BG2 with Bill Gurley & Brad Gerstner | MANG VC Gone Wild, Can You Trust AI Valuations? & More | E01

0:00 you know the number one question I get from Founders who come in here the number one question I get from my LPS is where are we in this correction what stage of grief are we in bill and when does it end BG squ hey man good to see you good to be seing of course you know to the audience do your own homework work make

0:30 your own investing decisions we are not your investment gurus so Bill talk to me a little bit about what you've been thinking about this week yeah so one of the things I've been thinking about lately and and we'll go into it in more depth is how some of the big decisions and and there's been kind of sequence of events in the large llm Market I think are going to create some pretty big Market distortions that that might be

0:55 felt you know along the way by a number of different players so I want to go in deep on on that what about yourself I was prepping for our annual LP update today I mean I've been doing these now for over 15 years and it's always that time of year where I stop I forces me to telescope out I think about valuations about what's going on with mag 7 over the last year about long run Tech

1:20 compounding about this AI cycle and and what's going to happen this year then I I also had this you know I guess my first tweet that went over a million views over the over the course of the last week which you know it's still amazing to me that because of regulatory capture people just aren't getting their calcium CT exam they're still like enslaved to looking at their cholesterol we saw the tragic news on that Warriors coach this

1:47 week you know so I'm just thinking everybody over the age of 40 needs to get this CT scan but he let me ask you a quick question on this before we dive in so you shared this with me I had had a spiked LDL on a on just a simple test and I went and did this and it was pretty simple I mean I was in and out you know in a Flash like it's not it's

2:10 not like it was a big invasive thing and so if it's so simple and so powerful why do you think the establishment's fighting it you know I I think we established standards of care in this country and in this case the standard of care is to track people's cholesterol and no doctors have an incentive to do anything other than standard of care and so I think they worry about liability I think other doctors just aren't on top

2:35 of it but the reality is a CT scan you don't need a doctor referral it costs less than a hundred bucks as you know takes less than 30 minutes in and out non-invasive at all and it actually will tell you whether or not you have black in your artery so you know it's you know I saw I saw after this tragic death this week that the head of preventative Cardiology at Stanford Dr Marin and said you know perhaps had of calcium CT be

3:02 alive today so it's just a no-brainer I'm thrilled that you did it I know we've been on this with all of our friends and so that's good news awesome well let's dig in we may as well start with the hardest topic of the day in Silicon Valley which is AI you know you stirred the pot a bit this week and it it was it was reacting to a tweet out of your firm so I know put the Tweet up let's tell the

3:29 story so put the Tweet up what was the point of the tweet and what was in the graph like what was being discussed you know well as you know so a por of on my team who helps cover AI he he started looking into the amount of venture capital inves everybody's talking about whether or not we're in a VC winter but if you look at the aggregated amount of VC Capital that's being invested it's a big number but if you deconstruct it a

3:55 little bit what you see is that we have this explosion in Venture Capital investing coming out of four companies right he called them mang Microsoft Amazon you know Nvidia and Google and so as you can see on this chart we go from almost no Venture Capital investing you know out of these folks six or seven years ago to all of a sudden this $25 billion last year in VC investing it led to the question like why is this

4:24 happening and you know it's not being distributed equally it's only going to a few companies so really what's going on and so I turn to you you you you know you retweeted it you had some things to say what's going on yeah and let let me start with two two kind of high level thoughts before I drill in the first thing is you know it's awesome that this new paradigm has come along one of the things that makes Venture Capital

4:51 investing being a part of Silicon Valley so much fun is you always get to move on to the new thing it's a learn it all mentality all all the time and it's just super invigorating when the new thing pops up and everyone gets to go play with it and talk about it and you have to learn it and if you don't you get left behind and it's it's a big part of the ecosystem so it's exciting that

5:12 there's a new Gold Rush and and because I'm about to say something that's going to sound cynical and so I want to start with that the second thing is you know I don't some of the things I'm going to say I don't have perfect visibility obviously inside these large companies exactly what they're doing but I have an intuition of what's happening if anyone out there you know after I make these statements says no bill you got it all wrong you know let me know

5:37 and we'll correct it and and and we'll talk about it so what I wrote I'll just read it I said this is what happens when you invest with credits that allow you to Goose your own revenues so I think if we think about this historically Microsoft found itself in a position where it realized one that AI could have a massive impact on the products they already have and that's been proven you know in the development world with

6:02 co-pilot now they're they're implementing it for office and all the all the productivity apps so they they knew it was powerful second they felt they were behind and so they embraced open Ai and obviously the relationship between Sacha and Sam is quite well known at this point as part of that relationship they made a quote and I definitely use quotes investment in open Ai and a we've been the world's been told a big part of that investment

6:33 wasn't cash dollars but credits for cloud services correct what I then speculated happened after that is the other large cloud service providers became fearful of loss of relevance or loss of market share because of this type of transaction and so we started seeing copycat transactions happen happen along the way and so what the reason I think that well I I'll walk into some of the details of what could

7:03 happen but what I fear is that this is happening at such a large level and maybe we haven't seen the end of it right I think there's reason you can see more that it's going to create a market Distortion and if if we think back to the last cycle you know I live through the market Distortion created by zero interest rates and and and the vision fund and the vision fund copycats and all of a sudden billions of dollars are

7:27 piling into companies and the reason this matters if you're a player in the ecosystem is if there's a massive Market Distortion the rules that you've been taught to live by can all of the sudden you know either not apply or there's new rules that apply the mark it can get messy the playing field can get messy okay so so let's let's break it down for just a second so I think that so I think I understand what you're saying so

7:51 you're you're basically saying Microsoft decided to make a big investment in open AI Amazon decided to make a big investment into anthropic just as two examples yeah and that of the billions of dollars that they're investing at these very high valuations those startup companies need to spend those billions back on the services from the people who gave them the money and they have the need right they have the need either for training

8:22 or or or even a lot of them are are reselling their software packaged with the the the computer and so it's like a value added service right we're putting AI on top of a CPU that you would rent otherwise now let's let's think about this from both players side from the big company player side I would just say definitively and and this this could get me in trouble but this is low quality Revenue like this is Flatout low quality

8:51 revenue and and I'm certain that they' got their auditor to sign off on it but I don't I don't think there's any way you can argue that it's it's high quality Revenue here here here's an example I'll give you to well first of all it's cashless right it's cashless Revenue so when the credit's reused you get zero cash coming in and we know you have an amorz cost against that big capex that you and the reason you have

9:14 zero cash coming in bill is because you gave the cash you gave it to them as a form of investment and they're turning around and handing it to you so for the from a company's perspective it's like taking out of your left pocket and putting it in your right pocket well yeah I mean a big skeptic would say you're using your balance sheet to to drive your your income statement which you know should be a no no the the other way I think

9:38 to highlight the the low quality revenue is imagine there's a startup I came up with a cool name for the startup it's called the ultra hosting company UHC so UHC got a bunch of money from venture capitalist they built a big server farm and they have their only customers they have are companies that they went out and gave credits away to as a form of investment that's 100% of of of their customers so they have tons of Revenue

10:07 as they reuse these things and zero cash flow whatsoever like and so I think that highlights it right and because some people say oh it's just a small percentage of this big company's Revenue can't you know I'm like it doesn't matter like it's still it is what it is so Bill if we if we steal man why this is might be okay right because I don't hear you saying this isn't illegal you're not saying it's a violation of

10:32 Gap you're not saying they're defying they're Auditors what you're saying I think at a minimum is that if Microsoft is is putting money in or I hear you saying two things if Microsoft's putting money into open AI at90 billion I think the first thing I'm hearing you say is you got to be a little bit skeptical of that valuation because it's not exactly an arms length transaction well yeah and here's another here's a way to really

10:56 drill in on that you know going back to ultra hosting companies let let's assume for the sake of this discussion that the service being provided is a commodity and one could argue putting a bunch of Nvidia servers and and gpus in a cluster and renting them to you is a commodity service right so if I'm competing with you to invest in this startup for you to turn around and use my commodity service isn't there a strong argument that the

11:26 way I would get there is by taking a price up to a level where you choose me over them and so all of a sudden like you know you've got definitive proof that the way you would win the war and and and you get another benefit you get Revenue you get market share so at the very least there's an argument of might you be maximizing this versus that correct and so yes I think the valuations could be Superfluous as a

11:50 result of this and that's one of the many Market distortions that would happen as a result of this activity the second thing is this could all come come to an end and so you know I think for the big hosting providers having Revenue that that is not non-typical let's just call it atypical could backfire if if we reach a point at which this type of activity is no longer done for whatever reason okay now let's describe a

12:19 scenario that I think you would have less issue with right if if if 10 billion was just invested into open AI by you know the five leading Sand Hill firms and then if open AI in an arms length commercial transaction decided to buy you know1 billion doll worth of services for Microsoft Azure to train you know GPT 5 GPT 6 Etc you're saying like that's no problem the problem you see here is that that's

12:49 coming from Microsoft so so so I guess you know when we look at this the the indicator that there's a problem from you might be do these companies have the ability to raise this type of capital because if they're just substituting Microsoft for somebody else who could provide the services that's one thing but if they don't have the ability to raise this capital from alternative sources it would seem to be more evidence of your case well and we you

13:20 know there's there's another element that you're touching on because we read you might have seen an article in the information this week about how Google's having to change their compensation policies to keep up with the the the comp that's coming out of the major AI companies and we've heard talk of you know what I would call pretty early secondaries at open Ai and so if if let's just call it accelerated liquidity is is part of what it takes to get a

13:53 a killer AI engineer then you will have to have funding other than just credits to be able to fund those secondaries that's that's one thing but yeah I agree with you let me let me talk briefly about why I think this could be a problem for those players and even for the persist the other smaller companies in the ecosystem so I believe that once you have these credits inside your company somebody is certainly going to

14:23 make the argument or they either going to be ignorant to the cost because it's now not a real cash cost right I have these huge credits that I'm using Andor they'll fool themselves into thinking if I sell my service below the replaceable cost of the credit that's really a negative gross margin sale but I but I bet you a ton of people walk into that world and if there's a price War for AI

14:54 Services all these kind of things I could easily imagine people pricing below the cred credit cost so just another Distortion that could happen I think the difficult thing as an investor for altimer you know we we looked at all of these businesses all of these models and there were two things that were really difficult for us one was the complexity of the transaction just looking at you know open Ai and trying to understand the nature of the

15:24 relationship with Microsoft again I want to stipulate from the start you know as I've said I think AI is going to be bigger than the internet itself I mean using compute to build human you know to build intelligence is a powerful thing for all of us so I'm actually happy as both a human and happy as an investor that in fact these models are are are getting funded and that they're being built but I'm just saying as an

15:48 arms length investor looking at these valuations it was hard for me to even and I've been doing this a long time to even understand the nature of the security I was buying and the relationship with these companies so I think that's why a lot of firms like altimeter have had trouble getting to a yes decision set aside the fundamental decision which is can these companies actually generate a lot of durable and ongoing revenue from this if we have

16:16 open- Source providers who are going to collapse the price of the market down to zero so for us we haven't invested in any of these these were the two bigger challenges but I will say I I haven't invested but I've sat here and and and thought to myself man I may be missing the biggest thing in the world because open Ai and anthropic and these other these other companies their valuations have continued to Skyrocket the usage is

16:40 very clear the teams that they've built are absolutely remarkable what they're putting into the market is terrific but I do think that it is a really important thing that you're pointing out which is at a very minimum I think we can say that the participation of mang Microsoft Amazon Nvidia and Google is distorting the price in the market in a way that wouldn't have occur if it was all arms length transaction with financial investors yeah and and I'm also not

17:12 saying anything negative about the companies or the technology or what they built my primary point is that they've done these unusual transactions that has become that has been mimicked right it's it's become a viral and the competitors have had to do it as well and now it's at such a scale where I think it could distort the market that we're in I'll tell you one other negative externality of this one other Fallout of doing this right if we have the largest

17:43 companies in the world who are effectively anointing the winners with their Capital it makes it really hard for a true startup that has to raise money from venture capitalist who don't have $25 billion to deploy to be able to raise the capital required to compete it's a sport of Kings sport of kings and and and look one one person said to me well if if Amazon can't buy a vacuum cleaner company what are they supposed to do with their capitals so it it may

18:11 it may be that the lack of m&a leads to people to be more experimental with how you know they want to deploy capex and and get usage off of that CeX that could play a role here as well well I think that you you know the thing I'm going to be looking for Bill we know there is a lot of secondary transaction being done at that 90 billion in all of these there's a lot of secondary being

18:35 done you've talked at length about secondary at these early stages as being a warning sign and not good for the culture of these companies one of the things I'm going to be looking for is do the by the way maybe it's a great thing for the players you know they say don't don't hate to play or hate the game in some ways it's it's just equivalent to you know the latest sports you know figure getting you know the Breakthrough

19:02 deal right I'm talking about for the AI Engineers themselves so is the answer to this bill like if both of these companies if open Ai and anthropic went public right washed their cap tables out now had to raise the money from the public markets to the extent they were burning it would you feel better about the health of of the situation yeah by the way you know I don't I don't Health imp implies once again it's

19:26 negative I just think it's really and when you have different you know factors these large externalities in in the market that we all play in all of a sudden the rules are different and the game plays out in a different way that's my my only warning is watch out I think there will be there will be ramifications of having done this that's my main thing the one thing I'm I'm pretty excited about is we have a lot of

19:52 competition right it's very clear this is viewed internally as somewhat existential at Microsoft Amazon Nvidia Google Etc and you're going to have a lot of competition these companies have incredible balance sheets as a result of this incredible investment we're probably going to accelerate the path to AGI so I'm glad they are deploying their Capital but I I agree with you it makes it very difficult for the Venture capitalists out there and for

20:24 other Founders if you're a founder and you want to compete in this you know the model game you know and you don't have their backing there is no no chance and while we're here I I can't help but mention it it's you know you mentioned open source I I personally am am just a massive believer in open source and there's a topic we're going to get to later that I think we'll U we're all come back to it but it's so

20:48 powerful for society that these ideas can be shared so openly and there for me it's been a sad reality that some of the larger llm players have literally attacked open source directly and are telling you know Regulators to try and disable it and I when I see that you know because I've never seen it this early in a market well I've never even seen attacking Open Source before and I recognize it's highly competitive but when I see it it makes me skeptical

21:19 and I look I look at the llm models I mean they've scaled up on parameter count and the width of the attention window they're they're easily could be limitations to that like if you just think about how optimization models work they could run out like it's not infinite scaling on those types of things and then a very smart I was having a conversation with Melanie Mitchell from the Santa Fe Institute who's a very smart AI specialist and

21:47 she thinks data may be what causes the ASM toote in other words what new data are you going to put in the training model it's already sucked everything up right and so it those things could cause a bit of an ASM toope a bit of a ceiling and the open source models at least on all the performance tests that are being published are just running fast behind and so I I could see why the the players might try and and cut off open

22:14 source at his knes it makes me it makes me disgusted I really hate it I also think it's impossible you saw that tweet thread out of Zuckerberg this week where he said by the end of the year they're going to have the equivalent or this year 600,000 h100 gpus running in superc compute and that he was and there's been a lot of debate on this and he made it clear they're committed to open sourcing AGI and you know it just

22:40 reminds me of the conversations you know that you've seen you know Elon have on X and he's he's he's raising capital for his own x. a but you know we have a company called open AI that clearly is a closed model and we have we used to be open source right and now attacking open source and we have the founder who everybody thought was you know perhaps not in favor of Open Source who's actually running the open source model

23:09 now so I think the competitive landscape looks great I we have not seen any bumping up against those scaling laws I think you know you alad said in a tweet yesterday we're going to have four or five companies that hit chat gb4 level this year with their models I think that's exactly right I think it's going to be an exciting time but maybe what do you think C back to Let's jump over to our second topic okay great

23:33 so you just had your big LP meeting why don't you if you're willing to pull the curtain back a little bit and tell the world what you're talking about well I you know as you know we cover both public and Venture markets and you know I had this thesis 15 years ago as a Founder that that Venture Capital companies were going to stay private longer they were going to scale faster they were going to have more impact on

24:00 the public markets I think that's played out exactly how we thought that it would I mean you have 40 50 in the case of bite dance a $300 billion doll still Venture company private company that's not public and so the insights you can glean from being in that market really inor to the value on the public side and then from public back to venture the SM you know like the things we went through it causes me to

24:25 telescope out and think about this last year we saw this multiple expansion I would call it really reversion to the mean as the market played catchup to the big pullback right remember 2022 and maybe we could pull up this chart that we showed on software evaluations but you know if you think about the pullback that happened Mike Wilson said we're going to have a hard landing at the beginning of last year Larry Summers was causing a panic about interest rates

24:53 things like meta and Uber and Nvidia they all have massive pullbacks think about it meta was trading at six times earnings and so if you look at this chart what this chart shows and this is public software kind of valuations and you can see that we were over 100% above the 10-year historical valuation that blue line in the middle of 21 and 22 we troughed at the beginning of 23 at about 35 and what was that Brad was

25:23 that this kind of we live in a CO world forever now so Ware is the only place that the world exists that right remember we we we were talking about this chart in our own chats and we were saying man this doesn't make any sense you know but we knew it was Zero interest rates right the zerp environment that was lead I just listened to a pod you and I did at se conference in May of 2021 Bill we I

25:50 should have been able to save myself a lot more money because we we were worried about interest rates and multiples and inflation in May of 21 before the fed started acting and that was part of it but remember everybody said well maybe it's different this time because we've pulled forward digitization you know nobody's going to leave their house everybody's going to have to buy everything online and do everything online so I think people tried to justify these multiples but

26:17 at the start of last year we were down to 30 35% below the 10-year historical average right we had a big runup you saw a lot of these names meta Uber Nvidia up over 100% over the course of the last year but that brings us to where we are today so you really got to go maybe we can bring up this next chart right which is you know we shared this with our investors who said okay great the

26:47 beginning of 2023 was an incredible opportunity meta trading at six times earnings but what about today well this shows you the multiple expansion that we saw in 23 and now both Tech and nonte are trading at a premium to the 10-year average okay so the Blue Line represents Tech this is the q's we're trading at about a 36% premium to the 10e average I just showed you software software is still trading at a

27:18 discount because people are more skeptical of software but when you look at the cues Nvidia Microsoft you know some of these bigger names it really shows you that premium and then even NCH and this is the one that's a bit of a head scratcher to me nonch is trading at a premium a 12% premium to the 10year average and then finally a a a show you know by comparison if we look at this next chart The Big Three what I

27:45 call Microsoft Nvidia and meta you know they too are trading at a premium about a 14% premium but if you look at their PEG ratio this is growth adjusted on the bottom of that slide right they're basically trading in line with where they've trained traded the last 10 years so what does all this tell us tells us it tells hey can I let let me interrupt and then we're going to go back to what does all this tell you I

28:15 one thing that that we've never spent a lot of time talking about is that the the largest companies in our world have some of the highest growth rates and I think that's unprecedented in it why do you think that's happening like what's well I'll tell you remember you know back at Harvard Business School they taught us the diminishing returns of scale remember the I think it was Lou Gerson who wrote the book elephants can dance right there was this idea that

28:45 elephants can't dance the companies get large they can't innovate they can't earn a great return on Capital and So eventually they get competed away right I would suggest that we actually have a new phenomenon going on in the world which is an increasing advantage of scale not a decreasing advantage of scale and why is that well because if you want to train the you know on 600,000 h100s like we just talked Zuckerberg doing with the Llama 3 Model

29:15 you have to have a business that is generating the massive cash piles that he's generating in order to do that and so I do think like you said it's a very unique you know moment in time now listen that doesn't mean that you're there forever you know I'm I I've been out there saying Google's got a lot of challenges as they try to transition their search Monopoly to their answer Monopoly right I think they're wrapped around an axle in terms of you know kind

29:43 of doing the things they need to do to catch up and to compete and to protect that search Monopoly but I do think that this is a moment in time where there are those increasing advantages of scale I listen to this figure we expect our forecast is that Microsoft and Amazon you know snowflake they'll all accelerate their growth rates this year right accelerating your growth rate you know as an old stock analyst accelerating your growth rate at that scale is

30:14 unheard of unheard of right and so that's kind of the takeown that that we were okay so so I took you off on that let's go back you you presented a lot of data a lot of you know historic you know to Here we are now now what does it mean what what does that mean for people going forward yeah I mean listen I think that as the as the charts have showed like all a tech if you look at the cues

30:40 combined they're they certainly aren't the deal they were at the start of 23 like you know the amazing thing is that we had the lowest exposures at the start of 23 you know investors were so nervous they weren't investing and yet things were being given away for free and now we see some of that money coming off the sidelines out of those money market accounts into all of these names you know after meta has moved from 90 bucks

31:05 a share to $380 a share I still think there are great returns to be had here but the returns are much more normalized I think the return to Target in our portfolio is 20 to 30% whereas the start of last year bill it was like 80% and we saw those returns play out so that's the big thing the world is normalized multiples have normalized it's not going to be as easy as it was at the start of 23 I want to show one

31:32 other chart because I think this is the thing that we don't talk about enough in this business and and this is long-term long run compounding in Tech you know you know how it goes with our friends we're always talking about you know much more shorter term stuff but this chart I I had my team pulled together and I said if we look over the last 10 years okay what have earnings compounded at for Tech versus non-te and what have

32:04 stock prices compounded at at Tech versus non-tech is all this just a bunch of crazy people in Silicon Valley that are running up prices and multiples or is there a reason that Tech is is has grown faster and if you look at this over the last 10 years technology companies have compounded earnings at 133% and they their stock prices have compounded at 7 % so a little bit faster than earnings have compounded but if you look at non-te so if you take the S&P

32:33 and you strip out all the tech companies they've only compounded earnings at about six 6% right their stock prices have grown at about 8% so let me ask you this question Bill Technology's gone from 5% of global GDP to 15% over the course of the last 15 years when we we have this conversation five or 10 years now is Tech going to be more or less less than 15% of global GDP I'm going to say more but with an

33:03 aster so you're your chart has left off 2009 and 1999 and if you were the argument you're making can be used holistically at any point in time but if your point of entry is 9909 or the top of the end of 2021 here you're you're you're not in a good place so maybe you have to maybe what do you call when you roll into like dollar cost

33:33 average price of price of Entry matters but what I would suggest to you is it's almost certain that Tech's going to be a larger portion of the global GDP in 10 to 5 10 years because technolog is becoming more important every day in every company's life every person's life the second thing I would tell you is that I think that technology in aggregate will continue to out earn non-technology companies right why because of you know the age

34:00 of efficiency why because of an AI super cycle and so if you you know of what I said basically if you're playing from home right I think the biggest free lunch in all of investing is the asymmetric bet over the Long Haul on technology companies compounding now the hard thing as you know Bill is are you able to pick the ones that do the best versus the ones that don't do great because we know lots of technology

34:26 companies get wiped out get wiped out so I mean I think unless you do it for a living you probably just buy the index and you're betting on technology out compounding you know for us we you know we have a lot of fun trying to pick the ones that are going to be the winners versus what what are the best I don't know if you know but just for listeners what are the best tech indexes no there I mean listen there are a

34:50 lot of ETFs like growth software ETFs or growth internet ETFs you know you can invest in the C use it turns out that even the spy which is the S&P 500 Index is very quickly becoming a tech index and so I think a big mistake here's an interesting one a big mistake like that a lot of Technology investors have made is nobody feels smart just investing in the big companies right they want to they want to present to their friends

35:19 the company nobody's ever heard of that turns into a 10 bagger a 50 bagger 100 bagger right it's a much more interesting conversation to have a cocktail party presenting that idea than it is presenting the idea for Microsoft which going to compound at 15% which has led investors to be grossly underleveraged to the largest companies that have done the best and overleveraged to the rest of the technology complex and and we just mentioned you had you had an unusual I

35:46 mean I I I can't I can't articulate how unusual it is for the biggest companies to be succeeding because my my entire career up until now you know the large companies become a laughing stock and and Microsoft had a window prace where it was in that place it was considered to be like HP or deck or IBM right and it was just assumed that the startups would come along and roll them and that the big company gets stodgy and Lead

36:15 footed and falls behind so this is a this is a different world we're in yeah I agree with that hey how about how about we shift gears here a second you know so that's public markets great year in 23 24 going to be a little more challenging people panicked when we started the year mag 7 was down I don't know 5% now it's up a lot you know and so it we'll we'll see where it shakes out but but VC you know man we've

36:43 talked a lot about this you know where we are in this VC correction you know the number one question I get from Founders who come in here the number one question I get from my LPS is where are we in this correction what stage of grief are we in bill and when does it end well look for for reasons that you and I have talked about a lot I I think the most differentiated element of this correction versus 09 versus 01 is

37:13 the amount of capital that the companies went into the correction with the speed at which they lowered cost afterwards so there wasn't denial everyone got along pretty quickly and therefore the elongated window months of cash you know we encourage a lot of our companies track months of cash just burn rate divided by how much you have in the bank account that was elongated and so things are taking long to play out because the Day of Reckoning has been

37:43 pushed out now one thing that's really wild to me in 01 and 02 when a company went bankrupt it was news every single one of them when they shut down there was this website called effed company that literally tracked them and the the VCS were see your air quotes Bill that was effed up company yeah and the guy that ran that site actually runs a really cool company in

38:14 the in the audio space that helps you post on Spotify anyway we were all vilified like we were just taken down oh you got these dumb companies that doesn't seem to be happening you you guys stumbled on this chart you can pull up I think it's it's from cter data or something but but the first three quarters of 2023 saw what is it around 180 a quarter of shutdowns and so our run rate let's assume the Run rate's like 200 we're

38:46 like 800 a year shutdown no one's writing about I mean we had Convoy like there's a few high-profile ones where people wrote about for the most part I guess I guess with the election and Ukraine and Gaza like there's so much going on that that maybe you know people just don't give a but it's it's wild that it's happening so quietly so that's one thing it I guess it is happening even though it's not so quiet

39:13 in Silicon Valley like I I you know like I feel for a lot of Founders and you know and frankly early stage Venture Capital firms even when companies are doing well they're really having Challen is raising a followon round of capital yeah and if you if you look at this other chart you know series a and series B type funding it's way down and that's where you take out the the credit funding we were talking about and get

39:40 that out of the mix and and so yeah it's tough you know I I do you and I have discussed this many times but I think the number one thing a Founder can do is to as quickly as possible get in touch with your with what your real actual valuation is and then ask yourself what what do I need to do structurally to give this company a fighting chance knowing that that's reality and I think a lot of people live

40:09 in a reality Distortion field you know this to me is something that I'm deeply passionate about because I think you know it's a unique moment in time right now where I think because of what happened in Zer Bill founder friendly this term founder friendly it kind of was like just telling the founder what they wanted to hear whereas you know maybe pull up

40:40 this tweet from jam and ball my team last week and I'll just read you what you know he said you know lots of talk about getting fit but too few boards and Founders are having honest conversations you know I've always preached to the team here founder friendly is doing the right thing and being truthful with Founders you know like the letter to met on time to get fit saying upfront what's too often discussed outside the boardroom and

41:08 behind their backs even if it means making hard decisions like layoffs selling shutting down down rounds Etc and so I you know I look at the situation today frankly I don't know whether it's because Venture capitalists are a lot younger a lot of people just moved into the system they haven't seen a draw down before whether they're on too many boards and spread too thin so they just can't handle the delug of conversation but my biggest concern is

41:37 that boards haven't even been having the tough conversations right we certainly have the examples like you pointed out I I you know and and and you know take something like claron I think seoa deserves some credit here if you look at Clara or you look at what happened in instacart I mean Clara's 2021 round right $46 billion led by Soft Bank Sequoia dragoner Silver Lake in that round 46 billion they do a round in 22

42:09 at 6.7 billion right sey and Silver Lake that to me is a great set of people around a board table having an honest conversation with the founder and getting the business reset you cannot it's not good for the employees it's not good for the company it's not good for the investors if you're living in delusion when it comes to your to you know to your cap table and to your evaluation so I think we're starting to

42:38 see more momentum of this I certainly know in our portfolio we're we're pushing really hard on every board that we're on on having those conversations getting liquid if you don't have a model that you feel comfortable with to get back to that valuation you can sell the business but you got to sell restructure or or take the business public I mean those are the doors yeah people get overly focused on this last round valuation thing like it is I can't tell

43:05 you how many Founders I've had a conversation with where it's clear the number one objective in their function about the next financing is to clear the bar of the last round and it just shouldn't matter that much like especially after we just went over the waterfall that we did like you got to just get that out of your head it's so stupid you've created an artificial constraint that that's just not that big a deal at the end of the day I used to

43:33 have this chart I wish I had prepared it but of the logos of the public companies that traded below their offering price and it's some of the best companies in the world it includes Amazon and Salesforce and and yeah a whole bunch of great companies and yet if you go to IPO and you're arguing over price they'll say the one thing you can't possibly let happen is is you trade below your offering price even though some of the

43:59 greatest companies in the world did it and so I think that's a similar kind of silly constraint that people throw out there I would say this about about your initial comment some of the board members are just too young they have never lived through it they don't know they were trained in the last 10 years they've only seen up some of them are naive which means they haven't studied economics and finance to the extent that they should I might Point

44:25 them to my one of my favorite blog post the the keys to the 10x Revenue Club because Silicon Valley mostly lives on price to revenue multiples like it is the conversation desure in in Silicon Valley and it's one of the most naive ways you could value a financial asset in the world and so people just need to sharpen their pencils to a certain yeah I mean like Ju Just a couple comments there I mean you know

44:55 you and I both know we talked about it even at the top price to revenue so you see this all the time in software it's just a shorthand for investors to get to discounted free cash flow but here's the problem because I live in the public markets we do DCFS all the time but how many people in Silicon Valley Even build a model on the company right like there's just not a lot of that that goes

45:20 on if you're doing seed in series a that's not what this is is is predicated on either but when you're investing in a business at over a billion dollar valuation you sure as the hell better be building a model and understanding what the exit value is going to be based upon a normalized multiple into the public markets and so I think way too little of that was going on we're seeing these Corrections you know beginning to

45:46 occur but if I go back to my first question I had for you on this topic bill I went back and I saw a talk you did in 2012 and somebody said oh 2008 wasn't so bad we've bounced right back Etc and you said you know listen 2008 wasn't so 2008 2009 wasn't so bad because the bubble never got that big and here's the interesting thing about what you said you said I don't know if we'll ever see

46:14 a bubble again like we saw in 1999 so gu was was the Zer was the Zer bubble as big as a bubble we saw in 1999 will it take us the same four or five years that it took in 1999 for the world to work through that entire backlog well it was wildly different in the terms of one thing which is the amount of capital being thrown around and so the companies you know in 99 a

46:47 huge round was 20 $30 million and so we went well past that with billion dollar rounds and whatnot and so from that standpoint I think you could argue maybe the price height of the bubble may have been similar or maybe even lower because then we we're giving companies with no Revenue huge prices but the the capital intensity of the bubble I would say is a more important metric was bigger it was bigger and and it how long

47:14 will it take I don't know I mean I'd love to see companies start going public again you and I have talked about this I I I don't think the windows closed like you may not like the valuation like you got decide you may be afraid to be public you know you may have had someone tell you it's too hard like all those things but it's not closed like it's just a matter of price and it it just

47:37 takes a while for everyone to get busy getting busy after you come through for sure I may even take it a step further Bill there is a voracious voracious appetite for IPOs you know normally we have over a 100 Tech IPOs a year and we basically gone two years with no Tech IPO well we had three whatever like no you had you had a handful but I'll tell you this yeah most of the folks who are on

48:05 the buy side right so think about whether you're a long only fund a capital group or tro or whether you're altimeter or kot2 or tiger Etc right if all you're buying is mag s you're feeling a little bit uncomfortable you're looking for new ideas all the time right and so I I think the only thing holding us back is to find highquality companies that are going to the public markets and accepting the valuations of the public markets right

48:34 which is the market clearing price I think you're I think you're going to see the the the the dam really break on this this year particularly in the back half of this year and the reason is because people got to raise Capital right and I just think they're they're coming to grips with it and I thought we would see some IPOs that were either related to recapping or raising Capital you know and there were some sometimes sometimes what you need first

48:58 is the derivative instrument that then makes you realize oh I really got to get public and convert everyone to Common that happened to to square actually they had done a they had done a time bomb derivative thing that then make made you go public and so maybe maybe that maybe we got to have those first and then and then we'll have more but but I I would have thought you'd see more I think a lot of people also

49:23 have this silly argument that we got to wait for someone big to go first and I actually I actually think we'll probably see someone a smaller company with a courageous founder step through the window like I don't think we don't have to wait around for stripe that's kind of a silly notion yeah know you a question earlier that I just wanted to touch on I just remembered which was why why is it taking longer for Founders maybe to come

49:48 around to the valuation adjustment right I think one of the reasons is that with all the secondary liquidity that occurred this time around right you know the hardest thing is if you ever anchor your net worth if you ever look at oh I own 20% of this company it's valued at10 billion so therefore I'm worth $2 billion okay and if you set that anchor in and worse yet if you start living your life that way right and then all of

50:16 the sudden you know you have this re dramatic reset down 80% and you're like oh I'm not worth $2 billion instead my company somebody says company's really worth a billion or two billion dollars all of the sudden like go back to the stages of grief what's that stage denial and then anger no doubt right I think it plays nowhere close to what I finally see happening this year I think 2024 in terms of the stages of grief is the year

50:45 of acceptance right I think people are just going to have to get liquid they're going to accept the prices that they have to accept because frankly there are no more soft Banks to bail them out right and the public Market's not going to overpay because the p Public Market knows what the clearing price is and so that I think gets Founders to the stage of acceptance but I think we probably have another quarter or two to get

51:08 there I think we've beaten that one to death right I I'll say something well you made me think of something that I will share maybe on behalf of of all venture capitalist and and maybe to to make everyone's lives easier one of the easy defaults you go to in the middle is oh I'll just go to my insiders and ask for a bridge and I will tell you at least all the data I've seen the success stories coming off a bridge are

51:37 are few To None that's why we always refer to them as peers rather than BR so as in walking off the end of a pier yeah yeah like well in it doesn't get you to the other side it just takes you out into the water you're much better off like like talking through a recap with with investors than you are doing you're just piling delay upon delay you know you're just setting yourself up for more failure it reminds

52:06 me of a related subject bill you know I remember at the start of last year we were talking about who were the companies that were going to follow Facebook in terms down the path of layoffs and getting fit and you know there was somebody produced an article and they said you know once we started to see a trickle of companies they all magically you know they hired some consultants and they said how many people should we lay off and they all

52:30 magically came up with like 13 or 14% and we're like why 13 or 14 and they said well it's bigger it's bigger than 10 and it's not as hard as 20 okay and I think that this is the other piece of evidence we have here that people just didn't get the drill we always say do it all up front get it over with and get on to rebuilding your business with unit economics that makes sense but

52:58 unfortunately if you just look at the number of layoffs being announced I think we now are up to 40 or 50 big companies you know I mean just recently Wayfair and eBay and go through the list but these were all decisions that could have been made at the beginning of 22 I'm wondering why or by at the beginning of 23 it's shocking to me that we're we're we're in the first quarter of 24 okay this correction

53:23 started more than two years ago right why are people just now getting to the conclusion that they should be getting fit it there's a wish there's a lot of wishful thinking and and and quite frankly let's let's paint it in a in a very different light startups aren't created by pessimists they're created by blind optimists right and so you're you're your most likely mindset if you're the type of founder who who runs

53:53 at walls is that that you you're going to figure it out that it it'll be better I I'll make it work I'll get back to where we were like that's how you're programmed so although I'll tell I'll tell you the story the story of Elon is you know always up and to the right people need to celebrate the stories about elon's survival and Elon not hiring people and Elon you know making it through through the near-death experiences of 20

54:25 eight what he did at Twitter laying off 75% of people that you know I saw somebody tweet the other day bill they said I guess I guess Twitter isn't going to fall over right I mean the platform is as vibrant and the product development cycle as vibrant as it's ever been why don't we maybe want to jump on to topic four sure so we're I think through our discussion we we'll get back to why this relates to VC

54:52 and Tech but a lot of people were found it quite interesting let's say the the new leader of Argentina's speech at the at the at the world economic Forum melee and I'm we'll put a link in but I'm sure most everyone's seen it by now obviously very different from all the other talks that are there but why why was it meaningful to you well you know the first thing I did when I

55:22 listened to the speech and it's something I've thought about a lot was you know here here melee is an economist when's the last time you heard a politician give a major address and he starts It Off by talking about the empirical evidence and starts quoting data so I was just my first question was like I want to see this data so I had one of my analysts go back and pull the data which was the underlying support

55:50 data that maybe we can bring up and what this data shows so this is the years it takes to double Global GDP per capita now first maybe we should just start off by saying why should we care about this right so GDP really is the excess the progress the prosperity that's created by a fixed amount of Labor and capital in the world we have a fixed number of human beings they can only work so many hours a day and we

56:20 have a fixed amount of capital in the world and what are all the things and services that we can produce with that and that is the global GDP well what he noted in this chart shows that basically from years zero to the year 1800 we had almost zero GDP globally and we had very little you know Prosperity we had very little excess you know one might think of it in a very primitive way even before the year zero

56:50 that we were hunter gatherers and we basically lived a Subs consistance life okay so in that case he said takes you 3,500 years for Global GDP to double and then something crazy happens around the year 1800 remember Adam Smith's wealth of Nation about free market capitalism published in like 1775 1780 and so we have free market capitalism Market democracies introduced into the world about that point in time and just coincidentally we start seeing an

57:22 acceleration in the rate of global GDP growth so the period 1820 to 1900 it only takes 87 years to double GDP and then 1900 to 1950 only 60 years and by the time you get to the year 2000 we're doubling Global GDP every 20 to 30 years okay which results in this chart you know the next chart which is the go this is just like such a shocking hockey

57:53 stick chart to look at at okay so this is the the increase in global GDP okay over the course of of the last 2,000 years right you almost have none and then it starts going up a ho hockey stick and then we said let's forecast it forward for the next hundred years and if we forecast it forward and we just assume right that we have the same rate of GDP you know being

58:23 added every year that we have this year so we're not assuming any acceleration from Ai No systems getting better you know you just see the advancements caused by this and melee was of course arguing that this was the result of free markets and competition yep no doubt so Bill you know I think if we look at this one of my questions for you you know gets back to this why should we care so much about these empirical facts

58:54 and the speech and what are the risks to this so I I would highly encourage listeners to read two books the first one is the rational Optimist by Matt Ridley and the second one is how Innovation Works also by Matt Ridley and they should be read in that order they're almost one's almost a sequel of the first one but in the rational Optimist you know Matt talks about the underlying mechanisms that lead to the

59:25 data you just shared and what melee was talking about and he he he sums it up in in around two functions one is ideas being exchanged he calls it ideas having sex I'll give you I'll give you an example if you know we can go back to early agriculture if I learn how to plow and put seeds in the ground and I go you know to a town to trade I can tell someone else how to do it I can

59:52 show them how and now they can go do it on their own and that exchange of idea was free but it had magnificent lift to Prosperity it's ironic because when I wrote down that I wanted to use that example the thing that immediately popped in my mind was in the AI world the Deep Mind paper about the attention window attention is all you can need this concept was done inside of Google as an open source concept

60:25 immediately copied by all the other players so open AI doesn't exist today if that's patented in control there it just doesn't which is another irony around this open- Source argument because they benit Fred it from massively from a major but but but the idea being shared and this is also why I'm such a massive open- Source proponent because I think it's so relevant to prosperity for the masses if ideas can be shared there's zero cost but infinite lift and then the second

60:55 part of it in in Ridley's book is Commerce for all the reasons Adam Smith talked about it's just a way to allocate resources and so if you get both of those things humming you get massive success it's super interesting if you look at the history of China because they've opened up and closed multiple times so they used to be like a third of world GDP and then they closed their borders and quit trading and they went down like way into the low like

61:23 200s or something and then of course you know by the way I want let me share something on my screen if I can I'm going to try yeah right here so this is my favorite test of a AI bot I asked the very simple question what single human being has brought the most humans out of poverty and chat GPT got it right of course ding Xiao ping who brought capitalism to China and brought 500 PE million 500 million

61:53 people out of poverty no other human being not not the most no you know not Mother Teresa not like no altruist no socialist has come anywhere close to this number that was done merely by unleashing the human potential that was latent inside of China by allowing for idea sharing and commerce to to have this massive impact and I even think there's an argument in the past let's

62:23 say three or four years that by stopping you know Commerce or at least restricting it a bit and stopping trade has led to at least the shakiness within the Chinese economy which may have led to what happened in SE or I guess it was it was in Silicon Valley in the meeting and like hey maybe we need to get this thing back on tracks because of that like you ask what could harm it one of my favorite thinkers and and and

62:54 Prof professors is a gentleman named Ricardo hman at the Kennedy School he's Venezuelan and he was giving a presentation once about what went wrong in Venezuela and he said they attack the Invisible Hand and I love that phrase attack the Invisible Hand yeah and so these people and and and I'm sure they're well-meaning but that I that view capitalism as the cause of of poverty or negative Prosperity when the data all says it's the opposite it's

63:23 actually the thing that brings people out of prosperity that appears to be the way you get yourself in trouble yeah I think you about out of poverty and into Prosperity out of poverty and into prosperity and that's that seems to me I think the reason that this speech in particular at Davos right because there's this phenomenon that's been criticized there for years that there's a move you know toward perhaps collectivism that we need to move away

63:52 from you know free market markets and I think people set up this false dichotomy like that people are absolutists on free markets and they don't think that there should be any regulation no government's kind of anarchist view or that you should have this very you know collectivist organization it seems to me like the United States has constantly been search of a balance between embracing its DNA of free market capitalism while at the same time putting in basic protections for the

64:24 least fortunate Among Us for those who can't take care of themselves for the people who don't benefit equally you know in society but I think what we've seen is over the last few years some concerns among the two of us included that the pendulum swung too far that there was a lot of anti- capitalist anti-free markets almost anti-democratic fervor that somehow it was unfair it wasn't Equitable you know to all participants and I think

64:55 go ahead go ahead I I would just say the social safety net is funded by the progress that's created from capitalism and and Tack and growth and all the things that we talked about and if if you eliminate the latter there is no money for the former at least in the long run well that's exactly what you know you know I think melee's argument is and perhaps bringing this bill full circle back to Silicon Valley back to Tech invest

65:24 you know people you know I have I have family members and others they say you've done well like why are you still doing this you know like and it may sound a little cheesy but I say like the very nature of what we do I think is a public good right and I think about it in this way like human progress and I'm not just talking I'm not talking V venture capitalist like in fact less about venture capitalist I'm talking

65:49 about Risk Takers I'm talking about Founders I'm talking about like the engine of the Innovative system in fact you know the rule of law around bankruptcy was a pretty novel Concept in this country but we wanted to make a deal we were basically saying if you're going to be the risk taker if you're going to want put your neck on the line to move our country forward if it doesn't work out we want to give you

66:14 some protection so it doesn't ruin the rest of your life because we were trying to create a system of incentives for people to take that RIS and so when look at you know what we where we are today one of the things that you saw in the empirical facts is the accelerating rate of capitalism right and it seems to me part of the reason for that acceleration is that systems compound upon systems these are nonlinear no doubt right and

66:45 so you know mobile compounded a lot faster because of the internet internet because you know of of of of microcomputers you know the cloud because of mobile and the internet AI all those things were preconditions to AI right you know you just made me think of something that like if you look at what ding xha ping did in China and how quickly and you you've you've you've been over there and met with the founders I mean and and and you've seen

67:15 comments from meritz and others just like like at the least they're equally good and arguably in some ways you know some mentioned better certainly harder working like from the cultural standpoint and that happened pretty damn fast right that that you know we used to say there was only Silicon Valley like there's no like there's no other place like it and then China very quickly mimicked it very quickly in the span of time and it makes me wonder if

67:45 you had like for say inside of Russia the type of embrace of capitalism and free trade that that that you did under ding XA ping you might see the same damn thing people are certainly smart enough you know I I I think your spot on you know I was having a conversation on Sunday with Mike milin and he's starting the center for the American dream and Mike is very very concerned about move away from you know just free market

68:13 capitalist democracy and he said to me something that struck me he said Brad when I travel the world it Dawns on me that Vietnam everybody there wants to be an entrepreneur everybody there is is running hard after after capitalism in the Middle East we see the same thing occurring and he's like I just want to make sure that we continue to underscore in this country that it is the thing that caused us to be at the top of the

68:40 Heap it is what led to the progress and we need to protect that because like you said you can't take it for granted and that's certainly that's even more true if you look at the last 20 years like American industrialism could have arguably been a postor War II thing you know we we all the factories were blown out we but but if you look at the just the companies that lead our our market caps today they're all venture back and

69:08 and they're all started within the past 30 or 40 years and most of them started by immigrants most of them started by people who didn't start with a lot like the amount of economic Mobility that we have in this country you know and so you know I would I would say that was a hell of a conversation I've enjoyed it like I always do we've been doing these things for a long time but why don't we

69:30 leave it there it's a good note to end on that was a lot of fun and until next time bg2 is out take care bye-bye take care