E62: Elizabeth Holmes verdict, fraud origins & takeaways, navigating "The Great Markdown" & more
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Happy new year, happy new year, new year, guys. And look, this is now it's candle season.

Oh god, look at the equity. This is A Y this candle .

costs twenty four thousand dollars. IT is trembly rare brazilian sandalwood. You literally have to go into the amazon and like, you know you you basically have to like.

I mean stingingly no bro.

you you tt a turn out like two acres of rainforest, and then you find this one tree completely, you know, sacred and then you chapter, you make this to produce IT and .

and at last, for a full forty five minutes.

how you like that .

sweet cal care le carts are right now. The D. M. Are coming.

You guys want to hear about poker last night, or did you go? So I go down. I take my eight hour drive down the house and I pull in and, uh, you know, the security guard greats me nicely.

As always. I walk in and I walk towards to the poker room and everyone's in there with the door open, like someone just got shot masks on freaking out. And tomato is inside the house and I wave and he's like getting here.

And then I go like, oh, who was positive? Max, the dealer test IT positive. Everyone been hanging on the poker room with no and .

only two people that were exposed to. Max, we sent home.

yeah. So everyone starts freaking out shots the, uh, shots, the poker game down to mah kicks everyone out sounds everyone home and then he's like, right let's go have dinner inside. You know, we're we're not we're going to be over up.

All the doors were going to a kind of light through the room. Tomorrow we all go in and have dinner. I go to dinner, the kids.

And then tom starts thinking, you know what, it's okay that they were only exposed for refuse ing. Let's call feedback OK. Let's call ship back. Let's call keeking back. And then they all come back for dinner, and at this point it's become like a dinner party.

And then a couple glass in the room probably say, I mean, the whole poker night went through the entire psycho le of psychology of cover the whole day, oh god, get everyone out. Lock up. And then by the end of the night, as like.

you know what.

let's go in the room and just play poker and give .

each other of IT. They cept ance got that anyone. Dozens of people, this point, and they all say.

was a cold.

Dozens of people.

for jack was on social media. Jack was party .

jack I was .

on social media giving everyone the update like, oh, I see today oh, I so test positive he's like sharing his positive test doing that super .

fat my stand were concerned it's .

the only test resolve yeah, lisa. But the only power that's true.

We can give.

We open source to the .

fans and got the.

Elizabeth mes has been found guilty on four counts of raud faces twenty years in prison for each guilty account. They would be, I understand, served concurrently. Most people are here speculating for to ten years um and then I think you can get fifteen percent off for good behavior again, i'm no expert on that, but that's what I read.

Guilty counts were two counts of our four and two counts of conspiracy to commit for. He was really been charged with a total of eleven counts of fraud. D A.

Four we're guilty for were not guilty. Three were a split verdict. The jury said they were unable to come to A S verdict on three of the accounts after more than forty five hours of deliberation.

Quote from the world street journal article, juries were persuaded that michell's conspired to foregone investors. This outcome could be significant because IT means hundreds of millions of dollars of there are no investors that there are no investors loss could be taken into activation. During her sentencing, big numbers, the jury was split, however, on which of the six investors who testified were defrauded the jury h of victim's homes, all three counts. These included one hundred million dollars from the family office of former education.

Ducaine was like .

doing for the audience. So anyway um thoughts on uh the legal uh technically of the case councillor sex. We talked about this before. I mean.

I think so at the other, the day he was convicted on the cause related to deceiving investors, SHE was not on the consulted to patients. I think that makes sense in that her obligations to investors are very clear whether I think that the patient related duties are I mean, he had them, but it's look at less clear. So I mean, look, it's it's what we've always said here.

As a founder, you can be as messianic as you want to be. You can promise you know anything about your vision and what you intend to the future, but what you must do is be accurate about the current state of your business. You cannot lie about the deals that you've made, about the current capabilities your product.

And SHE was putting, you know, logos of customer SHE didn't have in her deck. SHE was lying about the military being a customer. So SHE simply exact misrepresented where he was at that time, at that when these investors invested.

And that was the red line SHE should not have cross. And I think in that sense, is a pretty simple case. I think the part of this, again, the piece of this is interesting, is not the case itself, but really the media coverage, because the media wants to portray this case as an entitlement of silicon valley. And the thing you keep hearing over and over again.

none of us were involved.

Well, IT is actually, yes, exactly. We were in involve a single .

person in silicon valley. I think you put in a single shackle into this thing who actually does this as a real job. Tim.

rapper SHE. Tim, her, putting a little bit .

money as an Angel. And then he, he didn't put a single dollar and after that i'm saying, no, you can come to social capital or the craped ventures or the scope to T, P, B or the google to raise money for this thing. None of that happened. You know, sex is right.

Like the the summary of, uh, the walsh journal neck you can post because I I put IT in the group chat, basically summarized the fraud and is exactly what sax said SHE fixed the logo of specifically I think he was fazer that had not validated their nesses technology in materials SHE presented to investors. So she's basically like Fisher said, this is a go and apparently that wasn't true. SHE gave the false impression that the devices were used by the U.

S. Military that would got all these military folks to sign on board and support IT that wasn't true and then um and then SHE the biggest crew was that he signed to deal with wall Greens and safeway to include its devices in hundreds of stores. And then many investors saw these contracts as an endorsement of the technology and growth potential. But basically those folks did no diligence in papa hyphen. So IT was just a whole cycle of this thing that basically fell apart because the test didn't work.

Facebook, what are your thoughts as our life science grow?

What what's most interesting to me is how does this get to this point? If you're elisabet homes, your nineteen years old, and you start telling your story, and the more grandiose the story you tell is, the Better the reaction you get is IT becomes reinforcing and the behavior extends a little bit further and a little bit further. Every time he told the story about how incredible the tech was, it's just one drop.

You take one drop. I can measure everything when SHE simplified, IT reduced IT to that. And that was such an incredible statement.

And he saw the reaction from people she's like, well, that works. Let me repeat IT. Like any good sales person, they figure out what sells and then they sell IT and then they repeat.

And what's interesting to me that, you know, you talk about the media, but when SHE went out and told her story and got incredible press coverage, because he was a Young female doing something that was gna save lives, there is this alter with sixty jobs ask kind of combination here. The media wrote a glowing review of her, and then SHE said, well, look, they said something great. Let me go do that again.

And he got a bigger media piece, writing a bigger media piece. And the more he said, the bigger he said that, the more he claims he could do, the bigger the story got, the more coverage he got. And the whole thing became this kind of reinforcing cycle. And I do think that the press coverage that he got as he was building this business, which helped her raise capital, helped her attract employees, helps her get logins and safe way to the table. Alter is a leader to build a business, but it's exactly what created the narrative that wasn't true.

And so the coverage that the press gave her, and we see this everyday, you guys all see these top fifty companies, and we all know having metal loto these companies as you go down that list, this twenty companies are total game companies are fraud y're not onna work the gresser all the stuff that you guys might say about the quality of those businesses. But the press reporter isn't doing diligence. They're not a you know, IT turns out all the diligence was done after the fact and then it's like, well, maybe we should go do some diligence.

Oh, way to second because the the press coverage has now created this hype story about who and what he is. The the diligence actually pays off because you have something to take apart. If he was just a nobody starts tup that raised thirty million dollars and still trying to figure out their way, there would be no value in any reporters doing diligence on her try to figure what was actually IT.

Does the story got big that I gave everyone, including job Carry you an incentive? He's the last street journal reporter who broke all this, an incentive to go and take this thing apart. And so it's unfortunate and it's really self reinforcing that the Price coverage that created the circumstances ultimately also enable them the press to take the thing apart. And you land this woman in jail. And I might saying he did nothing wrong, but i'm just saying that there is a system here .

and the system is set up as such.

The one thing you free broken, i've got a question for sax and cheap, her basic premise that one drop of blood could get you hundreds of results. Let me just ask you a question for break. At what point with one drop of blood or so a nanotube be able to at our current technological um you know ramp, be able to give us a hundred different data points on a person .

every time you're generating a data point, you're running what's called an essay, which is A A measurement of something. The question is how much of a molecule you measuring against what volume is there enough of that molecule in that volume to give you a statistically good reading? And that is a function of how precisely you can measure that thing. So there are there are a great advances happening right now in the domain in life sciences of uh of hardware technology called microfluidic.

This is the manipulation of peo leader, you know, very, very small volumes of liquid, and then being able to run chemical essays using biochemical techniques, which we now have all these amazing new kind of tools, like crisp e and other things that would allow us to great get a much more precise, measured with a much smaller volume and has ever been possible. So we can manipulate small fluid, we can measure them. So there's nothing today that would physically say we cannot do many of the things that he claims to have been able to do.

But there there's a stacking of technology assets that needs to be done to make that happen in reality check again. And each of those assets are very different. So look, you could do IT with collect right now, you do IT with blood gore right now, but you could do both.

You could theod ally. You could put them into a device. That now the reason, the reason why lipids work, can you do four hundred things?

You not. I've actually funded three of these businesses, and i've poured almost hundred million dollars of money, and they've all failed. And the reason is exactly what he said.

You can do collapse because lipps are big enough, you know. And so you can basically build an essay that can pick that off with a drop of blood. You can do a reasonable good job with pretty large area bars on sugar.

But all of this other stuff where you're going na replace like you know A C B C or these broad you know profile panels that we all get once a year to assess our health today. I don't think that that's necessarily within rich. It's not within technological region.

It's not because people aren't you know smart officials that not enough of this investment is happening because then you go back to this whole idea where the funding cycle needs to see a big payoff for the capitalist to want to get involved in this thing. And there really isn't you know, it's not as if like question lab core are printing four hundred billion dollars of revenue and profits. And so it's not like there's a massive economic incentive to run in. And so even when you know we have tried and multiple occasions with completely different teams of incredible people every single time we have failed.

So there is a physics, uh, law here that just not physically possible. SHE made this claim.

IT brought. There are things, there are molecules, there are pathogens. There are things you can absolutely detect small molecules, and you can detect with the drop of blood, you know, magic, counting how many blood cells you have in your whole body, you using an estimate from a single droplet of blood. Because, no, we. These machines called flow python ec machines where we sort blood cells and then it'll tell you how many red blood cells you have and how many different kinds of White blood elves.

That's a big part of your and you'll check up that you'll typically get you need a good amount of blood to get an accurate reading on how many blood sales there are using even just using lasers and you know these sophisticated machines, can you reduce that down to a drop? Let physically? Probably not right.

And so there's some it's not universal to say this is possible. It's not possible. There are elements that are absolutely possible, some of which are being done today. And there are some things that are going to .

be very hard to pull off. Got IT and and he was making claims as early as two thousand and three one was found IT. So we're talking about eighteen years ago, and we're saying here, it's not going to be possible to do hundreds of these things maybe in our lifetime.

We talk about decades to be some significant breakthrough sex. Me asked your legal question. I was on a podcast and a said to them, why have that? The prosecutors had bill maris, who h as a friend of freeburg, who helped me get him on the podcast, he was great.

Thank you for that. David on this week started up very smart. I very smart guy, and he came out publicly when he was running google ventures, and he said, we looked at in a couple times he was referred to their nose, but there were so much handwaving like, look over here that we couldn't figure that out.

So we just had someone from our life science and investment team go into walGreen and take the test. And IT wasn't that difficult for anyone to determine that things may not have been, not be what they seem here. Now, sex, I was on this podcast to drop out, which this is a abc news one, and I said, why didn't the prosecution bring up E O G V? Let's assume the choir in recent and the twenty top firms in the valley who said no and they also know, because he wouldn't show them, do diligence. And I ask them, why didn't in the prosecutors bring up those two firms and compel them to testify about why they did invest to give the counter example? And SHE said, I don't know, wouldn't have been a much Better strategy to say here are the credible people who didn't invest.

I'm not sure I see the relevance of that because he lives with homes. Crime was not promising something that he couldn't ultimately deliver on. It's O, K, to failed in silicon on valley. One of the best things of about silken valley is that we don't punish failure. That her mistake wasn't making this representations.

The people who did invest right.

if anything, if anything, actually what olive with homes maybe should have done was call up some of those firms and they could have said how easy IT was for them to figure out that nation of investor. Maybe that would have been a way to the waters on her size. I was thinking that .

they would have said, hey, SHE wouldn't show us the technology. And when we did our independent diligence, SHE wouldn't let us diligence. We did outside back our diligence. IT felt there .

were red flags all over this thing we had talked about in our poker against way before this thing went off the rails. Um the fact that there were no major V C firms involved, you could who had expertise and biotech who could do the diligence IT was all sort of IT was basically family office money of people who warned in to look valley in writing big checks whether was your permit to or the divorce family or what have you were just red vice coming off this thing which is why looking valley was not by a large due by IT the people who are due by IT, where the people that Elizabeth was able to sell the peta of slim valley too.

And the media because the media, what we seen over and over again is they don't fact c stories when they fit their players. The prior here is that you know, what the media want to believe is that the next Steve jobs is gonna be a woman. And so when elisabeth homes serve that up to them wearing the black turtle neck, IT was too good to story for them to fact check to heavily. And so they ran with IT in the same way, in the same way that, you know, the eve remain hoes that rolling stone ran with was too good a story to be fact checked because they want to believe that the maga people, no clamp or eating horse paste. I mean.

no, there's a hundred Better examples of just I mean, just to be generic acts of other other startups that we all know our total .

nonsense and total nonsense there.

A there's .

there's a fraud and biotech going on right now that David I David and I saw up front. I mean, it's like this stuff is crazy. It's really, really crazy. Look, I think the .

moral of the story for treating neural, I mean, there's a couple of takeaway here. And number one, you got be really clear with the present state your business, it's okay to talk about your grand vision of what you're going to in the future, but you cannot be inaccurate in any way with respect to your current numbers and partnerships and deals and current capabilities.

I think number two, I think when you start working with the media in this way to promote your company, you're playing with fire. Because the media really has two kinds of stories. They build up and they tear down.

And when they're done building you up, they're gna tear you down because as the only story left to write. So if you're gonna go court, the media in that way to try and get publicity, you Better be really careful how you do IT. You Better be really accurate, and you Better not give them cause to later regret pumping you up, because they will tear you down even harder if you do that.

I think, I think the more important danger that I just like to speak generated for a second is to not let other people do you're thinking for you, the investors that came into this business came in under the assumption that this was a real business because the press had written about IT and the press rote about IT because the general had joined the board.

And the general joined the board because his body, George shell, said, hey, you should meet this lady. And the whole thing ended up becoming this round about where no one actually did any original thinking, and no one did any actually lives and the whole thing. So now .

you're talking about really how so little value so that all yek. You don't think these dupes run around thinking of the koa benchmark social capital craft, invest on just planning the money.

And of course they do.

They don't even think of proof. They assume that we've done that.

They're principal diligences got so far ahead of itself. No one actually went in and did the onus of those finals. Everyone assume that because someone else has is this and because someone else is involved or someone else something nicer been written about IT or said about IT, it's worth backing. And like the lack of original thinking in business and life in general, I think, is one of the biggest you know risk that each of us takes. And it's why it's really important to learn how to thank you for yourself.

I I have deep respect for early stage investors because they have to get in and make some critical decisions. Some people make those decisions about the team, write the psychology of the confounders. Sometimes it's about the end market and sometimes it's about a deep analysis of um detraction.

But you have to honest let's be honest, there is a valley of funding between the series a and maybe the d or the e where I really think a lot of folks just look for signaling value based on who the series investors were. They not sure making not sure that those family offices were any words or any Better. Maybe the device family looked at rupert murdoch, said, he's smart.

So i'm in. Yes, that s so different. All these series, B, N, C firms that say, uh, benchMarks in amen, totally. It's exactly that.

I literally had a situation and I think I brought her up a previous episode where I was working on a deal. IT wasn't like a major check for us. IT was six figures check and they said none of other firms are asking for diligence.

Uh, why should we give IT to you? And I was like, how much are they putting in case? And they were putting in more money than out. They were putting seven figures in.

great. And I said, because I have new diligence. When you have for diligence. Now some of these .

founders look at you like, how dare you? exactly? They know in this case were insulted. They said we're not giving you diligence. And they.

and we walked away .

visiting the house. Yes.

they like buy IT without this company that David, I all, well, David was calling the point. This company couldn't even even explain growth or revenue. They couldn't. They IT was a gross for revenue astracan. And it's like if there's one metric on A P dl that can never have an astracan ever the top line.

the top .

money I.

I, I, I get.

I get gap.

I I get IT OK, but a gross revenue .

astros.

how are of the the money? And so I would just remember asking the simple question like, um can you just take the abstracts away? And just so this .

is the company that two of you were looking .

at together you you and I .

ve talked about many times and your threats two point o sir.

that's for this and learned a lot about dela. I don't know if .

you guys have I think .

about this ah ah in the text you like but anyway i've been getting a big um a lesson here about delaware law there something called the section to twenty have any of you ever had .

to file one of ort you any any of you .

aware of what h you and if you aware of .

what a .

section to twenty years or heard of this before. Basically in a deliver corporation, if you're A A shareholder of any size, not just like a board member with ten percent whatever, if you feel there is a mouth reasons going on, you can file this two twenty in delhi ware and um according to this a great scarps uh article on this the the delhi are orts are taking you very seriously that if there is any accusation of any kind of mouths and especially financial, any shareholder even tiny, can get all of the books and in detailed not board minutes, not top level P L, like detailed financials. uh. And so for people who are running companies, and this is private companies to.

this is in private companies.

look up section to twenty of the delaware general corporate law.

I remember facebook is because we had these vagaries. Having to control shareholder account or stuff like that and information rights. Yes, we actually kept the financials on a physical computer that was not connected to the internet. S of the people that wanted IT would come here to come to our office and then we put them in like a windowless room without their phone or something.

I think that that's how they avoided people filing to twenty requests. And so just something for people to be aware, aware of on both sides of the table that if their sanity is going on a company, a founders think I don't have to give you an information to my shareholder. It's not true. Whatever you have an information rights, whatever your lawyers rode is not above section to twenty and deliver. So just keep that .

in my right now going on where I found D.

I won't give you information.

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

can be possible? A good question.

but it's at this weeks of a fraud. I'm not going to say the name yet because i'm hoping that they're gonna start acting in a more costal way. But it's the most the greatest thing i've .

ever see you all you have to do is talk to your attorney at Wilson in fan wik or whenever one of the coward of clearly .

have advancement. The company they've engaging a sale, the sales were publicly announced. We have reason to believe it's in the hundreds of millions and they won't tell .

anybody the yeah file to twenty, follow to twenty and you know what they are public. So then the crazy thing about these two twenty is IT used to be that all of the information had to be private to sign techno disclosures, whatever are now in certain circumstances of biggest, in the best interests of all shareholders, that two twenty information can be public. And so that is just like a snipper shot to anybody who is doing any condition.

And gans, we had a company in the same situation who wouldn't tell us about a cell. And then I have a call with the board because I own seven percent the company this years ago, and I said, can you explain to me what happened here? And they're like what we do in the sale in bb.

And I turned out the bankers, we're taking forty percent of cell, whatever I say, okay, well, i'm not going to prove this. You need approval. Let let's talk about how we could make this work because we have outside funding that the companies turning down to do a sell that everything was in their money on, just make sense.

And um they said what we can really do that because we really sent the eight employees over to the new company that's buying IT. What you mean like when we ran out of money to pay them so they all moved over to the pair of the new company. You have to close the .

transaction yet.

IT was crazy like this good stuff that I was a prime companies .

yeah .

this stuff is always at the peak of when there is a correction, right? I mean, this maybe a good to talk on. It's a great so it's like that level of grip happens right before, you know, basically we have to rerate valuations. You know, because because of generous entrepreneurs takes so much, well, there's just a small, small percent of them, but they just take so much leeway in pushing the boundary and and sometimes it's .

other board members who are acting their own interest. But I I solve this problem and I called the CEO of the public company that was buying them and explain the situation. He said, like, talk to my C, F, L, A friend of the pod, whatever.

And they said, how do we solve this with you? I said, this is how much money I have in this is the value of your company. How would you like me to be an advisor to your company for the same .

amount of that value? And chairs gifted, so basic bzzzz.

everybody is I used by election. And then they said, okay, will make you an advisor. Then I took the advisor shares and I rode a letter and pledged them to my investors.

And my investors are now three x or original investment. And I said, i'm not letting a gun, not signing the paper until I get the two hundred fifty k that my investors put in period. And then they didn't. I'm up, but let's segway crazy .

market pulled .

back the great right down has occurred charts from altimeter our friend regardin, I assume, uh, show a major regression to the mean for text. Toxic index meeting enterprise value next twelve expected revenue yai ta this includes people like adobe data dog shop of a olio workday. And as you can see here on the chart, which will pull up sax, explain to us what's happening .

here well is a major aggression to the mean on on public commit evaluations in both house. But also more generally, the the high growth stocks have corrected more than the indexes. So that would imply that there might be more correction to come against the index is I think the girls talks really taken the bulk of the hit.

But what trigger IT this week I predicted, and you guys had similar predictions on just a few weeks ago, that this would be the train train to be the year, the correction, and I really began in november. You had the the fed, you affect governors makes some hockey statements about the about inflation not being transitory, about the need to raise rates. Then we had the the fed open market committee meeting.

This is nothing around seven fifteen th, and they announced what they were going to do on rates. And now this week, the minutes of that meeting were released, and IT specially IT said something that was completely different than what they announced to us just three weeks ago. And so the market basically the seized ed, apple and convulsions, and specifically, what they said in in mid december was that they're going to taper faster.

They are going to N Q one. Sorry, they're going to N Q E. At the end of q wan is A Q two. And then we're going to have counter point rate hikes in q 2， Q 3， Q 4。 That was the plan for two.

And then there was additional guide dance that they were expecting three more quarter point rate hikes in twenty three and two and two and twenty force, and that was sort of the three year plan that was laid out. Then we find out from these minutes, and I guess these minutes weren't leaked to anything, they publish them after like a three week revise and extend reMarks type period. But what we find out is what they were talking about was having a rate hike as soon as q one, and not just ending QE, but actually shutting assets, which is like the opposite, f QE.

So instead of basically going out there and creating money, shrinking the bali a, shining their baLance sheet. So instead of going out and buying bonds, they are going to sell their bonds, which will reduce the money supply. So look, if that was their view three weeks ago, why didn't they announce that? I mean, my problem with this is that makes the fed look like they don't know what they're doing because they announced something just three, three and half weeks ago that's completely at odds with the statement they just put out. So either something changed in the last three weeks and this .

been no data or know they doing a little bit of a track record. IT looks like there is going to be inflation and power tried to get ahead of IT and he raised rates and the the market completely collapse. And they were looking, I think, at chinese data at the time.

And IT looks like, you know china was turning you know going crazy and china completely turned over IT was a complete headwaiter. The economy wasn't reborn, inflation didn't exist and um they basically just curtailed a lot of investment and destroyed a bunch of value. So this time around, I think they're very sensitive to not correcting too quickly.

But then the opposite thing happened, which is they probably waited a little too long. And now, you know, we're correcting too slowly, too late into the cycle, and we're just sort of digesting that reality. And so I think that you know, we're probably, to be honest with you, like actually like we've puked IT all out for the most part, in my opinion, if you remember right.

Like the big difference between now and even ten and Frankly, more importantly, twenty, thirty, forty, fifty years ago is how many computers are involved that trade, how much passive money is involved that owns assets, and how much of this stuff is sitting on the sidelines still in money market accounts and munis. So if you look at those markets, there is a ten trillions of dollars waiting to find a home. And what we've now done and brush charts show this is we've basically chopped the head off of all of these fast growing growth multiple.

The underlying companies have not changed once. And tiller, right, these companies are still growing by crazy amounts like snowflake is still an incredible business unbelieved. But the multiple that one was willing to pay has has been very much we raided .

as is a bunch of other. If we've gone from these fifty, sixty seven multiples time cells and now IT goes back down to twenty, is that there? I say a bite signal and my trillions of dollars start moving back in because who wants to be in the money?

More thing I don't know. I can't really call these things. But one really smart person that I talk to this week, you know, he actually liquidated everything in october and november. And you know and I don't be talked about this on the pod, but you know, I was feeling so much tension at the end of last year. I actually when I look back on q four, IT was probably the most difficult cover of my professional life and just trying to manage risk.

And I exhibit a ton of positions, all my pipes, you know, my third party pipes, I basically sold off, except for one, you know, I generated some liquidity in other places as well. And I was glad that I did that in part because I saw, you know, what he was doing and in part because, you know, jf fane on we're selling. And I thought, I mean, this is this is crazy to sit on the side lines and, you know, be the back holder here going into key one.

I talked to the same guys. And what he said to me, which I think is very smart, is you have to really look at the first and second derivative of the ten year bond. Because when that stops moving, like the ten year bond, this is beautiful barometer of the collective wisdom of every single investor in the world about what they think about long term growth and inflation.

And it's a really important market. You we've talked many times, look at the ten year break even if you want to understand where inflation is going. We started to talk about that seven months ago. And if you look at that, the rate of change. So the volatility in the ten year yield is slowing way down.

And if that continues to hold, that means that people are really saying there's a small amount of real inflation, a reasonable amount of transitory inflation and were about to kind of washed most of through the system with in a hundred basis points of retakes. And if that's the case, you may see a quick pullback, you know in q one, and we're back to the races again because of all the other money that's going to say I got got to get back in. And if you look at all these corrections in the world of computer trading algorithms and etf and passive money, and it's all the snack packs are so fast, you correct twenty percent.

And then what you wait IT back and you go. So I don't know. I mean, that's one view based on the past.

But when you have these big swings, remember, it's not that every issue .

moves .

perfectly and sink with every other issue. So there are these call IT over adjustments that happen within a cohort. So within a group of companies, some of them will trade down much farther than others, the multiple will compress much further than others.

And there is certainly opportunities within, as there is in any market, is moving quickly uh, to find businesses that now our Prices mature, non growth value businesses and they're profitable and growing. And there's a bunch of of those out there now. Uh, that wasn't the case a month ago.

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

and IT feels to me it's not just about what's going to happen with new emerging growth companies. But I mean, you correct me from wrong, but there are hundreds of companies that have raved billions of dollars evaluations that if they look in the public markets now, they are never actually going to achieve if they were to go public in the next three, four, five years based on their .

so to your points. So what are nine? Yeah, there are nine hundred. And orns right now, nine hundred. And so once you get to look, it's one thing to be a two hundred million dollar company itself to microsoft, whatever. But when you're a billion dollar company, there are very few.

But I just want to point is a huge disincentive for an investor shareholder of VC or a private equity firm to take a big right down on a company like that. And so there there is always this push to what do we do next? And that creates the certain, certain way. Tell you, i'd love your point of view, but you're this really like unhealthy tension because to take a right down on nine hundred unicorns is gonna a cause, a right down of hundreds of billions of dollars, and that a all B, C portfolios in aggregate, because they are not to end up going public.

And know, just to finish your thought, because the end market is only to go public.

There are very few in .

the million dollars because you have .

to think .

even even if you look at like these and that nobody's allowed to buy these.

Have an example I can tell.

met here maybe. But my point is when you have nine hundred companies with the billion dollars and plus to go go against, if you can go public into evaluation framework that values you at thirty to .

forty percent less of your .

last private mark, right? So important thing because is that all these cc with the the twenty fifteen and twenty sixteen and twenty seventeen, twenty eight and twenty nine invinted ge are gna end up having they've all got these great mark books right now. You know, the books are all mark to three x uh, you know, multiple and invest capital. And now they are going to end up having these liquidity events that they are going to come in a shockingly low valuations, and there's going to be this great right down and retrenchment.

I can tell you this couple of examples. One is the athletic yesterday, which had raised money at five hundred million just two years ago, just sold for five hundred million to the york times. And those investors basically put money in and they got their money back.

It's a push. So you to no, i'm agreeing with you. Yes, i'm going to give the .

example of acquisition by acquire.

And so they'll be plenty of those that occur. So it'll be a lot of pushes, I think, is my prediction of those hundred. And then for a lot of these sas companies.

you say you think that a unch of them are going to sell for under a billion dollars, and the VC, because they have preference, are going to get their money.

correct? I think it's gonna a lot of these pushes where I know what is that in black jack, David, when you're playing those three hands and you get push like and it's like, OK, i'm onta live to fight another hand now, which we ve seen sex in number times. And then for the sax is where sax, i'm interested in your position because we saw on sax offset the private market thirty, forty, fifty, sixty, seventy times top line. And now it's going back down to twenty, thirty, forty. So those companies now basically the public.

I think, in the market that has .

happened already, everybody's pausing. And so for the people who raised that fifty x congratulations, you do the right thing if you have enough money to fill in that valuation.

Congratulations though. I mean, IT teams like there are pretty .

tough .

position now know that you use raise money in a billion dollars valuation with ten million of revenue. You're like watching A N almost all the companies i've seen in this .

exact situation talk about have that twenty million they got a billion. They raised a hundred million or two hundred million, and they're basically now saying, okay, we ve got to make this last until we can catch up to evaluation and get to fifty to seventy five million. So I think you I would take that deal as a founder and as an investor because IT takes out the side and now you just have to worry about catching up to the valuation.

And you have four years of runway. They are not. They get the right size this time.

Those companies, companies absolutely do have four years of one. I will buy dollars to do. They have two years or less, and most of these companies have eighteen months.

which means they're going to be raising in sixty nine. No, they are changing. They are changing their .

spend and they're changing their firing. Anybody you're not hearing about layoffs are all right.

you're not hearing about, but maybe they're changing their four looking growth plans. What are you saying? sex? I'm telling you what i'm seen.

everything. I think that the trickle down effect is inevitable, but i'm not sure it's fully kicked in you. It's gonna take a few high profile deals to land at safe thirty times A R instead of one hundred times A R in order for everybody to know that there is a new valuation level. So if you look at the ultimate chart on set public as multiples will see nick pull IT up IT.

Basically, it's the SaaS index IT shows median expected value to um next twelve months of revenue and during this sort of um late twenty twenty early twenty one period, IT got as high as about fifteen times the historical average yeah for well for next twelve months or revenue, the which is sort of that that kind of make sense. So historically around eight, right? So basically all the valuation levels doubled and now they're come down to about ten times.

So you could say that if IT fully reverts to the mean, we stood out like another negative twenty percent to go. I don't know if that's gonna happen. I mean, I think there has been a greater recognition that sauces are seeing the best species to own, right? It's they are subscriptions offer businesses great growth margins.

They just keep rounding. So maybe I will stabilize at ten times, but I think what we can say with twenty twenty hindsight is that the record Price sovs we got to the public markets in twenty and twenty one were sort of unusual and unique and probably a result of this incredibly expansion. Ary fiscal monetary policy was coming out of washington, now has a trickle down to the again, VC markets yet.

I mean, the way that that has to happen is at the latest stage, investors, the cross over investors who invest in both public markets and private markets, they have to they have to start paying less for the latest stage growth companies. And then you know all the downstream VC are going to start paying less as well because you know if you know the markets are lower, you have to take them into account. So look, all of this is underway right now.

I mean, I gave a bloomberg interview in december and um I think I went on rea barros o show around that time as well and I kind of warned that all this was coming and um yeah we're in the mist of a of a giant rerating because we're realizing that so much. Of the peak values we are seeing in twenty and twenty one where the result of artificial liquidity and is what you guys predicted, one of our big I guess, my big prediction for business losers this year worked as a classes that were highly dependent liquidity. You guys predicted cyp to would be one of those.

Clearly, it's taking a massive hit. Have you seen how much the cypher markets are off in the last week? So it's so .

much for them being.

Sponge for liquidity. And the more liquidity there is out there, the more money can flow into a more speculative asset class. But look, my objection to this, I mean, is that if you look at the fed's actions, I me I think chh is right that they waited, wait too long to react, and during the crisis, they overreacted. I mean, they pumped on a previous pot. We showed the exactly between .

under reaction and over you.

Yes, exactly. And and now I think they're you're going overreacting again. I actually think they nailed IT in in mid december. They nailed IT by giving us business certainty around what the new rate environment was gonna.

And just three weeks later in the minutes to that, every meeting, they completely undermine the certainty or the the greater level of certainty and predictable order that they had provided. markets. They've now introduced massive uncertainty. So it's just it's unbelievable.

It's like they are pilot and like they stalled the plane and then they're like.

oh, let's put they are kind of pulling out the manual learning in real time .

yeah and it's like you need to just point the nose down a bit and air D A little bit speeds so you get some left like it's really as tragic .

that the performance of our government every level over IT since code at the last yes, it's twenty, twenty. I mean, it's been a dismal I mean, first you have the self inflicted wound of lockdowns. I mean, the economy is going to take a hit among of what? Because highly risk people would have stayed home and reduce the economic activity, but and serve just protecting the at risk people.

We had to lock down the entire economy. We padlocked elan's factories and on and on. So we basically shut down the whole economy for no reason.

And states like california kept going way longer than they had to. So and the government displaced like five, six trillion. And the fed doubles the size of its baLance sheet.

And then now they are properly getting off drugs. I mean, look, they put us on drugs and now they're going cold turkey. And so I think there's actually like a much greater risk now of the economy going into recession this year because of the feds of a reaction this week. I mean, they they had the golden oxen's down about three weeks ago, and I think they are going to take the thing now. Or there's a much great to risk of that.

Best advice for founders, private companies in this turmoil, which your best advice from your founder you got, I don't know, eighty months of runway right now you're going into this you know slash and you want to know what should I do?

What should I do I think paul grams advice that makes the most sense or you need to focus on being default alive um define what that .

is just for people yeah .

so you know payment m wrote this great I say I sport what he's a founder by combinator and you know he has a very simple you know framework of looking at companies which is your default dead or your default alive. And when you are losing money as a company in your burning enormous amounts of cash, your tea faut debt. Now, if you're growing fast enough, defauts dead is a great strategy for value creation.

But at some point, everybody around you will expect you to be defauts alive. And what that means is that the cost of what you do are less than the reviews you bring in when the resulting profits. And even then, that's not good enough.

I don't know if you guys saw, but you know, if you look inside a big tech, I was shocked to find out that, you know, for example, you know, companies like microsoft specifically and apple, you know, these guys traded huge forward multiples, right, for enormous profitable ability. But companies like facebook and google for the same level of profitability, no trade, almost a third less in terms of multiple. So even when you're that good, it's not good enough to be default alive.

That's how hard this game is over very long periods of time. And so when you have a moment to really understand how to be default alive and you don't take IT, I think it's a huge disservice because we don't do enough of that kind of coaching that really inflicts that kind of discipline and expectation setting. I remember I I have a large climate investment.

It's actually the single largest investment i've ever done. And so I sweat the details pretty significantly. And you know I was with the team in uh uh in november, december for board meeting and setting up twenty twenty two.

And my whole thing was, guys, you have to get default alive. You have to get contribution margins to be in a certain band. You were we are going to target this level of free cash flow generation this year, and there's no if and robots about IT.

And what's great is the entire team embrace that were marching towards that. But if they did in and they're like now, we're just gna grow at all costs again. Oh my god, I would be freaking out right now freely.

We have to to that as advice to founders who have not been through this before.

I built my business, my climate court. Uh, we raised around in november of two thousand and seven. We raised twelve and half billion dollars and in the financial crisis said and keep thousand and aid.

And um i'd say two things or really important, uh, number one was just keep building. So if you're building a great business IT doesn't matter what the market perturbations are. Uh you know the the market will value you what they're gna value you are. And if good business, there's gonna money available are to you. The second piece of advice is one that I know been set over over again, but you know never raised an evaluation beyond you know what you're reasonably going to be able to kind to deliver returns on at some point the future because others SE those nasty dynamic ics emerge. You know you could raise money at some crazy high valuation.

That's not always the best thing to do because then the expectation of the investor or is coming in a devaluation, are they want to make three times that money or four times that money and IT pushes you to do something unhealthy, like spend more than you otherwise would, stretch for a bigger outcome and put your entire company at risk. So you know two things to me. I've always been just stay focused on building your business, don't let you know kind of market conditions, drive your decision.

Making a second to find what for you is the best practice of staying focused on your business because that is a very general term. What is freeburg if you're going to see the server? Top three things of focus on your business tactically .

means I have a simple rubrics for equation in a business. You know, number one is, can you make a product? Number two is, do people want to buy your product? Number three is, can you make a positive growth margin selling that product to those people?

Number four, can you make a return on the marketing dollars you have to spend to generate that gross profit? Meaning, you know, can L T V exceed cake? And number five, this, can you scale the amount of money you deploy to grow your business such that as you grow, the return goes up, not down. If those are the five kind of things you can accomplish in that order, you can build the next google.

And so and the six thing is, can you be a platform which is mean meaning can you transition to be a multi product company that gets the leverage out of the the user base or the technology that you built? And so you know if you can revenue streams, revenue strange using the same customer base or multiple products, know whatever. Um and so if you can achieve those six things um in that order, every step of the way, every increment you can make across that spectrum drive significant values of business.

Ultimately, what the multiple on your business will be is purely going to be a function of what else is going on in the world, things that you cannot control. And so if you're driving your decisions about building your business using that first rubrics good for you, you're going to succeed. You're going to have money unable to awesome. If you're driving your decisions based on what the market is telling you to do and what the market is saying is available to you, money and all that sort of stuff you're setting yourself up to, basically.

what are are you also saying to be independent of valuation?

I I am always of the opinion that you shouldn't raise money beyond your um into evaluation that you are not comfortable saying in different market conditions or would have you I .

can return multiple think any founder has ever. Most of these founders were not around in two thousand and they were or two, but even two thousand and eight was less important in my mind because I was IT. IT was fast. And again, we had government stimulus. So, you know, like, I think two thousand and eight was an abortion tional moment. I was, I was in the middle, you know, inside facebook, and I was like, what the hell is going on here? The government's going to step in and you know, with tar printing a trillion dollar as he didn't affect this at all.

Yeah, you were the most powerful company or not?

Not that kind of two thousand eight ww.

you were do that cash?

No no but no. But here's a thing that that people don't realize. With facebook I O day, we were always devoted. I want every single person listening to understand, okay? We saw power ads for party poker in big banner s on facebook.

and we made money, were profitable.

Okay, so I don't buy this army. That argument of unprofitable growth is a vestige of fund dynamics. And VC, who wants to raise larger and larger funds to blind their pockets with fees is a function .

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

sense in two thousand that did make sense. You could not run an unprofitable growth business. The money would not have been there, right? And the real reason is that was a in market check, meaning you had people relocating capital because rise rates were different.

You know, you could put money at six percent in in us. Ten year bonds. Now obviously, you can do that today.

So maybe this cycle is just the new Normal. And so you know, maybe you can always be default dead and be able to raise money because the incentives exist. But I wonder when that the stops.

And so I don't know. Google was an incredibly .

cash efficient business. They is GLE indication. D O A O L paid them hundreds, millions of dollars. And that fund of the business, if you can sell ahead of your customers in terms of delivering the service of the product of them. You've got the most beautiful business in the world. That's the definition of booths strapping google, even though they raise venture capital, effectively bootstrap the business by getting customers to prepare on getting people to prepare for cars.

I wrote this in my annual letter like two years ago, but facebook, google, apple, microsoft and amazon raised collectively less than two hundred and fifty million dollars.

I mean, yeah so I think I I agree all of you guys have said um I mean to I grew the freeburg that recessions or downs are actually great time to build startups because innovation doesn't stop. And the pap was pretty built after the dom crash. Emr was probably built after the two thousand eight sort of great recession.

So it's absolutely doable and some things actually get easier in a downturn. There's like wave, you're starts getting funded. And so like talent gets easier to recruit. So you know things loosen up.

You know in terms of the company building side, the only thing that really gets harder in a downturn is fundraising, right? This is and by the way, I think is a good practice for founders not to care what happens in the public markets. The aza early state founders, right? Because the only time that really touches you is when you need to access the capital market gets right.

And then you will be subject to the downstream impact on vcs of what's happening in the markets. So so the only thing that really gets harder is fundraising. And this is where I think chaos advice comes in.

I I personally think that trying to achieve default a life status is too high a bar. I mean, it's a wonderful thing if you can do IT. I mean, facebook did IT, google did IT.

The very best companies did IT. But I know a very few as companies that I could you to grow if they had to be castle positive. I mean that an early stage. So the metric I uses burn multiple or router blog about this once basically does how much are you burning for every dollar of net new air or you're adding?

So in other words, like if you're burning a million dollars over when I appeared time a month, quarter, year to add a million dollars of net u AR, that's actually pretty good. So a burton full of like one or less is amazing. I'd say event up to two is good. So other words, like if a SaaS company can say add ten million of net new A R A year and burn twenty, I think VC will fund that all day long even in two .

year paid yes.

But when you starting to burn multiples of three, four, five, six and up, that's when like VC a way to second yeah you're that will not you're not a thing. It's not just efficient, but IT starts to raise questions about your product market fit because you're effectively spending too much money to grow. So like why is a growth that hard? right? No marketable? no.

Yeah, exactly. No market place of things away putting IT. So I do think you have to shark like in a downturn or in choppy waters. If the sharper the pencil, get more efficient about your burn, look at your burn multiple. And then I think, you know, if you have the opportunity to top off your war chest like that smart, you know, and don't wait .

too long and be frugal. I mean, god, the amount of like crazy spending i'm seeing in some startups and unnecessary spending if you're spending something is not going into product, is not going into marketing, you know, it's not going into sales and it's not you know just you really have to ask ourself, why am I spending money on going to this conference, going to that conference on this office space like really beef frugal. I know that it's when you have all this money slashing around you looking for things to spend IT on but .

stay focused yeah I mean.

don't spend .

seventy five hundred on that unless you've got to the cash and we will be getting back to the people who applied. We're going to go through and somebody's going to approve you.

Another thing to this, which is you're right that like most founders have never even seen a downturn, because the last big one was a great recession in two thousand eighty nine, some many found, was even around .

back the the most, really the real one .

was two thousand.

That was IT. Froze, I would say, froze to two thousand eight was what? Like twelve, eighteen months of choppers. And I would say a lot of companies couldn't raise money.

How to do downwind ds, how to do multiple liquidation preferences? IT was not only on some captors les, during that period. And if you don't know what multiple liquidation provinces are.

I understand, but there was no real market check. The market check was really into thousand, and you saw IT was a multiyear slog.

You had to be .

different.

You had to be so. But I would say a third of the startups went .

away in two thousand and eight. I don't think we're running into that again. So let's not create A A koa graveyard.

Nobody is the point. Look.

it's a it's a probability of getting your business fund right. And and that's kind of lower. It's it's not like .

but here's a thing, but I but I what's shocking to me, it's like I don't understand why people think you can grow infinitely forever. It's just not true. Even the best businesses in the world after fifteen or twenty years are barely growing at twenty percent people's forecast. Facebook and google, those are the two best businesses in the world.

Isn't the question what kind growth are to finance?

No, what i'm saying is if you know that your terminal growth rate, if you are one of the best companies ever created ever, is twenty percent in twenty years. IT doesn't take a genus to do a line of best fit between now where you're at a one hundred percent in twenty and realized that at some point, if you don't figure out how to make money by selling what you're selling, there's a lot of people who will be smart enough after enough historical data has come through the transit or come over the past to realize that these things are not that funeral. And this is what's shocking to me.

It's like that day is hiding in plain side for anybody to look at IT doesn't make sense unless you believe that those those growth rates of forty, fifty, sixty percent are sustainable for thirty years or forty years. We've seen zero examples. And you have to look at these canaries in the coal mine because if if the best companies in the world can do IT, you're you have to really scratch your head here already, ignore IT, whatever .

ever just wing .

IT and like .

feature of those .

features will work .

and save the day there's some .

magical future you are yeah I mean.

valley in terms of capital is um you know seeing kind of power returns itself right there going .

to be a few firms .

that are control eighty percent of and tiger tiger s ital. Deployed vate right now in in probably two years, eighty percent of it's gonna come from three firms or four firms.

The problem is if you're running that much money, you're insane to not take your G P. Public because it's the only way like you're not really generating Carrier at that point because you're generating a market data return. So you'll do OK. But when you're sitting on twenty, thirty, forty billion of computed wealth by being the owner of the G P of tiger or and reason, you'd be insane. And I go public, I think .

you going to be tty high that and rerecorded public, right? I mean.

there are certainly .

set themselves up to be a lot more than just right.

It's never but no but I mean, like venture never scaled up to the point the private I would have until now. And now that is very like very likely that you'll see and recent be the first. I don't know them you know very well. But sax, you are going say something .

here I think is a super interesting point because if you talk to the previous generation of the what they will tell you who retired, right, is what you ask him, what did you get anything for your partnership share in the firm, not just in a fun, but in the firm? Let's till, you know, the bases gave IT way to the next generation of partner. You know they built the firm and because the historically, the belief on the part of cc was that there was no value to VC firms other than just their interest in each particular fund. But you're right, like if they do achieve a much clear level scale and they can go public, that there is actually value in the form itself.

If you look at the terminal evaluation of blackstone as index to A U M S, once you pass a couple hundred billion of A U, you can trade point toward point one, point two times. And so you know, if you have fifty billion of A U M, there's ten billions, five billion dollars that just appeared out of nowhere. Why would you not do IT?

Right, right? It's a little bit like global X. I always said that we're a partnership.

We're never going IPO because and they did.

and something would see a do that too.

Now I guess what I C, A was of its sole, this position to go to dizen. So there would be a conflict. But he could have kept any like residuals they were .

getting from package training ever even looked. And i'm not sure.

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

Wait a second, what if we take each of our businesses, put them together and then taking public as all in capital, and then .

we get .

the we start of studio .

difference and we .

on the day and food .

for our one day event to my M Y.

That's because the matter work you guys want to do is slashing ing me and a slap in a chat.

No, what we wanted someone to do the work.

We hire professional.

I have been doing conference for twenty five years.

Upside ti. You launch camera .

of my conference, and I put the fix in for you to win.

Thank you. Technical is a beautiful conference, but for all in summer is IT just the case. We want pull a shop and there can be a stage and people talking on stage, and that a sole conference are, we want to create a more magical experience. All law.

a dove. Everybody, thanks for tuning to episode 6。 Two of all in hot test will see at the all in some money. And if you want to do as a favor, please go ahead and subscribe and way us on apple, we could really use that. Uh and thanks to spotify for including a Daniel share Daniel, he included us in their video. So now if you're on spotify and you're listening to the pod, you can click a button as of this week and watch the video where you can watch he mailed us and his team and then I he's the would he be good for I would think .

about having him and mr. Beast.

here's my a for a trial, him, mr. Beast, and then one of the person to do a media trio.

future media. What is? What is your? What is your idea? You don't even know.

The.

oh, my god.

are you great? Get the .

the same.

Time your .

winter.

Light man.

We open sources to the fans and just .

got .

crazy with.

You should all just get a room, just have one big huge org because like sexual attention .

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