBS have there been in the past 10 years? It gives you the wrong answer, uh, which is a real life example I did. Um, and I made up some quotes for, for Masa when I was trying to get it to help me on a story.

• 11:32Speaker 01

  But so put that aside and, uh, you know, I think there's, then there's a question like, well, does it actually?

• 11:40Speaker 01

  As, as venture capitalists would say, does it have, do you have a moat? Is there any difference between all these companies that are doing it? And, and I really don't know enough about the technology. There's a lot of people who would be able to answer that pretty quickly. But like, is there anything that distinctive, uh, in, in terms of, uh, if, if we fast forward a year? Will essentially everyone have a pretty similar product to, to OpenAI? And, um, you know, if the answer is yes, then, or if there's three companies with the same product? Then, uh, you know, it's a lot harder to see how, how you sort of make money off that. And then there's, it's complicated because it really does open up a whole bunch of new potential verticals.

• 12:23Speaker 01

  Uh, or, or sort of areas that, that you can go into and it's hard to sort of play that chess out.

• 12:29Alex Kantrowitz?

  Now, it's interesting because there does seem like there's a bit of a bifurcation among VCs. And I wonder if this is the case that you hear from the ones that you speak with. But some are like all in on AI. And we're going to talk about SoftBank in a minute. That's one of them. But others are like, I'm not even touching this stuff. So Keith Raboy, who is a VC, one of the big Miami crowd, was popping off on the fact that he doesn't care that AI companies aren't starting in Miami because he doesn't want to invest in them anyway. And he said this on Twitter and I said to him, do you think there's no major business opportunity there or just too competitive? And what he says is there's no venture capital returns there in generative AI. Very interesting. I'm kind of curious what you think, you know, what you think from the VCs that you hear about that don't want in on this. Like, what's their rationale?

• 13:12Speaker 01

  Yeah, no, that's a pretty interesting thought. I have not explored that in reporting. But, um, but like, I guess the general thing that's happening is, you know, and maybe another way of saying what he's saying is like, the valuations have gone from like zero to a zillion overnight. And that, that means that, that, yeah, it's, it's even if you pick a winner, um, like, you know, say you invest in OpenAI right now and OpenAI does, does win. They're worth what, like $25 billion? Like, what's the expectation that, that, you know, in 15 years do they, or 20 years, do they go to be a $100 billion company? That would sort of be at normal risk level?

• 13:54Speaker 01

  Like, are they, uh, there's pretty high risk that won't happen. Is it likely to be a $250 billion company because they came up with the first chatbot? Like, I don't know, maybe. But they, like, that's, that's, there's not too many $250 billion companies. Um, and, and so for VCs, that's sort of that level. They often are looking for like, yeah, 10x return, um, maybe a 5x for, for that sort of stage of the company. Because, uh, you're, you, there's, there's only so many, um, you know, companies that are going to merge. And like, you hope that one's going to win and sort of pay off the other bets of similar risk. That's sort of how that game works. So yeah, like, so that's the way of saying when you don't, when every company that has dot AI

• 14:39Speaker 01

  after it is suddenly worth, you know, over a billion dollars, then it becomes really hard for to play the sort of the VC game, which involves spreading 10 bets around and hoping that one does really well up from basically nothing. So it's hard to do that when you start at a sort of mature valuation for a mature company.

• 15:01Alex Kantrowitz?

  Right. And I think the crucial thing that it's done for venture capital and startups right now is it's given them all a story, a story to go to LPs and say, even in a time of higher interest rates, please trust us with your money, a story to go to venture capitalists and say, you might be sitting on a lot of dry powder and being very careful about where you're going to make your bets because you need to justify to your to your LPs. But because we're an AI company, that's where you you make the bet. And maybe that's sort of the shot in the arm, because it did seem all throughout at least 2022 that like we were about to head to a really bad place in terms of like startup investing and venture capital, where it was like, going to dry up. It seems like this has been the story that's reinvigorated it or given it reason to continue.

• 15:41Speaker 01

  Yeah, or at least something to talk about on Twitter. Like, I mean, you know, remember that there's, you know, X thousand, you know, very valuable or companies that raised very large amounts of money out there that that would struggle to suddenly convince anyone with a straight face that they're a generative AI company. So I mean, you have something like, you know, a trillion or so of value companies that are not AI companies that were funded by sort of the ancien regime. And they're they're still in trouble. That's not changing. But in terms of, yeah, venture capitalists are like, you know, don't ask

• 16:24Speaker 01

  me about that, that I just spent, you know, the world, the largest fund I've ever raised on, they're all be like, because now over here, things are just going to be dandy, which which could be true.

• 16:37Alex Kantrowitz?

  Are you talking about Andreessen Horowitz?

• 16:40Speaker 01

  You know, Andreessen certainly seems to be talking a lot about AI and less about crypto these days.

• 16:47Alex Kantrowitz?

  Almost zero about crypto.

• 16:48Speaker 01

  Yeah, there's not as much coming on the A16Z podcast about Web 3 or NFT. I mean, there were like numerous episodes of that thing last year about NFTs or two years ago, I guess. And now it's sort of like crickets on that thing where that had completely, you know, the fund was trying to convince the world that the entire internet was going to change to this weird tokenized, energy-intensive thing.

• 17:16Alex Kantrowitz?

  So putting a bow on this, do you think we're going to see some IPOs? You know, because now the valuations in the public markets are better. Maybe for big tech, but I don't know, maybe not the Ubers.

• 17:26Speaker 01

  It really depends, like the overall, like the tech market isn't good. And if you, you know, compared to six months ago, and so if you strip out Google, you know, the big stocks, it still sucks. So if you were making, you know, a random, you know, shoe that you sold online to venture capitalists and think, and they gave you lots of money in 2021, like I don't think you can IPO tomorrow and get anything close to what you want. But what we are seeing, maybe this sort of segues to another thing you wanted to talk about,

• 18:08Speaker 01

  is if you do have an, you know, an AI tie-in, then it's probably a good time. And so SoftBank, for instance, is planning to, or, you know, appears to be planning a fall IPO of ARM, which is the chipmaker that it bought for 32 billion back in 2016.

• 18:34Alex Kantrowitz?

  Right, and it's almost doubled in in value since then. So let's let's jump into the SoftBank. Um, well, you we'll talk about it, but let's jump into the SoftBank topic. So you have a great story out in the journal recently about um how Masayoshi Son, who runs SoftBank's Vision Fund, uh, mentioned AI more than 500 times in quarterly and annual results presentations between 2017 and mid 22, 2022. Yet, out of the 26 generative AI startups valued at more than 1 billion, SoftBank's only invested in one. I mean, how did you miss that?

• 19:12Speaker 01

  Um, yeah, it even gets a little worse. Like, they don't have, uh, they they basically missed, you know, there there's this huge public market frenzy for AI. And then they they basically don't have any exposure to that either. So um, none of the, they have like 35 companies that are public and and basically none of them um are sort of caught in that wave, largely because it is just these uh, top few big ones. Uh, a sort of funny twist of history is that they had, like, at one point, they owned like 4.8% of Nvidia uh, back in 2017, and they spent like 4 billion on it. And uh, then they sold it in 2019, and it is up 10 times since then.

• 19:57Alex Kantrowitz?

  Unbelievable. How do, yeah, so so talk us through like, is it is this just like, I mean, they knew where it was going. They just didn't, they, I guess they didn't have the conviction to hold Nvidia.

• 20:08Speaker 01

  Oh, it's painful.

• 20:09Alex Kantrowitz?

  Nvidia wasn't talking about AI or?

• 20:11Speaker 01

  The, no.

• 20:11Alex Kantrowitz?

  How do you miss, how do you miss this bad if you think that this is so important?

• 20:15Speaker 01

  It's painful. Like, if you go back to their their slide deck, they showed investors uh, in public back in 2017 when they were buying Nvidia. It's like, what we, you know, why are we doing this? And it's like Nvidia makes the chips that power the AI revolution or something like that. It's like, so they actually got it right.

• 20:33Alex Kantrowitz?

  Yeah.

• 20:34Speaker 01

  And then they sold. So Nvidia, you know, that was a miss. Now, in general, I think what this shows is sort of two things. It's it. It kind of shows the the craziness about timing in venture capital. So basically SoftBank has been, you know, more or less investing, you know, approximately gobs of money per quarter since 2017. Gobs of billions. And then in mid or, you know, early 2022, they just shut the spigot off. They're like, oh, well, now that valuations are down 70%. Or, you know, maybe 50% by that point.

• 21:18Speaker 01

  It's like, we we realize it's a it's a bear market. So it's a bad time to invest. Now, what sort of any academic will tell you, or or even a lot of venture capital firms is you do really you want to be consistent. I mean, you can go up and down a little, but like a lot of the best ideas, because they're so cheap, or a lot of best venture capital wins, come at bad times because prices are so cheap. And, you know, then also there's like changes that you don't really see. So like Airbnb, Uber, Facebook, all of those were were sort of born out of of venture capital winters.

• 21:59Speaker 01

  So anyway, they they shut the spigot off. At the very time they shut it off, that's when a lot of these these AI companies got funding rounds because VCs were trying to find something new that to get excited about. And then OpenAI released ChatGPT. And so then the the like the the lemming like frenzy goes it goes crazy and everything jumps up. And so SoftBank's competitors have spent the past five months just showering all these companies with or six months with with money. And SoftBank has still been sitting there biding its time. And so they they missed sort of a chance to get a big, quick return. And then also have missed the chance to get in. These companies' valuations have sort of been going up day by day.

• 22:43Speaker 01

  So that that's one answer. And then then the other sort of, you know, chunk of it is, you know, they said they were were investing in AI. But they weren't, you know, the money was going to companies that convinced SoftBank that they had AI, like WeWork and Compass and Greensill, which was essentially a alleged fraudulent lender. You know, I don't think the alleged fraud has much to do with AI, if I recall the court docs. And what are some other, Oyo Hotels, I mean, you know, basically any company. They said it was every company was about, you know, leveraging AI.

• 23:24Speaker 01

  And then you look today and maybe they're using AI, but it isn't really reflected in sort of the share price.

• 23:32Alex Kantrowitz?

  Right. There was a line that they had about like a large chunk of their companies were using AI in their operations. And it's like, hold on a second. You can use AI in your operations, but it doesn't mean you're an AI company. For instance, if I use ChatGPT to help me formulate story ideas, I could call a big technology an AI-powered company or a company that uses AI in its operations, but I'm not an AI company.

• 23:57Speaker 01

  Well, I would like to write you a check.

• 23:59Alex Kantrowitz?

  Exactly. I mean, it's a huge difference. You can sort of lie to yourself when you have this thesis and you're a lot of money and you're trying to jump in and jump out and try to deploy it. And that's kind of seems like what happened with SoftBank.

• 24:12Speaker 01

  Yeah, I mean, there is a company that is just, they can't really catch a break. But like, I mean, they are a, you know, sort of since 2007 or so, which was the last time they made a really good investment, which was really good. They have.

• 24:33Alex Kantrowitz?

  Which was?

• 24:34Speaker 01

  That was, 2006, it was the buyout of the Japanese arm of Vodafone, which has given them billions of dollars to play with, probably tens of billions.

• 24:46Speaker 01

  You know, they really haven't been like made many great investments since then. And a lot of what they've done is taken the winnings from their past successes and lost them, making peak of the market investments or, you know, many peak of, they made many peaks of their own by with like WeWork and just flushing it down the toilet. So, um, yeah, it's, uh, I, I think, you know, the numbers we use is they, they basically, they spent a hundred forty billion dollars on at least two funds that were rhetorically fully devoted to AI and they basically have nothing to show for it.

• 25:28Speaker 01

  Now, the, the, the big caveat there is that ARM, the chip maker I was talking about a minute ago, um, that's, you know, if you ask the analysts six months ago, they would have said ARM would probably IPO for like, who knows, forty billion dollars. Now they're thinking like sixty, seventy. So it's, it's actually a pretty bad return over seven years. Like that's, that's not a good return. It's, it's, it's a bad return. Um, we're certainly below the, the market and below other chipmakers. But, um, you know, I didn't make thirty billion dollars in six weeks. That there were six months like that, that's pretty hard. So that's pretty good. Like that's really helped SoftBank's stock. It's, it's a huge amount of extra money that they can, they can play with.

• 26:13Speaker 01

  Um, so, uh, you know, in that sense, they, they did, uh, they have a big win, but it, it just wasn't, you know, sort of the part of the, the startup investment frenzy that they, they were doing.

• 26:25Alex Kantrowitz?

  How much does SoftBank matter? Like in terms of, are they still the biggest, biggest VC firm? Like, do they set the agenda for others?

• 26:32Speaker 01

  It depends how much they're gonna invest. And, and right now they're investing nothing, so, so they don't matter in that sense. Um, it, it were virtually nothing. If they start, um, opening the tap again, then they can really, you know, the, the sort of move the market, which, which we've seen a few times before since twenty seventeen, when they launched the first vision fund. And so, I mean, it's just a flood of money that really does change the dynamic, especially depending if they, you know, target at a specific area or not.

• 27:04Alex Kantrowitz?

  I know you're not the gonna predict stuff, but just to wrap this section off, it seems like in a way, private investment has been saved in this moment by the AI narrative and by the stocks that have gone up in the public sector. And perhaps the reports of this era's demise of frothy valuations of big checks before you have a product, maybe that was premature, or maybe they're still gonna keep kicking as long as they can.

• 27:31Speaker 01

  Yeah, venture is this, it's like, it is the hurdiest industry I can ever think of. And so you have a lot of money sitting around there. And so then, when I think they saw some green grass like spread out of the snow, people just like rushed to it. And so that's what explains a lot of the hyperbolic enthusiasm for AI, beyond just the reality that it is really cool to create a limerick out of your email.

• 28:11Alex Kantrowitz?

  And this is why, this is where I'm gonna take Mas' side on this, because maybe he does have it right. Like, who cares about all these generative AI companies? The man says he's been investing in AI since 2017. Maybe it is the stuff that, I mean, I know I just gave him crap for this, but maybe it is these companies that put AI into play on in healthcare, or in construction, or even in the restaurant industry, and do it in a way that like can even help them inch past their competitors. Maybe that's where the real opportunity is.

• 28:40Speaker 01

  Yeah, I mean, it is legitimately early, you know, as to the question of whether the Vision Fund One is going to make money on that. I mean, they've been selling down a lot of their old holdings. So like, they don't own Uber anymore. They're, you know, a lot of them have gone bankrupt, or some of them. So, but, but yeah, like, it is very legitimately early. And, you know, there could be a transformation that sort of unlocks one of these older, mid-sized money-losing companies. But, you know, I would sort of bet like history's more on the to the incumbents, or sort of like the upstarts that win, as opposed to the sort of like adolescent or middle-aged companies.

• 29:23Alex Kantrowitz?

  Eliot Brown is here with us. He's a reporter at the Wall Street Journal and the co-author of The Cult of We, WeWork, Adam Neumann, and The Great Startup Delusion. In the second half, we're going to come back, we're going to talk about something that's been big and brewing under the surface, which is the risks in commercial real estate. Very interesting story that Eliot has written recently, and we also have some more stuff to talk about in the second half, so please stay with us. We'll be back right after this. And we're back here with Eliot Brown. He is reporter at the Wall Street Journal and the co-author of The Cult of We, one of my favorite books about tech. People might say, oh, WeWork's not a tech company. It's a tech book. One of my favorite books that I've ever read about tech. Go pick it up if you haven't read it before. Eliot, also want to say thank

• 30:02Alex Kantrowitz?

  you. You're pinch hitting here in a last second, July 4 podcast episode. So this is the second time you've done it this year, and I just want to say I'm grateful for it.

• 30:13Speaker 01

  My undying patriotism.

• 30:16Alex Kantrowitz?

  Yes, exactly. You are, you're in England, so you're kind of, you're in the place that we broke off from. But anyway, it's in the past. It's in the past. Let bygones be bygones.

• 30:28Speaker 01

  Too soon, Alex, too soon.

• 30:29Alex Kantrowitz?

  Did you see that Joe Biden said at the end of one of his speeches, he goes, God save the Queen? Anyway, talk about commercial real estate. Okay, so the, one of the other things, one of the other big vulnerabilities in the economy, and something that you've looked into, is the fact that commercial real estate might be in trouble. Now, one of the things that people have been talking about is, okay, post pandemic, people are going to be working from home, and they're not going to come back to the office, they're going to break their leases, commercial real estate holders are going to be left holding the bag, they're going to go to banks, they're going to default, economy falls apart. And maybe that's going to happen, but there's also like another side to this, which is the debt that they hold to build their buildings. And in an age of rising interest rates, it's

• 31:13Alex Kantrowitz?

  less safe for them than it's been in the past, where they've been, they've been operating with no constraints, and now there are real constraints that are being placed upon them, which might shake up their business, which is something I didn't fully appreciate until I read one of your most recent stories about this. But do you want to just take us through exactly what's happening in the commercial real estate world right now, and how concerned we should be about the potential for that space to collapse, or at least, you know, maybe implode a little bit?

• 31:38Speaker 01

  Yeah, it's actually pretty interesting. So I'd covered property before I covered venture capital. And so, you know, I've been in New York, then to San Francisco, and now I'm here in London in this sort of broad finance role. So it's easy to sort of at least like pick up on some of the commercial real estate stuff. And yeah, I mean, that is becoming the sort of deflating bubble, popping bubble of the moment. I'd say it's, you know, there's two very separate, but, you know, when their powers combined, dangerous forces going on.

• 32:16Speaker 01

  So one is pretty familiar for folks for the past few years, which is that, you know, work from home has lingered and is changing the desire to be in the office. And so that means like offices are a huge part of the commercial real estate sector. And, you know, the biggest. And they, when you have lower occupancy, that means lower rents. And when you have lower rents, that means that landlords don't get as much money. And then when landlords don't get as much money, that means that they might not be able

• 32:56Speaker 01

  to pay their loans, which means foreclosures and sort of, you know, a lot of bad things. So that's, you know, point number one. And then point number two is just completely related to interest rates. So a lot of landlords borrowed gobs of money when interest rates were really low. And if you had a good, you know, office building in Manhattan, you could get, you know, a 3.5, 4% mortgage. And now mortgage rates are higher and, you know, it's probably 6% or 7%. And that costs you a lot more money.

• 33:38Speaker 01

  And usually when you do it, you, you know, would pay for that with the rents coming in. You'd pay your mortgage off with the rents coming in. And so what's happened now is the rents are going down. And the amount you owe the bank will go up. And so it either goes up just on a monthly basis because it was a floating rate loan. Or, you know, more likely when the mortgage comes due, you need a new mortgage to replace that. And rates are higher and the bank's much more skittish and sort of everyone loses. So, yeah, there's a worry that because these things happen slowly,

• 34:19Speaker 01

  it's commercial real estate is, takes a, as I learned last time when I started covering this, it's an iceberg or a Titanic, you know, slowly sinking or aircraft carrier. It takes a while to turn. But there is a worry that it'll sort of cascade. It hurt a lot of landlords, then hurt a lot of banks. And then our banking sector is really dependent on, on sort of the strength of the commercial real estate market, especially the regional and local banks.

• 34:48Alex Kantrowitz?

  So why don't you tell the story of one firm that you profiled, SBB out of Sweden, and what's happened to them in this moment?

• 34:55Speaker 01

  Yeah, so, because I'm in London, you know, looking more toward Europe. And my editor actually had the idea of this, sort of profiling this guy in Sweden, who became known as the, was declared the real estate king of Sweden. And he built out of nothing in a really short amount of time, a very, very large commercial real estate company. And it wasn't interested in skyscrapers or offices. It did this weird thing where it was essentially buying town halls and police stations and preschools from, you know, regulated apartments from the public sector and other buyers,

• 35:39Speaker 01

  and then leasing it back to them. And so it, you know, became, yeah, I think it was like eight, in the stock market, it was worth like 16, 18 billion at its peak. And they had borrowed, this whole thing was financed by debt. And there was this really, really kind of frothy bond market in Sweden, where, you know, seemingly it would give anybody money at really cheap levels. And the whole overall...

• 36:11Speaker 01

  Annual interest rate that the company was paying at the end of 2021 was 1.5%, which is just wild. I mean, Alex, like I would not, you know, I would demand higher rate for you if I gave you $10. Like it's, it's like that, that's no friends rate. It's, it's, it's just really low. It's basically nothing. And so, you know, now you'd probably need, one would probably need, like I was saying, like five, six, seven percent. So, lo and behold, the, the real estate built on very cheap debt suddenly had a problem

• 36:50Speaker 01

  when the price of debt went up. And, you know, since then, the empire, when we last wrote about it, it was wobbling. They, they were trying to sell things and, and, you know, not get a debt downgrade. And then they did get a ratings agency downgrade of their debt to junk and everything basically fell apart. So that the CEO, the, the real estate king, Ilya Balan, is, is out of the company he founded as CEO at least. And, you know, there's sort of like lawsuits flying and, and they've been trying to, you know, fire sale their,

• 37:30Speaker 01

  their, their properties and, and the stock has, has gone sort of a lot closer to zero. So that one sort of fell apart very quickly. I, I think the worry is that there's going to be, there could be a few of those and, or lots of those in the US. And, and one of the things that happened in commercial real estate is, is it's sort of all interrelated. It's like there's a lot of similar buyers and sellers. And so, you know, if one guy can't sell his building and the building's value plunges, then everyone's like, oh, I guess my building is not worth much either. So it can, it can cascade.

• 38:04Alex Kantrowitz?

  Yeah, it's a little scary. I mean, if you think about where like the real shock can happen. We've already had banks go down without any of this stuff falling apart. So about where the next shock can come from. Sorry?

• 38:15Speaker 01

  Yeah, you like a bunch of tweets can cause a bank to fail. Imagine what happens if a real estate collapse happens.

• 38:21Alex Kantrowitz?

  All caps, all caps is the problem. Hey, what do you think? So this, I think, you know, tomorrow, the next day, the new Facebook competitor to Twitter is coming out. Excited to use that?

• 38:32Speaker 01

  We'll see.

• 38:33Alex Kantrowitz?

  Apparently.

• 38:33Speaker 01

  Yeah, no, I at least want to give it a whirl.

• 38:39Speaker 01

  Again, bad at predicting the future, but I do remember I got very excited when Google launched Google Plus? Was that what it was called? It's on social network because it seemed, whatever reason, I'd like to is like, oh, they like this more than Facebook. Tech companies aren't evil.

• 38:58Speaker 01

  And, yeah, that bombed pretty quickly. So who knows?

• 39:05Alex Kantrowitz?

  Yeah. And I think the thing is that with Google and Google Plus, what they did is they wanted to design like, like basically imagine it from the beginning. And actually, one of the things that we've seen in social media is sometimes the best product is somebody else's product, right? So Facebook is the master of this.

• 39:20Speaker 01

  Yeah.

• 39:21Alex Kantrowitz?

  Sorry?

• 39:21Speaker 01

  They copy it to a T.

• 39:23Alex Kantrowitz?

  To a T. Facebook, I mean, Facebook has done this successfully with Snapchat Stories, with TikTok, on Reels. Not, I think people who are underestimating what's going to happen with this new product threads are failing to comprehend the the long history that Facebook has of doing a very good job of copying and then implanting into their products. And there's an added level right now because of the Zuck, Elon Musk animosity. And I think that if he was thinking, if Zuckerberg was thinking about, hmm, how much should I actually push this in the product? Now, after Elon Musk has, you know, said that he would, you know, beat him in a steel cage, I think that this is going to be front and center in the product. That's just my my speculation. We'll see what happens. It's gonna be fun.

• 40:09Speaker 01

  Yeah, I'm looking forward.

• 40:12Speaker 01

  We will, we can tweet at each other or whatever.

• 40:15Alex Kantrowitz?

  Yeah, I'll thread at you.

• 40:18Alex Kantrowitz?

  I'll threaten you.

• 40:19Speaker 01

  No, I get it now.

• 40:22Alex Kantrowitz?

  Actually, really, if that's the case, it really is a one to one copy of Twitter. Okay, so WeWork, one last thing about commercial real estate, $553 million market cap. What do you think about that?

• 40:34Speaker 01

  Um, yeah, it's, uh, what's their stock at, like 22 cents?

• 40:40Speaker 01

  Um, so, so.

• 40:41Alex Kantrowitz?

  And how much did they raise? How many billions?

• 40:44Speaker 01

  They, you know, SoftBank alone has, has lost 12 billion plus on it today. Um, its peak valuation was 47 billion. Um, so, uh, well, that's not a good look, is it?

• 40:59Alex Kantrowitz?

  No.

• 41:01Speaker 01

  I don't know what's gonna happen there. It's, it's, they've sort of been, um, you know, they were hit by the tech bust essentially. Were hit by, they, they were a creature and victim of the tech bubble. Um, and now sort of unwittingly have been, um, you know, uh, hurt by the real estate bubble or bust or whatever you want to call it. So, um, like they're, they're kind of chasing rents down basically. Like rents keep going down, but they keep having these fixed costs. And so, and not, there's not much demand for any office space. And so you're like, well, why wouldn't I just rent this random office from, from this tech company that left it? Why should I pay you for your kombucha?

• 41:40Speaker 01

  Um, and, uh, I don't even know if they serve kombucha anymore.

• 41:44Alex Kantrowitz?

  Last time I was there, they did.

• 41:45Speaker 01

  Yeah.

• 41:45Alex Kantrowitz?

  Vibes were good. Salesforce, WeWork, the vibes are good.

• 41:48Speaker 01

  Uh, yeah, I mean, it's, yeah, look, it's, it continues to be nice office space. It's like, the problem now is sort of the basic business model of like, well, they're, they signed leases with landlords at one rent and then they charge you a higher rent. But, you know, it turns out rents are falling and they're still stuck paying the higher rent. Um, so they have to renegotiate that. It's hard. It's time consuming. Meanwhile, rents keep going down. Um, so, um, not a great place to be right now.

• 42:18Alex Kantrowitz?

  So buy the dip is what you're saying?

• 42:20Speaker 01

  Buy the book. Buy, buy, buy the book.

• 42:25Alex Kantrowitz?

  I'll take the book and the dip. Last thing I want to talk about, I want to bring attention to a very important issue that's, you know, personally impacting you. Evan Gershkovitz is your colleague. He is currently imprisoned in Russia. I wanted to see if you could, you know, share with our listeners both a little bit of the details of your friendship and, and what's happened to Evan. If you could.

• 42:49Speaker 01

  For sure. Yeah. A colleague and friend. So, so I met Evan when, when I, well, I guess to start out, for those tuning in, it's, yeah, Evan is our, one of our Russia correspondence reporters and he was captured in March by the Russian FSB, you know, KGB or whatever, their security services and, you know, detained on, on charge of espionage, which, you know, for the record are completely untrue.

• 43:29Speaker 01

  And so he's basically being held hostage by Vladimir Putin to, you know, presumably as a bargaining chip with the US or the West in the war. So it's, it's extremely surreal. He, we became, we became friends pretty quickly. He, he and I moved here to London at a similar time. So basically I moved here because I was moving here for, for work in March 2022. Evan had just gotten here a few weeks earlier because at the time he needed media accreditation to work in Russia.

• 44:09Speaker 01

  And meanwhile, while he's waiting here at, at our big office here, he, which, and he had just been hired by the Journal, he, you know, war breaks out and, and so, you know, then he's sort of stuck here. So, you know, we'd, we'd get pints together, we'd get cheap Indian food. He, you know, sort of quickly.

• 44:33Speaker 01

  He struck out, struck me as somebody who just like really quickly just slid right into the newsroom and this journal is like a really hard place to figure out. It's, you know, there's a zillion different bureaucracies you have to navigate and, you know, some sharp elbows and Evan just was this smiley presence who I just saw him sort of like bounding around the newsroom in his New Balance and like the one sweater he'd wear every single day. And I was like, who is this guy? And so, I don't know, we just became friends and he's super inquisitive, he's super funny. He loves to gossip, he's a real chatty Cathy.

• 45:15Speaker 01

  And, and so, yeah, I mean, he's just a really magnetic presence, anyone would sort of love him. And then, you know, he, starting in the summer of 2022, started tiptoeing back into Russia. I mean, in part, I think he missed it, but like I think he knew it was a high risk thing to do, but, but is, yeah, he's a very committed journalist and like to the sort of the reasons that any good journalist is. I mean, he thinks that people need to know things and that his job is to inform and there were very few people willing, few Westerners, willing to go into Russia, willing or able to go into Russia to do on the ground reporting.

• 46:00Speaker 01

  And, and so he was doing that for, you know, two, three weeks out of five, until he was, until, you know, he was detained and imprisoned where he sits now.

• 46:15Alex Kantrowitz?

  And so, I guess it's hard to say hopeful or not, but just talk a little bit about, you know, it seems like there's been some progress and, you know, what do you think people, I mean, of course, we have to, in these situations, it's very easy for people to sort of disappear. And so it's important to bring attention to this and that's what we're trying to do here, but. Curious like if you could give like a sort of where you where you think his case stands right now and if it is is just awareness the thing that people can do or shows of support where where like if people are interested in helping him.

• 46:50Speaker 01

  I I mean.

• 46:51Alex Kantrowitz?

  What do they do? I know it's limited.

• 46:52Speaker 01

  Yeah, sure, like I you know, I mean, with with the disclaimer that there there's a very small crumb of of news literally today. Um, there we basically haven't heard anything from the Russian side with with that asterisk uh since his capture other than that, you know, they're charging him as a spy. He's going to go through a long trial. Um, and so um, our sort of approach has been here at the Journal, here in in sort of, you know, the press uh in the West um to to yeah, keep him front and center in in in the public eye because uh at least the thought is that that um, you know, it it it needs

• 47:37Speaker 01

  to be on the the the tops of minds of of uh Biden, the the the West, um, you know, EU NATO countries uh whenever the time comes to to negotiate with with with Vladimir Putin. So um, you know, because we think it's the most important thing ever and, you know, I I would uh, yeah, like say we should trade the whole treasury if if need be for for Evan, um, but they don't put me in charge of making those decisions.

• 48:09Alex Kantrowitz?

  Yeah.

• 48:10Speaker 01

  So uh, that's sort of the approach and and sort of, you know, we wear like Free Evan pins and T-shirts and and put Free Evan signs in our windows and and sort of hope that that people know who he is because, yeah, it is, like you said, it's it's really easy to just, you know, forget about it because there's not really much news. Um, though, uh, that said, there there was, uh, you know, this basically.

• 48:35Speaker 01

  No information, but it's something. You know, today, there are reports out of Russia that, you know, Vladimir Putin's spokesman, I believe, said that there are certain contacts between the Russian state and the US over Evan. I have no inside info on what that means, but, you know, that's something. And up until now, they've basically been saying, you know, there won't be any negotiating, or signaling there won't be any negotiating until he's convicted and sent to, you know,

• 49:13Speaker 01

  prison or labor camp, a penal colony, and which can be a very lengthy process there, especially on espionage charges.

• 49:24Alex Kantrowitz?

  Yeah. Well, I'll say this, our hearts are with him, and we hope he gets freed soon. It's not a, should not be imprisoned for doing journalism, no matter where you are in the world, no matter what the situation. So, appreciate you sharing a little bit about him. And I think like you're, you're, you're coming on here and talking about who Evan is as a person, right? It's sort of like, gives a little depth to like the people, the person that we see in the news. So, I appreciate that.

• 49:54Speaker 01

  Yeah, and I'm more than happy to, and if anyone, like, he likes getting mail. And so, you can go to, just Google sort of like Free Evan Gershkovitz. I think it's freegershkovitz.com, but Google will correct the spelling for you. And, you know, his friends who are running that made it, make it super easy to send him a letter, and they, they, they work on the translation and sort of, because it has to be in Russian when it arrives there. And, you know, he just, he likes getting mail, likes sort of hearing about, if, if stories he wrote touched anyone, because he wrote some really good stories, then that's a nice thing to mention, too.

• 50:39Alex Kantrowitz?

  Eliot Brown, thanks so much for joining.

• 50:41Speaker 01

  Thanks for having me.

• 50:43Alex Kantrowitz?

  Okay, thank you. Please come back. Thanks, everybody, for listening. Thank you again, LinkedIn, for having me as part of your podcast network. And we'll be back on Friday with another show, breaking down the week's news. We'll probably have a recap on what happened with threads. Plenty more to come. We have a bunch of really amazing interviews coming up the next few weeks. Flagship interviews, as well as our Friday breakdown, so please stay tuned for that. If this is your first time listening and you want to hit subscribe, that would be awesome. If you're a longtime listener and want to hit the five-star rating on Apple Podcasts or Spotify, that would go a long way in helping us bring some great guests on. We hope you do that. All right, that's going to do it for us here today. We'll see you next time on Big Technology Podcast.