everybody, we're here with cat is Eric newcomer. I'm here with Tom and Katie. And we've got Rick heights, who is in FirstMark. Capital, we were talking about the markets. I was like, Oh, can you just come on the podcast? And actually tell everybody this? Because I feel like, yeah, you know, I tried to, for the newsletter, you know, accumulate a bunch of views from smart venture capitalists about what, you know, the public markets mean for the private markets, because they're not always sort of one to one. And Rick is one of my go twos and sort of translating, I think, you know, talks to smart people in the public markets. Anyway, Rick, thanks. Thanks for being here. Hey, thanks for having me out. This is awesome. longtime listener. So excited to be part of it and excited to be on beyond the record for
Yeah, I mean, what is your high level takeaway? Or I mean, do you think this is, I mean, this is the hardest prediction to make. But I mean, you think this will stick? I mean, I think a lot of people we saw, you know, march 2020, where it seemed like that, that was the end of the world. And then everything rebound, saw
somebody tweeting out that Bill Gurley has correctly predicted five of the last two recessions. So there's certainly no shame in insider trading a bad period. But, uh, what's your what's your honest take?
Yeah, I think Bill Gurley I, yeah, I can make I'm not gonna make predictions about grilling, but I will make slightly more difficult predictions about the market, I think we've entered into a new normal, I, I'm not going to call the bottom. Because I think that's hard to do. And there's too many things at work here. But I think we've entered into a new period where capital is not free. And it's going to be more and more expensive, even as the tenure is kind of popping up. Over 3%. People are saying, oh, you know, this is, this is an unfathomable, and we're still at historic levels. So you're gonna see dollars kind of trickle out in a macro sense out of risk categories out of the liquids, and into more liquid, you know, fixed income, where they've been before. And that's just going to recalibrate the supply and demand for venture capital, and therefore make venture capital more expensive and more competitive for everyone. Could Could
we maybe back up for a second here and just maybe set up for listeners, like from a macro economic standpoint, or, you know, a financial industry standpoint? What were the parameters and environment that kind of led towards the last 10? However, many years of venture capital investments, I mean, like, what exactly were we working under that allow for so much venture capital to enter the industry, and when you say is, you know, cheap money.
So compared to compared to historic levels, when I was in the 90s, when I was in college, folks said, Hey, you had to have 10% in cash, 60% in bonds, and 30% in equities, all equities, and a small portion of that could be illiquid equities. And what happened was, both with stimulus put kind of, in the early 2000s, post that recession in September 11. And then an increasing stimulus, including quantitative easing, post, the financial crisis, we were seeing is unprecedented new lows in the in the fixed income market in the high yield market, and what you could get for your risk free rate. So your cost of capital, decreased tremendously. And so if you were an institutional money manager, if you're a pension fund a foundation, someone like that, you said, Well, if I'm not getting any yield and fixed income, what can I go and put money in to get yield. And as you know, as, as more of that money kind of trickled out of fixed income and trickled into equities, you know, some portion of that trickled into venture capital. And what we saw was, interest rates continue to fall. And that was kind of a self fulfilling prophecy, where, you know, it culminated in the early days of the pandemic, I think, April or May of 2020, where interest rates were effectively zero here and negative in large parts of the world. As correctly, the Fed said, Hey, we need to stimulate this and we need to figure out what's going to happen on the other side of this pandemic, we want to make sure the economy doesn't crumble, as well as everything else going on. So money effectively became free, or it were even negative yielding. And therefore people want to put money in whatever was happening. And there was no discount for companies that weren't making a profit but making a profit later, and therefore tremendous dollars transferred into risky but illiquid venture capital and the startup ecosystem on the whole dollars
from where by the way, I mean, where did you see kind of a new class of investors during that period start to enter enter the you know, investment or LP or what Whatever stage market,
you're seeing it from everywhere. So, you know, there, there were firms that were allocating more dollars into venture capital or private equity as a liquid, you know, people call it alternatives, liquids, VCP was showing better returns, right? Because you're seeing that same supply demand demand dynamic happening among the LP class. And we're seeing worse returns among fixed income. So with that gradual transition, and that's a self fulfilling prophecy, right, the more money you put into a small asset class, the more that asset class is going to grow. And the more it'll create yields. Therefore, as interest rates are falling on the fixed income side, and returns are growing on the venture capital private equity side, it increases that that transition or increases the velocity of that transit write
this down even more. I mean, if interest rates were low, people loved risky companies were what produces the best risky high growth companies, venture capital people flooded in to the private markets. And then the risky is companies raising a lot of money. So then the good companies, you know, sort of software businesses with high margins, were trading at extreme multiples earlier in earlier, because relative to sort of cash burning businesses, there was so much appetite to get in them that they drove valuation in such a way as well, yeah.
But yeah, if money has, if there's no risk associated with capital, and no yield required, people are just gonna dump more and more capital in and that could be startups or that could be crypto or that could be NF.
And that's kind of how we saw during, you know, the spring and summer of 2020, really up through most of last year, these companies raising these bonkers round, especially like fin tech companies at insanely high multiples. I mean, I was covering media during the time. So I was seeing this incredible rebound from, you know, initially, everyone fearing that there was going to be no money in advertising to an abundance of advertising and companies kind of artificially looking like they were doing really great. I mean, it was this kind of 18 month euphoria of what you're what we're talking about here, right? Well,
there's flooding flooding in the system, you know, the Fed was flooding the system with money, and therefore, there were more consumer companies being funded, who want to spend that money on advertising. Traditional companies were more than happy to spend money on advertising, because their threshold to return on their investment on advertising was much lower. So every you know, every part of the economy, dollars, were slashing around, and therefore, you know, everything was good.
Okay, let's, and just for context for people, the NASDAQ composite is down 24%. Right now, year today. Yep. And then as of today, it's down like 2%. So that I mean, and yesterday, I'm talking about Thursday, it was down and that terrified, everybody was down about 5%. So that's, that's, that's what God is scared. And just to highlight one thing, I mean, it is amazing. You know, if you're not in the finance world, it wasn't a pandemic, that terrified the stock market, it was the Fed moving to raise interest rates. So that is why this conversation routes around interest rates so much that that contrast pandemic, nope, markets are fine interest rates that drives company prices and everything. And that's, that's why we're sort of reacting at this moment. I mean, let's split it into like, with our private market focus here and what this means for the private market, sort of the bull case and sort of the bear case for, you know, in a good situation and a bad situation like to me in this in this, okay, things are gonna be okay. The okay market, is there still a ton of venture capital, there aren't sort of systematic risks. You know, they're, I don't know, what's, what's the bull case?
There's a bolt case is and I'm an optimist, right? So I'm always pulling for the bull case, I'm always optimistic about what's going to happen. So I want this to happen in the worst way. What you're seeing is that the digitization of every single industry, we're probably still in the early innings. Now you're seeing disruption happen in every industry, whether it's a shift to streaming and media or whether it's a shift to the Internet of Things in railroad cars. So you're seeing a gradual disruption of traditional business practices and disruption
in the most sincere way. I mean, people use Spotify Exactly. You're using Netflix, your parents use cable and you're like, what's wrong with you like there's a most people are still using cable TV there's still plenty of room for things to shift over to the disruption that most millennials already accept is as meaningful
exactly and people are finding jobs on their on their phone and they're and they're ordering food on their phone and all these things, which are not only disruptive, but are more efficient right that you're there's less there's less aspects of the of the activity chain and you know, traditional toll takers who are resellers are losing value, right? So you have to pay your cable company who would then turn around and pay ESPN for you to access ESPN. Now you can just go on your phone and subscribe. So a lot of this Are these elements of digitization are creating a much more efficient economy. And so all that's good, there's high return on investment. And you're we still we think we're in the early innings of that. And it's come in waves. And I think the availability of free money led to a lot of entrepreneurship, it's becoming democratized is becoming global. And we're seeing great ideas come from everywhere. So from a fundamental, most macro basis, digitization, and the push for entrepreneurship is making everything work better than it did before. And that's creating better companies than before. And those companies are also able to use completely new go to market channels, and reach more people more quickly than ever before. So if we started a company, and we knew we were looking for Chicago based pizza makers, we could go on Facebook or Google and advertise immediately to all the Chicago based pizza makers overnight. And, you know, therefore business has become better and more efficient. So that's a great tailwind there. So these companies are getting started. You know, there's also a much more evolved ecosystem in the funding of these companies. So they're seed investors, incubators, seed investors, series, a growth, all those things. And all each element of that call it financial activity chain has been well funded over the last period of time, you know, they're even the revolution, right. So the rest fund is able to deal with large parts of the countries that were venture capital deserts. Individual industry sectors have individual venture capital firms
are well capitalized. And everybody Sure, maybe maybe, you know, we hear about like D ones of the world, like tigers, like firms can either redirect to the private market, I'm sorry, from the private markets to the public markets. That's where it's most dangerous. Right? Right. That's right. And we're still talking about
the Brown case, and they still have tons. If you're Henry, or if you're it's hard not to talk
about the barricades. Yeah. So So
these guys guys have a ton of money. And you know, Tigers doing more at the series A and Series B level. So you know, you're seeing more dollars and more parts of the ecosystem than you've ever seen before seed
and a are still I would call them frothy are still right. I mean, would you say that I think
we've we've just begun to see valuation expectations reset. So usually, it flows back through the system, right? Because the feedback loop is longer, the farther you are, if you're if you're trading a liquid stock, you get feedback, every second of whether that was a good trade, if you're doing a seed, it takes you years to get feedback. And therefore this adjustment takes longer to get feedback into your cycle and decision making. So we're seeing the reset on pricing happen at the sea at the series A now and it'll probably happened in the season series over the next quarter. But you know, overall, the ecosystem from a very macro perspective is great. Companies are creating value. They're, you know, these companies are also more profitable sooner than ever before, as there's a bunch of tools become capital efficient. And it's a well funded activity chain to get companies from idea to the public markets in a relatively efficient way. That's the bull case. So go into the bear case, you know, there's more companies than ever before. And there's going to be a lot less capital. So they're, you know, as Eric said, in the in the growth stage in a later stage companies, there's probably 80 to 90%. down from last year, certain players have left the market completely, that were top 10 players in the private markets last year. Other players are down significantly. This is the third longest time without a tech IPO this century. I didn't know that just after, after the early aughts. And after the global financial crisis and
the big IPOs Coinbase. Robin Hood of 2021 are looking terrible. So yeah,
they're looking to and there's yeah, there's a hangover, so the people who bought the IPOs last year, which also because the crossover funds tended invested heavily in the privates last year, we're saying, Wow, the things I took out last year, I wasn't as smart as I thought these things are down 70% On average, and the things I invested in last year thinking they were going public this year, I'm either getting liquidity nor a valuation pop, I'm going to take a second and figure out where this market really is. So I'm just gonna sit I'm gonna sit and wait because it doesn't feel like I'm missing out on anything. As you know, I as everybody else is sitting on the market, I can invest in anything I want, including these these IPOs of last year that our onset. So there so the late stage market is completely pause with very few deals getting done. So just
to make that specific, if I'm a big investor and I'm looking at snowflake and Databricks snowflake is liquid, I can exit it, it's been marked down Databricks is you know, presumably still valued at whatever it was in August, you know of last year. And so are you really going to do a big growth round now obviously fundamentals you know how the company is actually performing matters. So there will be cases where people still invest in the private company, but you have to overcome sort of a huge, you know, this, the fact that you've really been marked down without that ever getting
a flip. I mean, for the first time in my career, you know, going back 2025 years, last year, there was a private company premium, meaning that people were willing to pay a premium multiple to get into private companies, where historically there was always a private company discount for, as you said, Eric liquidity, right. So you're able to if you buy snowflake today, and then side tomorrow, you don't want to be in data infrastructure, software companies, you could sell it, if you bought data, bricks, if you let around a data bricks today, you know, you're in that for a couple of years until they go public. And even after they go public, because there's a lock up and everything else. And with so much uncertainty, everything from a shooting war, to a resurgent pandemic, to political cross winds, you know, do you really want to say I'm going to lock up my capital for a year or two? And most people are saying no,
for all the main reason me the big question on the bear case, and this is sort of moving into Tom's world, is whether there will be a company that really like blows up or like particularly, even if they don't blow up, if there will be our expectations for what a company like Uber or Instacart. You know, we saw Lyft dropped by a third, right or earnings, this so called odo online to offline market, we've never the market, those companies have existed fully in this sort of bullish period. And we really have no understanding of what are the true pricing of this industry? And
seemingly overnight, I think that was what that was kind of incredible about it is, you know, walk us.
Yeah, it was, it was the fourth quarter of last year overnight, everything changed. And you saw it as part of the budgeting process last year. And you know, entrepreneurs were whipsawed, you said, 30 days ago, the most three, three most important things were growth, growth and growth. Now, you're saying the three most important things are profitability, unit economics, and long term sustainable business model. And if I'm trying to create a budget, oftentimes, those are going in different directions. And therefore I might need a new team, a new thought process, everything and you know, it's easy for an investor like me to sit there and just cross things off on a piece of paper and rewrite my top three goals. But to operationally change. That is awful, right?
I mean, it's almost like that cartoonish depiction of Wall Street traders where like, in one sense, you see them all saying like, buy, buy, buy, and they're running around with the papers. And then like, you know, the color changes on the monitor, and they're like, sell, sell, sell, and they don't really understand, you know, fully what happened to them. I mean, it was it was fascinating. I covered the earnings for Uber, Lyft and DoorDash in the last week, and it was very interesting, seeing the media, the way that the media tried to explain what had happened. Because, you know, they would say, oh, Lyft dire earnings report, you know, bombshell embarrassment, as it and it was just like, really, it was actually pretty good. They like beat their numbers. You know, the thing that really killed them is the fact that they're going to be investing more in driver growth, which like, seemed to be great news last year when they were doing it. And then hilariously, Uber decides to move up their earnings pre market to kind of circumvent what they assume, you know, was a very specific lift disease, because they're like, well, they're bad. We have great earnings.
And I think that's like the first time since the financial crisis.
Vogue Lehman Brothers, right? Did the banks move on to exactly
it during, after Lehman Bryce's Lehman Brothers collapse, every bank had to rush to the street to tell them right, I'm not dead.
I had people from Uber, I can include this people from Uber, Uber, like kind of spinning to me being like Uber Lyft really missed the memo on how to run a profitable company. And you know, that clearly was like, in then they decided to move up their earnings. Uber does their things dropped seven or 8%, it drops 10%, immediately upon market open, and then DoorDash, which actually has a very strong quarter, I thought a lot of their fundamentals are great. They have you know, good growth, they have better EBITA than Uber Eats even they're down like 16% right now. And it's I mean, it must just be maddening inside these companies, as they kind of optimized for a very specific style of projection and and signaling to the street to suddenly be told everything what you've done, everything that you've done is wrong.
Yes. And operationalize that probably takes a year of rethinking about that. And they're hitting the expectations they set out. But someone moved the goalposts. Well, when
you say that somebody moved the goalposts, like how much of a recognition is there, that the goalposts is being moved outside of the valley and outside of the industry by things like the Federal Reserve and how much recognition is there, that the reason those metrics could have been important and that people could have focused on those things is because the market was willing to both take the risk and pay for them and when I say the market, I mean the broader market is influenced by fixed income in commercial real estate, I mean, so that when we kept saying somebody with the goalposts actually not like an unknown somebody that was
probably public market investors, right? And that's the, that's the key linchpin that they said, you know, hey, I'm unwilling, we're in a rising rate environment, I'm unwilling to fund losses in the long term. So I need to see some definitive point where you're going to be profitable. And I need to see what this business looks like in a run rate. And companies who didn't respond to that got crushed, and then you know, then private crossover investors or growth investors said, hey, look, they're crushing people who aren't pro focused on profitability, we're never going to be able to get our company public unless we're profitable. Then they go back to the board and say, Hey, rest of the board, did you see these companies got crushed? They're focused on growth. And whereas the board says, Yes, you know, profits? And if you want to see us, and that's the same guy who said growth, what do you want from me? 60 days ago? Yes.
Maybe just made from the outside it looked? I mean, like I said, I'm not. I don't remember the industry, but just outside of the industry, it actually looked pretty logical to me. I mean, when you look at all these other points, Eric had this great newsletter, looking at all the times when people said, libera Mark is going to happen. And the one thing that wasn't really happening in those other supposed inflection points, is the rate environment was not changing. And so I think it was basically almost in tandem with this stock slaughter, you saw the Federal Reserve come out and say, not just that they were raising rates, but they were immediately starting to not raise rates. But to take some of the other measures off the table that weren't rate raises, that had artificially had the impact of keeping a speech
to the era that I've learned business in that I don't even know what the opposite of quantitative easing is called. It's tightening. So what's the
so many things were so many things, because so many things were implemented post financial crisis, and then post pandemic, and post post post whatever you want. It wasn't just rate going up and down, right? It was buying back your own paper, it was, you know, it was all these sorts of market manipulations, like
people like Eric go into wreck being like, explain to me the time of tightening. Well, you've ever seen.
No one's ever seen this before? Right? There's
no we haven't seen this since two since when two,
quantitative tightening. I don't think we've ever seen, right, because I think that there was quantitative. Yes, that's created crime TVs was great during the financial crisis. Absolutely. That helped the banks and they said what main The problem is, like a lot of things, some is good, more is better. Oh, that thing, we use the financial crisis, we could use that, again, the pandemic. And if we use some of that before, let's just lather that on everywhere. And now they're like, at some point, we have to reverse that. And they still really hadn't reversed what they did in the financial crisis. And now they have to reverse all that. But even a 50 basis point. Change in in the Fed rate hadn't happened in 20 years. Absolutely. 2000. So they're doing a lot of stuff. Yeah, it was when people
were like, well, rates haven't moved yet. So why is this downturn happening? It's like, well, it wasn't just the rates, again, to your point, all the things created around quantitative easing, those things were being quietly dismantled and
expectations drive so much of it also, absolutely, you have the effect for everything has been implemented.
So it looked very, perfectly logical to me from the outside. I was like, Yeah, of course.
I mean, we don't know the floor of this. But I mean, obviously, you know, Fed policy keeps a lot of people employed, they focus on unemployment, we got to enjoy sort of this booming economy. And I mean, there is some culpability for investors where it's, you know, you know, it's not like no one, everyone in the world thinks that Uber is a money losing business, you know, that we've gone there lots of you know, it wasn't a secret that both these companies lost a lot of money and that there would be come a pivot point where people sort of reoriented their thinking and sort of short termism and hedge funds get paid once a year. There are lots of reasons and incentives that drive people to chase you know, growth that will come to an end. Well, that
makes the old thing turkeys go further and further out on the risk curve before they get slaughtered. So people knew that eventually we're going to have to build a profitable company or a self sustaining financial company. And then you kept getting rewarded for not
I like the turkeys. I also like swimming without shorts. I think we should put together a full list of all of the analogies made for people that take
a little what happens what happens when you sweat without shorts? Worried?
Oh, yeah, that was that was the Warren Buffett. Warren Buffett. When when the tide goes out, naked I guess it says we can. Analysis.
I think we all clearly agree interest rates driving this situation. I mean, in my piece, which I'll include a link to an The post with this. I mean, I had two charts from red point where they showed in a private investment dollars after 2008 and private investment after the.com crash. And the point is basically, this is oh eight, you know, there was resilience and.com You know, investment really, really dropped. Katie, you were sort of making the point that a key key question there is the interest rate environment. Yeah. And I like that nerd. I was like, Eric, I really wish they'd overlay tenure.
Because that was the right thing to do.
I don't know the answer, because then I did not have time. I actually, I made a note to myself, look this up before that instead, I got on the phone with all these people for for the other things I
do. But in May 2000, Fed raised rates 50 basis points the last time before before this week. And so not only were was the tech market crashing, but people had a safe had another pathway of somewhere to go differently than maybe the pandemic where they they drop rates tremendously. And folks like Well, I'm not gonna go there, they're not gonna give me any yield. I might as well stay here and see what happens in growth.
Right. And obviously, the complicating thing for tech in the pandemic is also everyone moves to zoom, sort of the technology industry sees companies see revenue, skip ahead, because people are adopting stuff faster. Now, we're coming out of the pandemic, and we're seeing sort of the opposite, where tech people wanting to believe things would be stickier than they are. And in some cases, you know, we're seeing companies like hoppin where there are questions about whether sort of the tremendous growth is really sustainable. So there, there there are, there are other obviously, anytime you try and tell a big story about the overall economy, there are lots of pieces at play a play at once.
Can I ask a somewhat hypothetical question? Sure. Because you mentioned 2000. And the basis point, then, and we saw a couple of things, obviously a market crash and a big fraud. Right. And Ron WorldCom, fast forward 2007 The feds like, Okay, this housing markets very overheated. With rates move. We have a big crisis. The momentum stocks were weirdly banks at the time, but we see them get crushed. Big fraud, Bernie Madoff, here we are in 2022. Rates are moving up. Momentum stocks are down. What's what's gonna be the big fraud?
Seems like a Tom question.
Yeah, we've covered the riskier companies here. I don't know. I mean,
like, who's our next Enron or Bernie Madoff? Like that's the good stuff?
I mean, we saw the market goes thing, right. Yeah, I mean, there's only
like, I don't know, like cases of slam dunk, but it's definitely the canary in the coal mine.
I do think that Eric has a point there that I think that a lot of people who are using margin loans are might be they might be, they might not be committing fraud, they might not be a made off, they might not be an Enron, but they might be using a lot more leverage than they let on. And that could be a hedge fund, it could be a private equity fund, it could be a growth fund, or it could be an individual, that I think you're going to see things blow up, because interest rates are going up, and their collateral base is going down. And there's going to be folks who cannot have, you know, modeled out that their collateral base is down 70%. And there's going to be margin calls. And I think that's going to be the the overuse of leverage when people thought money was free, and therefore they could use their returns is going to I would say is an obvious or saying things I've heard, you know, could be one of the one of these great disasters.
I mean, and there's always the cynical argument that things become crimes when they go really poorly. The government is unhappy when sophisticated people don't make things work. But I mean, yeah, without talking about crime at all, I mean, you can just see sort of the interconnectedness you know, I mean, we had Softbank go huge. Softbank is a big investor in Uber, Didi though you know, Ubers a stakeholder and Didi you know, there's a lot of internet connectedness in the big risky bets, then we see Tiger global takeover, invest deeply in internet. So they're just these players who are willing to deploy a ton of money that we're taking correlated risk. So if the correlations go the other way, they're gonna have sort of a big negative impact. But that doesn't mean they're doing anything. I mean, that to me, I mean, maybe that will change. What's amazing about this time is it feels like it was it's so obvious, there was no secret, there was no like, hidden thing, like we work, which I mean, we work with the case of sort of the market can sustain it, the the sort of collapse isn't bringing the system down, but to some degree, you know, we yeah, we saw it and people were just willing to take a risk because what else were they going to do, I don't know.
correlated concentration risk was that's that was kind of how they got caught it. I'm gonna mispronounce names, or chinos or kandos. And it was they were in 10 media companies that they were highly, highly correlated and they used additional leverage and crowded people out in what might be an illegal way. But if you're soft bank and you're using leverage, and you're have highly concentrated, highly correlated positions, if this thing on wines, you know what happens?
It's interesting to me also the foreclosure of the IPO and the effect that that's going to have on a lot of these companies to, right, because, you know, we saw the whole spat craze from a couple of years ago being the quick way for a lot of these companies to go public. And honestly, it's probably good that this back window is entirely closed now, during this period, because things could have been truly disastrous, if you had had a lot of companies sort of immediately going public, and, you know, getting crushed by the new expectations of what a company is. But I'm also interested in a lot of these venture debt rounds, that companies have been doing these sort of like bridge to IPO rounds, like we saw go puff, do one, earlier this year, Vice has this kind of Honorius is a slightly different situation with his very honest relationship with TPG. Where they, you know, gave them what's akin to like, some sort of a convertible debt, round no vices and a really tough spot right now. You know, I think a company that sort of relied on that with the expectation that like, well, it's not gonna be a big deal, because we can go public and, you know, these shares will convert, they don't, it could get ugly very quickly,
don't even historically square, which is now block had, that is one of its reasons to go public, they had structured debt that you know, picked at a high interest rates, the longer they wait to go public. And I think you're right, that people thought the window to go public, after being open for so long, would always be open. And now it's closed. You know, the other thing you're not hitting on, but is tied to this is, you know, the things that make investors invest and put more capital out, is feeling good and driving returns, right. So if you have a company go public, you think you're smart, because you invested early, and therefore you want to invest more, and the opposite is true. So the lack of liquidity either to send back to your limited partners, or the ability to think that you're really good at this, and therefore you should do it a lot more, that that decreases investor confidence and decreases LP confidence. And that slows down the whole machine. Right? Keep
thinking Katie, back to your question on like, what the next implosion is going to be and using the analogies to made off or Enron and WorldCom. What connects all of those, to me was the fact that everyone who covered the space knew that these companies were not sustainable. Right, it was sort of like an open secret. I mean, maybe made off slightly differently, although I feel like I
was a little different. But I think a Bear Stearns was probably a better because like, taking criminal like, you know, but like, people knew that bearer was over leverage. They knew that Lehman's real estate portfolio was over leveraged, you know, there was a sense that something was wrong, saying that something's wrong when everything's going up, as we know, as reporters is the most thankless task ever, because nobody believes you, and they make fun of you.
So like, my guess is that it's going to be a company or a group of companies that we all sort of knew, were not sustainable, that we all could tell as they were raising money and more and more leveraged ways, was a possible, you know, like it had a clock ticking next to them. But because things get getting pushed further and further out during quantitative easing, and this easy access to capital, no one really was concerned about it. But when it dies, when it implodes, when it becomes you know, the next, whatever world come, it will have been so obvious to all of us. And we will be embarrassed that that was not the stories that we've been writing for the last I
mean, if you remove a lot of my coverage, and what I was trying to show in the piece yesterday, is that these companies got so big people made so much money, they exited, like, they got away, just like the money has been made. And that I'm just what's my point, like, I guess in the case where Uber like, say Uber is the test case, or, you know, I think it's Uber could be you know, like a $5 billion company instead of a $50 billion company today. That doesn't mean it goes bankrupt or anything but like if that if that would be the case. I still I think they're all these people will be like I knew it. Uber was like, like a crock the whole time. But it's like but but you didn't know that people would make a whole fortune. I mean, how long do companies stay humongous, valuable companies? You understand the point I'm making like
well, I guess in bull in bull markets, though, the rule of thumb was always in the last 18 months of a 10 year bull market. Most of the money's made so that's why people are always afraid to get off the get off the tread right?
You guys were an investor in Postmates. Right? We weren't so you you are you happy right now? 3 billion sale it's an interesting I mean, somebody was making the point I totally different company. Slack, the slack sales looking great. Now there are these sales where it's
a lot of things last year software companies were selling at 50 to 50 times revenue you feel really good about I mean, we Postmates we sold Ubers, we got Uber stock. So we were able to ride that up and then pick our exit point. So that was that was quite nice. But yeah, I would say that you're right, the company is where you, you know, you talk to people outside of our echo chamber. And they're like, I don't understand how I could get a bar of soap delivered to me cheaper than going to Walgreens or CVS by a guy who's gonna drive here in 15 minutes. And then you explain what you do for a living.
There's a venture capitalist who's paying for the other $2. But I think the Yeah, I would say these quick, quick delivery guys who I'm in New York, and that are all all over the streets of New York, the Joker's the getters, the you know, all those things are going to be like, oh, you know, we saw Cosmo. We saw it didn't work. And then we just did the same thing with another ten billion dollars.
Yeah, I mean, that's been sort of like the core of every story that the mainstream pubs write about them. It's like, yes, all of these companies were embarrassments during the early.com era. But this time, it's different. Yes, why?
We, we saw this movie, everybody died at the end. And now we're gonna we're gonna wondering why in the sequel, know, the answer is gonna be a happy ending
this time, venture capital firms have more access to liquidity for longer periods of time they hadn't before. So that's
the point, like, you know, there was people who made money we work, they, you know, wrote that up and said, Well, you know, Adam, certainly, and people made money there. And therefore, it's fine. Or, you know, people made money in some of the ride, sharing things. And then we're going to see how much you know how many, if you have to pay somebody to go get that bar of soap for you, someone has to pay for that, or, you know, it's not going to work,
right. And I guess it gets down to the intrinsic value of the service, right? If this truly is something that a broad number people want to do at an elevated price point, then it's a good thing, then I think there actually is some some larger value to it, if it's just purely about it being cheap. And the second the price goes up, you're basically not interested in it, then it wasn't a great service to begin with. It was just free money, essentially, or a free service.
I think that's kind of the perfect storm here to write seeing at a moment where the price for the bar of soap has to hit $14 or whatever. And the consumers willingness to pay $14 Go down at literally the same moment when consumers might have been happy to do it five years ago, like that, seeing that those two trends come together, I find really fascinating.
The funny thing we haven't talked about is crypto, which in venture world has been sort of the thing that's still doing well, you know, crypto funds have been raising, there's been a lot of money made bitcoin is down. I think it's 20 plus percent so far this year. But But yeah, it's funny that I don't know right now, people don't know whether there's a totally different world where we say crypto,
that tends to be the last, the last place to go, right? Because the first the tends to be the first ones first people, you tend to evacuate the tactical things, right? So you're able to say, you know, software is a service. We know how this stacks up, we know how revenue grows. And therefore I could pencil out a way to this type of exit in that period of time. And if everybody rewrites we know what someone's paying for it. The things that are completely asymmetric like crypto, where you're not, you can't pencil out what you think that crypto is going to be worth or what NFT is going to be worth. People are still willing to take asymmetric risks on because no one could pencil out that they're wrong. So you're seeing people with risk capital shift to asymmetric risks are things that can still be big. Because there's a lot of confidence in the space. Do you
have a piece of advice? Or like I guess if maybe, you know, if I'm a sort of tech worker looking for my next job? I don't know what what advice would you give them?
Right? Yeah, I was gonna say the audience can be tech CEO, tech worker, young VC, probably all different advice. So you know, the advice we're giving around boardrooms now, you know, we had thought that, you know, 2020 and then obviously, 2021 was great times to raise money wasn't you know, and I've been investing since the mid 90s. If, you know, if that wasn't 9099, it was pretty close as, as, you know, an A, if not a plus time to raise capital. So we advise people to, you know, to raise
to three rounds, some of them Yeah,
yeah. Take the money. I mean, it's, it's it's very, very cheap insurance. So you take that money. And then you know, we talked about having a fortress balance sheet that can withstand a lot of external turmoil. If you have a fortress balance sheet, and haven't been
not necessarily having fortress on your balance sheet.
Times the exact opposite. Yes.
You don't want that.
The so you have a fortress balance sheet. You withstand market turmoil, and you eliminate financing risk. And you haven't been an entrepreneur in the early aughts where there was no financing. Elimination financing risk is something that is I think about a lot. And then being able to say, all right now you have a fortress balance sheet. How can you make sure your team is great. And you increasingly you're hearing very quietly, that folks are saying, especially as returned to Office is showing up that are the is my team great? If my team is not great, how do I turn over the folks who aren't great? And then I, how do I go out to people in the market and say, Hey, I have a fortress balance sheet, I have $400 million in cash, I have $400 million in revenue, I don't care if I can't get public next year, I'm going to get public and I'm going to be one of the great companies that survived this, you should be on my team with the All Stars and they're starting to do selective kind of rifle shot hires of all stars from from companies where might have been hard to take them out of because that also our might have had a significant amount of time
to read between the lines a little bit, a lot of coaching there. Well, they're, you know, on Twitter, nobody's gonna say like, layoffs are good. And you know, I don't want to be the person to say that, but there is a degree to which, when everything's going great, your company wants to be happy, your employees don't want you to fire anybody. But that's hard to fire someone during a pandemic, right? And but you know, you, you need to be able to good companies don't just keep everybody they ever hired and they make mistakes, and people don't work out. And so this is an excuse to sort of say, Who are the people that we want in the company, and that can be good, good for companies, and that bad for,
they're seeing who they want to be on companies. And then so they're saying, Hey, I'm going to build an A team, I'm going to call the herd and maybe do a layoff where different maybe in the past the strong companies are doing a layoff because they feel like that they have a provisional position of strength, either via strong balance sheet or market position. And then, you know, we're saying wait until maybe the second half of the year, and then you can be aggressive on the acquisition side, because you're going to start to see, we're already starting to see, a lot of companies have extra cash, right, because it was so easy to raise some people raised twice last year, but maybe only are now getting the memo of a unit economics work, and they're not going to be able to refactor their business in time to do another raise. We're seeing a lot of duress distressed sales already, but there's gonna be a lot more in the second half of the year, you think,
sort of super teams, startups like merge with each other to try or you think it's more, I mean, the challenge with acquisitions has been the antitrust situation, and that there are a couple of dominant tech companies that can't
buy and I'm saying less like, no less of Google buying something for 10s of billions of dollars. This is more. This is, you know, a DECA corn or, you know, a unicorn type startup, who's able to pull in teams are able to pull in Product functionality like hey, we always like this team. But they said they wanted 150 times revenue. And now Now they're willing to take two times revenue, right. And because they don't have a whole lot of truth, they're not independently financeable. And those teams that which create a fortress balance sheet, build an A plus quality team, and then go out and say, hey, it's gonna be two times revenue. I know, that's not what you expected. But you can join this team, we have all the capital we need, we have a great team that you can be a key player on. And when this thing all clears, in two years, the IPO market opens, we're going to be a decided winner, do you think also
there's going to be a shift towards more salary based comp, rather than equity based if we're in a market where it might take a couple of years for, you know, shares to appreciate in a big way, or there to be a strong kind of exit opportunity.
That's not what's happened in the past. You know, frankly, you know, in other downturns, you've seen, salaries were the remain relatively flat, but equity can't be go down. Just because, you know, equity, cash comp has gone up a lot. And if you see a renormalization in the in the labor market,
everyone's getting laid off, employees have left less bargain slimmer, so they're getting paid less.
Yeah, so I think people are gonna say, I'm going to keep my same salary bands, which are up 30% from two years ago. And you know, people are just going to make less money if they don't believe in the equity portion here. But if you join the super team, that's going to go public, you have a better chance of making money as opposed to this company, which seems like you're going to run out of money in a
semi Instacart resetting valuations. Do you think you'll see startups just try to artificially reset the valuation they give to employees?
It depends. I mean, that's a very unique situation with a very high price and their whole concept of you know, is was down in 75 80%. So that was a very specific, hey, I'm close to IPO. Every one of my comps it's down tremendously. It's gonna be really hard to recruit, especially with a ton of preference ahead of me if people are bearish on the sector. We haven't seen we've seen that in the past that people have reset for nine out a B valuations, especially if the company has raised a lot of money and has a lot of preference ahead of the employees. We haven't seen that investors don't root for it. Well, no, we generally do. Because we think the team if the team is the most important thing at a startup. And you think you're not going to be able to recruit a great team or you're going to lose people, because they don't think their equity is going to be worth that much. You rather, you'd rather keep your best your best players and you'd rather recruit the best team. So most good investors were actually root for a low for many. Publicly, we want the most fair, third party value for it and a price. But as a director, I'm looking for that price to be low. So people get excited about the equity opportunity.
What would you see if you could name a couple of companies as winners, out of this period, companies that you think are slightly under the radar, but because of their capital structure, or, you know, they're having a more sustainable business model could surprise people and end up looking very strong in the next few years,
I still think that healthcare is an industry, it's going to change tremendously. And I think, you know, companies that are coming at it in a holistic approach, and they're going to be winners in the space that there's there in consolidators in the space are going to be really important, you know, when examples row or Roman health that, you know, came out of the gate strong, grew very quickly, has an excellent team. And even in the last year where there was less consolidation, they bought a handful of companies that failed product needs as they brought it build out their full portfolio, both in terms of delivery ecosystems, as well as end user products. And, you know, I think that's a good kind of case study or an example of, you have a big balance sheet, you're in a big market, you've gotten to millions of customers. And now you're going to be able to use that balance sheet not only defensively but offensively to build a really big reopen company, right? Yeah. So full disclosure, it's a portfolio company.
They're a male fertility company, right?
They have male and female, recession proof. And healthcare is generally recession proof. We also like we think the reopening is going to be real. We'd like to travel sector. You know, Airbnb was a former portfolio company that you know, put up great numbers, everything around travel, as consumers chips from people. Traditionally 70% of consumer spending is on services. And that can be restaurants or travel or whatever it is. 30% is on hard goods or home that shifted during the pandemic. And I think there's a lot of pent up demand for that to shift back so you know, we believe in you know, restaurants reopening, travel reopening, etc, etc.
Nice. I like that. It's sort of like digital, you know, telemedicine, but also travel. So it's like seeing people remotely and also actually going and going to places.
Yeah, I think there's gonna be a mix. I think some iRL is obviously coming back. And that's great. And some of this and but I think we'll still have zoom accounts forever. Right.
Thanks so much for coming on. We really appreciate it
awesome, saying everybody. Thank you for having me. Thank you. Goodbye Goodbye, goodbye. Goodbye. Goodbye. Goodbye. Goodbye. Goodbye.
