Dan talks with Not Boring Founder Packy McCormick about managing paternity leave after the birth of his second child (1:49), the volatile emotions fueling public markets (5:31), finding proper valuations for startups (7:55), Ethereum’s price slump after “The Merge” (12:44), Bitcoin’s struggles to prove its value (14:15), Elon Musk’s stunning announcement that he will buy Twitter after all (18:41), why Packy thinks the most exciting companies right now are in the private markets (27:17), and if big tech companies like Meta and Amazon have a path to get out of their slump (29:42). Later, Dan chats with FirstMark Capital’s Rick Heitzmann about his takeaways from FirstMark’s recent founders summit (39:34), if the market overcorrected from the surge in interest rates & the U.S. dollar (41:15), the potential fallout from redemptions in the private markets (45:35), Apple’s strength in the U.S. versus overseas (48:50), when the IPO market may finally reopen (53:15), venture debt changing the landscape for startups (58:55), and how much longer capital may be sitting on the sidelines in private markets (1:05:50).
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NewsTranscript
00:00:00 Hey listeners, it's Dan here. I want to tell you about a company that I'm really excited about.
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00:00:37 Welcome to OK Computer. I am Dan Nathan. I am here with Paki McCormick from Not Boring.
00:00:43 And stick around, when he and I are done speaking, I have Rick Heitzman of FirstMark Capital.
00:00:48 Paki, welcome back to OK Computer. It's been a few months and you've had some exciting things going on in your life.
00:00:55 What's going on, man?
00:00:56 Yeah, it's been a while. Good to be back.
00:00:58 So I guess in the interim couple of months, I had our second kid.
00:01:01 Took a month off for paternity leave, which is the longest I've taken off since starting Not Boring.
00:01:07 That's a very long time to take off.
00:01:09 And just continuing to now get back into the swing of writing and investing and all that fun stuff.
00:01:14 Yeah, well, congrats on Maya. That's an amazing addition.
00:01:17 And congrats to your wife. And you have a son, Dev. It's his second birthday today.
00:01:21 So you've just been in it for a couple of years, huh?
00:01:23 It's fun. He's a monster and amazing and all those things.
00:01:28 Maya's actually been an angel. She's been really easy.
00:01:31 And it makes us wonder how we thought the first one was hard.
00:01:34 But he's just been waking up in the middle of the night. He won't nap anymore.
00:01:38 So it's not one, it's the other. But it's been a blast.
00:01:42 Well, there you go. I mean, my kids are now 19 and 17.
00:01:46 But they are two years apart. And I remember what that was like.
00:01:49 And my oldest child is now a freshman in college. And it's absolutely amazing to see the difference of that.
00:01:55 Talk to me a little bit about paternity leave.
00:01:57 And I will tell you that in 2003 and 2005, when my kids were born, I was at a hedge fund at a trading desk.
00:02:03 There was no paternity leave. There was like, take a few days off and get back here when you kind of rested a little bit.
00:02:09 I suspect that was probably something much deserved after the couple of years that you had.
00:02:15 But also, what sort of perspective did it give you, like taking a step back?
00:02:18 I assume that was earlier this summer, correct?
00:02:20 Yeah, that was pretty much the month of August and into early September.
00:02:24 I mean, yeah, one of the fun parts about working for myself is the paternity leave policy is kind of whatever I feel like the paternity leave policy should be.
00:02:32 I think if I were working for a company, I'd feel more uncomfortable taking that much time off for better or for worse.
00:02:38 But I think it was really, really good, quite frankly.
00:02:41 Before the paternity leave, I think just in the lead up to having a kid and having a kid who was at the time 22 months old and writing a lot and getting dunked on on the internet for the first time and being in the middle of a bear market and all these things kind of happening,
00:02:57 I felt actually like I wasn't doing as good a job at kind of like anything that I should have been doing, particularly on the writing side.
00:03:06 I think just being able to take time off and time off is in quotes, I was still having conversations with potential investments, still having conversations with LPs and still reading a ton.
00:03:17 But I think just that space, stepping back, reading a bunch on a bunch of different things, kind of forming my perspective and getting out of the day-to-day fray was really good.
00:03:27 After I started writing a couple of pieces recently that feel like they've just come from a place of having more fun, I got feedback from a few people, particularly there's this app Farcaster, which is this Web3 Twitter right now and will be a protocol that people build on top of.
00:03:43 But it's great because right now it's this really small, kind of friendly community.
00:03:47 And so when people there give feedback, I'm like, "Oh, this is actually great."
00:03:50 If people on Twitter give feedback now, I'm kind of like, "F off."
00:03:53 But on Farcaster, I'm like, "This is really good feedback." And somebody was like, "I liked your piece today. To be honest, I haven't liked your stuff as much in 2022."
00:04:01 And then got positive feedback from that same person a couple of days ago.
00:04:05 So I do think just having that space to read and think and step back has made me come back to this more fresh and having a lot of fun again.
00:04:13 Yeah, fair enough. I mean, listen, a lot has changed in the investment world, both public and private, and just in the last few months since you and I've talked.
00:04:21 It's just amazing the speed in which it has happened.
00:04:24 I mean, think about the public markets. NASDAQ was down at its lows on Friday at a new 52-week low, I think a little more than 32%.
00:04:31 The S&P 500 was down about 25%. The move in yields to the upside has been staggering.
00:04:38 So the 10-year yield went to 4% and quickly reversed. The U.S. dollar up 10%.
00:04:44 Think about this. And you're a former trader. I mean, the U.S. dollar appreciated in a little more than a couple of months 10% versus these major currencies.
00:04:53 And so we've seen these crazy dislocations. We've seen lots of worries just as it relates to corporate credit, which some people are worried about, maybe the real risk or sovereign credit.
00:05:03 So all of these sorts of situations are making some people who've sat around and watched the last couple of crises,
00:05:09 let's throw the pandemic, recession, and bear market out the door because we kind of maneuvered our way out of that one.
00:05:16 But little bits and pieces of the last couple of crises, the financial crisis, the dot-com implosion, all up into one.
00:05:22 All that being said, you and I are recording this right now. It's Tuesday afternoon into the close.
00:05:28 And then NASDAQ's up more than 5% in two days since closing at a new 52-week low.
00:05:32 And I wonder, do you miss that action? Do you miss the public markets and the speed in which sentiment can change?
00:05:38 I think it's the most fun thing in the world. I think it's crazy to kind of sit back and be on Twitter and see people day to day,
00:05:45 either being panicked or elated or whatever the emotion of the day is. And then two days later, it completely reverses course.
00:05:54 I think we're probably just range bounding down for a little while. Do I think this is it? And we've bottomed and we're bouncing back?
00:06:01 I highly doubt it. But it is just very funny to see the emotions from day to day swing wildly.
00:06:07 I've actually, for the first time ever, I think not boring, the media company's largest holdings right now are U.S. treasuries.
00:06:14 And so I'm becoming a bond guy now.
00:06:16 What did you think over the course of the summer when it seemed that a lot of VCs were sitting on their hands?
00:06:22 There was a lot of capital that was raised over the last year, but the trepidation really was around valuations.
00:06:28 Some of the valuations that we had seen being paid in the last couple of years.
00:06:32 And so, you know, you had this thing where a lot of VC firms were not taking marks relative to what was going on in the public markets.
00:06:39 But the public markets being marked to market every day, we know that things overshoot to the upside.
00:06:43 But we also know they could overshoot to the downside.
00:06:46 It seemed to be like a weird period this summer where the private markets were really stuck still,
00:06:52 while the public markets were really careening higher from June, you know what I mean, into late August and then careening lower.
00:07:00 How does that affect your psyche about deploying capital and how you're thinking about what is the next great company that you want to invest in and not boring?
00:07:09 You know, my psyche, and this is why I'm not a good trader, is calm and sanguine on a lot of all of this.
00:07:15 But talking to kind of smarter, more experienced people, I mean, I think one of the real questions and risks kind of even at the earlier stage,
00:07:22 which is like what the capital supply chain looks like, like what's going to happen even if you invest in this great company at the seed round right now?
00:07:29 What happens if markets fall apart? And even if it's doing well, it can't raise an A.
00:07:33 Or the company that you invested in that raised an A can't raise a B in nine to 12 months.
00:07:38 And so I think that got people worried. I'd certainly slow down the pace of investing as well.
00:07:43 At the same time, like I am a believer in not just because things in 2008 is when all the great companies of the last generation were founded.
00:07:52 I think there's something to that. And I'm sure there's a bunch of confounding factors that make it look like it was related.
00:07:57 And maybe in some ways it wasn't and all of that kind of stuff.
00:08:01 Just looking at the companies that I'm seeing now, there's some really, really unbelievable stuff being built.
00:08:08 And to me, the most interesting thing that I think that I've seen, like valuations have come down a little bit for sure.
00:08:15 But there are some companies that are raising at absurdly high prices early with very little revenue because they're doing unbelievably cool things.
00:08:23 I think what I've seen is fewer companies that, and particularly in Web3, fewer companies that are just doing it to do it and to raise in a hot market.
00:08:31 Like those have kind of disappeared. So I actually think the job has gotten more fun.
00:08:35 And the percentage of companies that I talk to that I'm really excited about, and I get excited easily, obviously.
00:08:40 But the percent of companies that I'm excited about that I talk to is way higher than it was six months ago.
00:08:46 Yeah. Is this largely in Web3? And I was on a podcast a couple of weeks ago.
00:08:50 And I actually used your definition of Web3. And again, I wonder if that's changed a bit in the last year.
00:08:55 I think you were kind of coined your phraseology about it.
00:08:58 I remember you wrote that thing with Chris Dixon and that was picked up by The Economist.
00:09:02 And I'm just curious, like how has like this crypto bear market over the last, call it six to nine months or so,
00:09:09 how has that affected entrance into Web3, if you will, and the sort of company creation and the project creation and just in general?
00:09:18 I mean, are you positively disposed to what's going on, maybe taking out some of the froth?
00:09:23 And now you're starting to see a lot of really serious operators kind of lean in, or is there more room to go on that front?
00:09:29 It feels like that one's probably like the scariest thing is just how boring and sideways everything is trading crypto right now.
00:09:36 I think that's also great. I tweeted actually today about the fact that a bunch of portfolio companies that raised,
00:09:43 that I invested in in the bull market are now starting to come out with their products.
00:09:48 There's one that I can't talk about, but they sent out a private beta just to their 52 kind of like closest people and investors and whatever.
00:09:57 And I've been on that thing every day and there's no token component to it. There's no whatever.
00:10:00 It's just like a really compelling app and something that I'm going to use.
00:10:04 And I think there's a bunch of that kind of stuff coming out now.
00:10:06 I think we might've talked about this before, that a lot of the products that actually got to market that were founded in 2021 and then also got to market in 2021,
00:10:16 were almost like definitionally not going to be the best products that were ever built.
00:10:20 They were just rushing to get into a hot market.
00:10:23 Whereas the majority of at least my portfolio and a lot of other investors I talked to, a lot of their good stuff is coming in 2023, even 2024.
00:10:32 A lot of the stuff that's going to take a little while to build.
00:10:36 So from that perspective, I actually feel really lucky. I keep going through my portfolio.
00:10:39 I'm like, all right, what's at risk, particularly when things were falling apart.
00:10:41 I was like, is this whole portfolio going to zero?
00:10:43 Am I going to have to send an apology email to all of my LPs that I invested in Web3 and this bull market?
00:10:48 And we had one company that shut down. They didn't run out of money.
00:10:51 They just were like, we're in an overly competitive space. We're giving you guys your money back.
00:10:55 And that's it for the carnage in that portfolio.
00:10:58 A lot of them are kind of waiting now to release the product when the time's right to launch a token, if they have a token coming, when the time's right.
00:11:05 But I'm excited about kind of like the actual usability of the products that I'm seeing now.
00:11:10 Right. So the bear market, let's say in Bitcoin and ETH, you know, obviously there's tremendous correlation to a lot of tokens of some of these Web3 projects.
00:11:18 But are there some that have surprised you that based on kind of the strength of the project, they've actually shown good relative strength or just correlations went to one?
00:11:27 Correlations pretty much went to one.
00:11:29 Which is probably what you would have expected, correct?
00:11:32 Well, yeah. I mean, particularly in a space where growth and usage and all of that is so tied to price and there is so much speculation,
00:11:39 I think even more than in a traditional startup where the dollar amount isn't attached to the project itself,
00:11:46 you'd expect it to kind of go to one when people just get less excited.
00:11:49 This is a post I think I want to write on just kind of the different innovation cycles when people need to be involved to actually make the product successful.
00:11:56 So everything in Web3 and then something like AI where out of nowhere, there's been all of this innovation.
00:12:03 And if zero people interacted with it, if one person was like, oh, cool, I'm going to use stable to fusion, it's an equally impressive and compelling product.
00:12:11 And so there's just these two very different kind of cycles that both of those would go through.
00:12:15 And so, yeah, it does not surprise me that I think crypto correlation kind of close to one.
00:12:20 All right. Quickly, though, on the ETH merge, it's been a few weeks now.
00:12:23 You and I talked about it, I think, in May, the bull case for ETH back then was that the merge was going to happen.
00:12:28 It was going to be this, that and the other. Right. Well, it happened and ETH got killed into it.
00:12:33 It rallied. It went from 2000 to 1000 back to 2000. And now we're back in around 1400, 1500.
00:12:39 It seemed to be a sort of sell the news. Is there anything fundamental that you've figured out about ETH since this kind of proof of work to proof of stake
00:12:48 and how different operators are kind of thinking about it now that it's happened?
00:12:53 And how do you think about ETH being where it is? You know, it's kind of found a home.
00:12:57 I know that it's down considerably, 60 some percent, as is Bitcoin, which is probably less than most other coins, you know what I mean, from their highs.
00:13:04 And maybe from their highs doesn't really matter. Maybe there's some other metrics we should be thinking about.
00:13:09 Give us a sense of where you are on ETH right now and just takeaways from the merge.
00:13:14 Yeah. I mean, ETH is still my personal largest kind of crypto holding and probably personal largest holding generally.
00:13:21 Definitely a sell the news thing. Definitely. I think if the merge had happened in, call it October 2021, the price action might've been a little bit different.
00:13:30 People might've just bought into that euphoria and kept going.
00:13:33 I think what's been really interesting about the merge is that you see like Starbucks coming on to Polygon, which is built on top of Ethereum.
00:13:41 And one of the reasons is like, now we can interact with Ethereum because it's not killing the planet or X, Y, or Z kind of big project coming in.
00:13:49 A lot of them are coming in through Polygon. They have an incredible BD team, but are finally like, all right, cool.
00:13:54 We can build on Ethereum because our customers aren't going to kill us now that energy usage is down 99.9% post merge.
00:14:01 So certainly sell the news. Certainly if you were going to time the merge based on when you thought you'd get a bigger pop from the merge, you wouldn't have timed it into this market environment.
00:14:10 But I think for Ethereum overall, it doesn't necessarily make it faster or, you know, that's not the point of this one, but I think getting that energy usage down makes it more appealing to both funds and to projects that might build on top of it.
00:14:22 All right. Not trying to set you up here, but quickly on Bitcoin, it just doesn't seem like many of the bull cases have really held up particularly well.
00:14:30 And the way in which it's acted, not since it careened lower, you know, over the course of this year, but it's found his home in and around like 20,000.
00:14:39 And I'm hard pressed to find like, what are the use cases right now?
00:14:42 Like, what are the things that excite you about Bitcoin in general? I'm just curious.
00:14:47 We need to get Meltem on here, but I have never been particularly, I mean, you know, I bought it in 2013 and then sold it, but I've never been particularly excited by it.
00:14:56 I mean, I think like the store value use case is interesting.
00:14:59 Like they're making a hard stand on mutability and never changing the thing and all of that.
00:15:05 Obviously the inflation hedge thing hasn't held up. Obviously it's been correlated with traditional growth assets.
00:15:11 I mean, I think I don't have a well-formed thought on this, which is something that I've been thinking about is if Bitcoin were the, and this is maybe why Bitcoin maxis are so anti everything else.
00:15:20 Like if Bitcoin were the only crypto and it got widespread adoption and it got like all of these things, then the fact that there's only 21 million Bitcoin might matter as an inflation hedge.
00:15:30 But the fact that like crypto as a whole can inflate by popping up new projects every day, I think kind of hurts that use case in a pretty meaningful way.
00:15:39 And if Bitcoin isn't accepted everywhere and used by everyone, same kind of thing.
00:15:44 So I think the 21 million Bitcoin hard cap is less compelling than I maybe would have originally thought.
00:15:50 Maybe I'll get killed by Bitcoin maxis and there's things that I'm missing here, but it feels like it's losing a little bit of momentum and it needs that momentum for that use case and that value to manifest.
00:16:00 Yeah. And that's the other thing that I think is really interesting. Just how the sentiment has kind of shifted.
00:16:04 I don't see too many of the laser eyes anymore. The Bitcoin emoji on the Twitter is not nearly as prevalent as it was a few months ago.
00:16:12 And in some ways it's like, where have all these guys gone with their hundred, $200,000 price targets?
00:16:17 And so the idea that you say, oh, maybe I'm going to get dunked on by a Bitcoin maxi gives a shit. Like, seriously.
00:16:22 I mean, these guys are like, you know, to me, I've been in markets for 25 years and any time there's ever this kind of religious fervor about an investment or an asset class or something like that, it just never pans out.
00:16:34 And it's one of the reasons why I've felt the way that I do about Tesla in a way.
00:16:38 Now, this is a very tangible company. They make really good products, I think, for the most part.
00:16:42 You talk to car people, they'll tell you they're not great cars. They're not as great as another $130,000 luxury sedan, that sort of thing.
00:16:49 But they're doing something that most of the incumbents are not doing or really took them a lot of time to come around to.
00:16:55 And, you know, so I get all that. But like the interest in the founder, the interest in every word that's out of his mouth or every tweet out of his Twitter, it's just very odd to me.
00:17:05 And that's why I feel very confident that this thing will unwind in a very odd way, or at least he will unwind or the company will unwind from him.
00:17:13 And it's funny, if you want to get destroyed or wrecked, as the kids say on Twitter, say something nasty about Tesla, say something nasty about Bitcoin.
00:17:22 And there's probably another. And you know what? If anything, it should really empower your conviction as why these people just probably are not going to have it right in the long term.
00:17:31 It's super interesting, I think, to look at the contrast between those two things, right?
00:17:35 Bitcoin belief is all about getting everybody to do this one thing with it, which is like buy and hold Bitcoin.
00:17:43 I do think that we have our agreements and disagreements on certain Elon Musk things.
00:17:48 But I think the thing that you're betting on if you're a Tesla bull or just an Elon fan is that he'll keep coming up with, there was a very funny back and forth about the robots.
00:17:58 And his fanboys thought these robots were the greatest thing in the world because he rolled them out and not very much time at all.
00:18:03 And other people were like, what? Like, there's people holding this robot up? Like, this is not why are you guys excited about this?
00:18:09 But he has, I think, at least earned the right between Tesla and SpaceX and Starlink and all of that, that you believe that he might have another rabbit to pull out of the hat.
00:18:22 Where with Bitcoin, I don't know what the other rabbit to pull out of the hat is.
00:18:25 Yeah, he's one guy, he's the richest man in the world. He has either from scratch or just taken like in the case of Tesla.
00:18:31 And he's just changed the game as it relates to auto, as it relates to the electric grid, the way that regulation is thought about in an entire industry.
00:18:39 So like, I get all that. Let's switch gears because as we're speaking right now, there's headlines hitting the wires that Elon Musk, who had agreed to buy Twitter for 44 billion back in April,
00:18:50 and then kind of wanted to get out of it and then was sued by Twitter to kind of close on the deal that he said he would.
00:18:56 And it's gone back and forth. It's been a big mess. It was supposed to go to court on October 17th in Delaware.
00:19:02 It wasn't looking good. Some of the pretrial stuff was not looking good for him.
00:19:06 So he comes out and says he's willing to kind of proceed with the deal that he agreed upon in April, pending receipt of debt financing proceeds.
00:19:14 Now, here's the interesting thing. All of this kind of pretrial stuff are some of the revelations about some of the conversations that he had with people who are willing to put up equity financing.
00:19:24 I mean, think about this goes back to what we just started talking about this whole conversation.
00:19:28 Look at how different the financial world is today than it was in April, where rates are, where the dollar is, where valuations are.
00:19:36 I mean, the list goes on and on. And if he's going to buy this company for 44 billion dollars, he's likely overpaying by at least 20, maybe 25 billion dollars.
00:19:47 And so if you are also one of those equity or debt providers and you know this is going to happen, you're not that interested anymore,
00:19:55 considering what you know now about future growth, valuations, rates, you know, all that sort of stuff.
00:20:01 So think about what the Fed has done in that time period. The first rate hike they had done since 2018 was in March.
00:20:08 He agreed to buy this company. Fed funds was still well below 1 percent at the time. Now it's a different world.
00:20:15 Thoughts here, because to me, just because he says he's willing to do this because he was going to be ordered to by the court doesn't mean he's going to have the financing.
00:20:23 And the last thing I'll just say is, and that is why Tesla's stock sold off a few percent when those headlines came out,
00:20:29 because if he's got to come up with the equity for this, the only way to do it is to sell Tesla stock.
00:20:35 Yes, on all that. I was shocked, frankly, when I saw that headline this morning come out.
00:20:40 I had bought some Twitter calls just because I thought there was no way it wasn't going to work.
00:20:45 And so those look like they'll print once they start.
00:20:49 Look at you. Look at you. A little options action there, buddy.
00:20:53 I went on options actions and talked about Twitter, and so I was inspired to buy some calls. But yeah, wild.
00:20:59 Wait a minute. You were on CNBC's options action?
00:21:04 Yeah, talking about Twitter. I forget exactly which day it was, but it was one of the days where big news broke.
00:21:10 Nice. All right, my man.
00:21:12 You know, you want to be taking options advice from-
00:21:15 The thing I would say to you about that is, let's just say the stock's halted right now.
00:21:19 It's at $48 or something like that, and the price is $54.20. So cute. $54.20.
00:21:25 Let's assume that that stock, when it reopens, goes to like $52 or something.
00:21:29 There's always going to be something left over. He's obviously not going to have to pay more than that.
00:21:33 At that point, I'd sell those calls, and I might buy some puts, actually.
00:21:37 I mean that sincerely, because is there a chance that the thing gets pushed out?
00:21:42 Maybe this is just a delaying tactic one way or another. Who knows?
00:21:46 I mean, this could be like a kind of gift for traders. So interested to kind of track that one.
00:21:50 But let me ask you this, though. As a power user and someone who you've been very honest about the fact that you help build a huge brand with Not Boring.
00:21:58 You have, what, 140,000 subscribers to your newsletter. You have a great presence on Twitter.
00:22:04 It's been something that's very important to you.
00:22:06 But you also just kind of alluded to something that's been really helpful at times, but it's also like it could be a time suck.
00:22:13 It could be like just something that is not really great for your psyche.
00:22:16 I'm just curious. Will you prefer to see this company privately in the hands of, let's say, Elon Musk and whoever he brings in to kind of retool the thing
00:22:26 and not have to kind of see the day-to-day, you know what I mean?
00:22:29 Like it just seems like we're nonstop talking about Twitter because it's a publicly traded company.
00:22:34 If it was private, do you think we're going to be talking about it a lot less?
00:22:37 Certainly, whatever happens in this deal, we're going to be talking about it a lot less than we're talking about it right now.
00:22:42 This deal is ongoing with the most famous billionaire in the world. It's just a fun thing to talk about.
00:22:48 There's a lot of open questions, obviously, about what he'll do with Twitter.
00:22:52 I think there's ways that he can obviously make the product better.
00:22:55 I've written a bunch of times that I think it's like the most under-monetized property in the whole entire world,
00:23:00 particularly relative to the importance that it has.
00:23:04 Hopefully, he figures out ways to both monetize it and make it a little bit less accessible.
00:23:10 All those things I hope are true.
00:23:12 I think the text conversations that came out are very funny because there's this article in The Atlantic dunking on the amount of diligence that people did.
00:23:20 I think that's stupid because obviously, it's a public company.
00:23:24 People have a view on this thing. They have smart teams of people.
00:23:27 They're not just like, "I don't know. Whatever Elon will do." I think that that part's overblown.
00:23:32 I do think it's very funny that all of his friends treated it as if one of our friends were buying Twitter.
00:23:37 It was like, "Yo, I have this idea for what you should do when you buy Twitter," including Jack.
00:23:42 He talked about how much of a pain the board was and that he couldn't decentralize in the way that he wanted to decentralize and that it should be a protocol and all of that.
00:23:50 It'd be great if Elon gets really wild with this thing, but it would be interesting to see what he does with it.
00:23:57 Yeah, the funniest takeaway I had from that Atlantic piece and seeing some of those texts is that guys like Elon don't really have friends.
00:24:03 You know what I mean? They have people who are kind of hanging around the rim.
00:24:06 I thought that there was one interesting back and forth between him and a VC where he said that the guy who runs his family office, he suggests, "You're using my name in a way that's not helpful to me."
00:24:18 I thought that was really interesting because there were people who were willing to fall on grenades and ride or die and all this sort of stuff.
00:24:25 Come on, man. Let's be frank. The chances that he actually improves this thing, they might better monetize it.
00:24:32 It won't be a better product whenever it comes out to the public markets or whatever. It's just not going to be.
00:24:37 All of these libertarian, techno-fascist, whatever the hell you want to call these guys, you think they're going to improve this product?
00:24:46 I don't really think so, especially when a guy like Jack Dorsey was one of the inventors.
00:24:50 Multiple times, CEO couldn't get it right.
00:24:53 Then he finally, literally is bowing at the altar of Elon back in the spring.
00:24:58 Then Elon tosses him aside.
00:25:01 I think the thing's a big shit show. I don't think it's going to be particularly better.
00:25:05 It'll be really interesting to see.
00:25:07 Under too many circumstances, if the whole goal of taking a public company private is to retool it, make it more profitable, and bring it back out at a better valuation, with what he just paid for this, it would nearly be impossible.
00:25:23 Your guess is as good as mine on that one.
00:25:26 What are you excited about in the private markets right now?
00:25:28 It's funny. It seems like all the consumer-related app-based stuff, e-commerce stuff, it just doesn't seem like there's really any excitement about it.
00:25:40 I think what took a lot of air out of the room in 2021 was obviously Web3.
00:25:46 It started Creator, then it went Web3, and different forms of monetizing for users, and then it had to go on the blockchain.
00:25:51 It had to be tokenomics, and all that sort of stuff.
00:25:54 Now, that's obviously come back in a little bit.
00:25:58 I guess my point would be there's got to be some stuff where you live that is going to be the next thing.
00:26:03 If you think about the convergence of mobile and social and broadband 13, 14 years ago, what would be those super trends converging?
00:26:11 It has to be something with AI, machine learning, all this stuff, and then putting those tools in the hands.
00:26:17 I know you write about a lot of these companies coming up or whatever.
00:26:21 To me, I'm not going to be able to figure that stuff out.
00:26:24 It's interesting. I guess, I don't know, NVIDIA, just the incredible demand for GPUs with all of AI when it's really been proven that what you're supposed to do to train these models is just throw as many GPUs as you possibly can at them.
00:26:38 That feels probably a little overbought.
00:26:40 But otherwise, I think most of the fun, exciting stuff that I'm seeing is in the private markets.
00:26:45 It's really companies that have been almost architected for where the cost curves have come to today, as opposed to if you look at a Ginkgo Bioworks in the public markets, which we wrote about, which is an interesting company, but that it doesn't have the right cost structure.
00:27:01 I don't think to get really huge, and we just invested in this company, Melanfrost.
00:27:04 They're automating 90% of what a Ginkgo Bioworks does by using AI robotics and this evolutionary algorithm to design organisms, which means you don't have to hire scientists for every specific project that you're working on.
00:27:19 I'm more excited about the private markets right now, just because there's a lot of stuff that's just being built from the ground up with AI in mind.
00:27:28 I think that's interesting.
00:27:29 I talked to a multistage investor who I respect a lot today, who said they've done nothing in the private markets and have deployed a billion dollars into public market.
00:27:38 Nothing in private have deployed a billion dollars into public in the past four months.
00:27:42 I guess that's my point in a way, too.
00:27:45 I think that there's going to be, for instance, the hardest hits names in the NASDAQ, for instance, have topped out over a year and a half ago.
00:27:53 The S&P topped out in early January of this year.
00:27:56 Why?
00:27:57 Well, it took the largest names to finally start coming in in a way.
00:28:01 The names that were not profitable and were trading at 30 times sales at some point last year.
00:28:07 It wasn't long after the Fed said, "Hey, listen, we really have to battle inflation.
00:28:11 How do we do that?
00:28:12 We raise interest rates."
00:28:14 The only way to calm things down were to see bubbles burst.
00:28:18 We saw it in crypto.
00:28:19 We saw it in NFTs.
00:28:21 We saw it in SPACs.
00:28:22 We saw it in recent tech IPOs.
00:28:24 We saw it in valuations and meta down 60-some percent.
00:28:28 That pivot wasn't lost on us.
00:28:30 I remember you actually came on, I think, Fast Money that night.
00:28:33 Everybody was scratching their heads because the only thing that they were saying is, "We are going to spend tens of billions of dollars to figure out how to do this new thing and monetize it among our 3 billion monthly active users."
00:28:48 They didn't really have much of a plan other than some cool Mark Zuckerberg avatars in these virtual spaces.
00:28:55 Cool is generous.
00:28:56 You know what I mean?
00:28:57 I still don't know what to get.
00:28:59 Facebook or meta or whatever is just a bet on the ad.
00:29:03 There's just nothing I'm really, really excited about in any of those companies.
00:29:06 What about this?
00:29:07 What if you were going to play a little bit contrarian with a meta and you'd say, "Listen, Mark Zuckerberg, this is not how he's going out.
00:29:13 They have these 3 billion users.
00:29:15 We know that the main page is going away.
00:29:17 We know that WhatsApp has an amazing user base that they really haven't monetized yet.
00:29:21 We know that Instagram is going to continue to copy Snap and TikTok and Be Real and whatever social app comes out.
00:29:30 They're going to basically keep the Instagram users engaged enough.
00:29:34 I think commerce on Instagram is a home run if you think about it."
00:29:38 To me, do you want to bet against meta at 325 billion?
00:29:42 I would never in a million years short meta.
00:29:44 I'd rather be like you asked about public market venture-like returns, and I think that's tough to see on a meta, but yeah, I would own it.
00:29:53 Okay, so then here's another one while we're riffing here a little bit.
00:29:56 Okay, so Netflix, the stock was down 75% at its lows.
00:30:00 If you tell me that Reed Hastings, and you and I talked about this in May, if Reed Hastings has come up with a plan, he's doing a bout faced on ads on the platform because he knows that he can't grow North America anymore.
00:30:12 And then he knows a lot of these households have multiple users on one account.
00:30:16 And I will tell you as a father of teenagers, okay, who pays the bills still, if the kids had the option of paying themselves 10 bucks a month for a Netflix account or watching some ads or getting more product placement or something like that, they're going to do it.
00:30:32 They don't give a shit.
00:30:33 Most of what they watch is on YouTube anyway.
00:30:35 So to me, if that will drop right into the margin of that business, could that be a double or a triple over the next three to five years?
00:30:43 Yeah, short term.
00:30:44 Yeah, long term, I don't love it.
00:30:46 Right?
00:30:47 Like competing against both just more different forms of entertainment everywhere, and Amazon and Apple who have just unlimited money and how much they spend on content is like their competitive position just seems really, really interesting.
00:31:02 So yeah, I think that the margin expansion and revenue from ads and all of that in the short term, I just find they're just in a really crowded.
00:31:10 Yeah, but think about this.
00:31:11 If the stock market bottoms, let's say the S&P down 30, 35% or so, and let's say Netflix, which has shown really good relative strength since it made that 52 week low back in May or June.
00:31:23 Okay, so it never confirmed the new low in the NASDAQ.
00:31:27 And let's say they start getting a couple things right.
00:31:30 And let's say the churn in North America bottom and let's say they start a new metric as it relates to advertising.
00:31:37 And then all of a sudden the margins start.
00:31:39 This stock will be back at 400 like that.
00:31:42 So then it'll be a double off the lows.
00:31:44 And then if we go into a raging bull market, it'll go back to 700 where it topped out at.
00:31:49 I'm just saying like that's the way of these markets.
00:31:51 You know what I mean?
00:31:52 And so your risk is really probably back towards the lows at 160 or something like that.
00:31:58 So I think you have like a one down, three up risk war.
00:32:02 And then I would say, let me ask you this.
00:32:04 Names like Lyft.
00:32:05 Okay, this is a company that on a gap basis is still losing money and they're really focused Uber and Lyft and in the unit.
00:32:11 No one likes these business models, but this is like a $4 billion enterprise company value.
00:32:18 Okay, and when you think about that, what about that data?
00:32:20 We talk about, well, if Tesla is going to have this huge lead as it relates to, you know, autonomous and the fleets in which they've been deploying their full self-driving.
00:32:32 And then we know that there's Waymo.
00:32:33 Would somebody pay $10 billion for a Lyft?
00:32:36 And here's the thing, and you know how public markets work.
00:32:39 If there's even a whiff of that, okay, the stock will be up 30% before a deal is even announced.
00:32:45 So there are doubles to be had when the market bottoms, there's going to be a lot of really silly M&A, a bunch of companies that came out via SPAC.
00:32:54 They're going to be trading at cash, right?
00:32:56 And I bet you in the very near future, you're going to see some of these companies gobbled up and taken private again, right?
00:33:03 This is my dumbest take that I keep buying a little bit of just because it's so cheap.
00:33:08 Open door, you know, it's different than what I was like, I understand all of the arguments against it in a rapidly rising rate environment, terrible.
00:33:15 I'm sure they'll report horrible numbers this quarter.
00:33:18 In a higher rate environment, there won't be the same volume and turnover.
00:33:21 And so that's not going to be good.
00:33:23 But unlike the AI stuff where I think like there's an advantage to a company starting now and eating a public company's lunch, I think they have like a pretty good model for how you do homes in the US.
00:33:35 Like I don't think there's anything that you would like really structurally change with a new technology.
00:33:40 And that needs to be fixed and consolidated in some way.
00:33:45 It would be a long-term buy.
00:33:47 I'm not putting my family's like life savings in it, but at $3 or whatever it's trading at right now, it's just, I like that one.
00:33:54 No, that makes sense.
00:33:55 Here's one I want to ask you about.
00:33:57 What about Amazon?
00:33:58 When you just mentioned Amazon, you think of their ability to kind of do whatever they want.
00:34:01 Jeffries had a report out this morning that they have $165 price target on the Amazon's trading at 121.
00:34:08 And there's some of the parts basically is valuing the retail business at zero.
00:34:14 Okay.
00:34:15 So it's really AWS and it's this advertising business that's growing very fast, quickly becoming a huge competitor.
00:34:21 And the one thing I'll just say is that these guys have been, they've made some acquisitions.
00:34:24 They bought MGM.
00:34:25 They bought Whole Foods.
00:34:26 They bought One Medical.
00:34:28 They've been buying things.
00:34:29 Pretty soon, they're not going to be able to buy too many other things.
00:34:32 They're going to have to build some stuff.
00:34:34 So my question is you might see some M&A allowed.
00:34:37 Netflix might allow it to be bought by some other big company or merged with somebody because these guys are so big and their moats are getting deeper and deeper.
00:34:46 So my question is like an Amazon, like down, you know, still considerably from its all-time highs, don't you think that's going to be the leader in the next bull market in the NASDAQ?
00:34:55 Yeah, I mean, again, I don't think venture-like returns, but I think Amazon is definitely worth owning.
00:35:01 And Apple, I'm of two minds on Apple.
00:35:03 One is they just keep like pushing boundaries enough and pissing users off enough and like pushing up against antitrust stuff enough that it just kind of falls apart.
00:35:12 And when you're so dependent on brand, I think all of that stuff matters.
00:35:15 And the other side is like they could be five times as valuable in a decade because they just have, I mean, they have car and whatever AR/VR thing they do and whatever AI thing they do and the combination of all those things.
00:35:25 So you probably just own Apple also.
00:35:27 Well, so there's two ways to think about it.
00:35:29 So Apple is going to basically be a $400 billion in revenue company at the end of this year.
00:35:35 It trades at about 23 and a half times this year.
00:35:38 Earnings and sales expected to grow mid-single digits.
00:35:41 But here's the kicker, man.
00:35:42 And, you know, when you think about it from a margin standpoint, this is a hardware company and they have literally 90-some percent of the gross margin of the entire smartphone business.
00:35:51 Okay, like so it's truly astounding.
00:35:54 And if this company now, as you just mentioned, if the car for them is software, right?
00:36:00 And if the car represents greater access to services, which is a great for their kind of mix shift as it relates to like their margins.
00:36:08 So here's a 43 percent gross margin company that could be on its way much higher.
00:36:13 Right. And if you start de-emphasizing some of these new hardware platforms that they won't be making, just providing software and services.
00:36:21 I see that, you know. And so here's how I would say to play all of these mega trends with these huge incumbents is that, you know, Apple, Amazon, Microsoft, Alphabet, Facebook, Tesla.
00:36:34 They make up, you know, 50 percent in NVIDIA through NVIDIA, 50 percent of the NASDAQ 100.
00:36:40 Buy the NASDAQ.
00:36:41 Buy the NASDAQ 100 and then the QQQ.
00:36:44 And then you get dozens of stocks that are down 70 or 80 percent at the lowest.
00:36:49 Some of them may never come back.
00:36:50 And that's the story that we remember from the last two major bear markets in the post dot com and the post financial crisis.
00:36:57 But you're going to get some of them. And then if two or three of those six names that I mentioned are the next three trillion or four trillion dollar market cap companies, that's the layup trade right there.
00:37:07 Trust me, my in Composer, my my biggest position is NASDAQ.
00:37:11 Buy the dip. And it's just if NASDAQ drops 5 percent, add more.
00:37:14 Yeah. And that's that's what I that's my biggest position in in Composer right now.
00:37:19 All right. Fair enough. Right. This turned into an ad for Composer.
00:37:22 I like that platform. I've checked it out myself.
00:37:24 All right. Packing McCormick. We're still recording. Yeah.
00:37:27 We covered a lot of ground. That was our best stuff. I really appreciate it.
00:37:31 We hope to have you back soon, my man.
00:37:33 This is awesome. Thanks for having me. All right. Thanks, bud.
00:37:36 All right. Stick around. Rick Heitzman from First Mark.
00:37:38 After the break. Hey, Dan. What up, guy?
00:37:42 You're into this fintech. What's all this I'm hearing about current.
00:37:45 You're going to like this guy. Current is a fintech company that's completely disrupting traditional banking.
00:37:50 Wait a second. Does that mean I don't have to drive to the bank anymore?
00:37:54 Yeah, exactly. I'm a new current customer and I manage all of my finances from one easy to use app.
00:38:00 Well, I got to get this app. But where can I learn more?
00:38:02 It's super easy. Just go to current dot com slash.
00:38:05 OK. OK. A.Y. and download the app. That's current dot com slash.
00:38:09 OK. Current is a financial technology company, not a bank.
00:38:13 Banking services provided by and Visa debit card issued by Choice Financial Group.
00:38:17 Member FDIC pursuant to a license from Visa USA Inc. and can be used everywhere Visa debit cards are accepted.
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00:40:02 All right. Welcome back to OK Computer. I'm here with my co-host Rick. It's been a first Mark Capital. Rick, how are you?
00:40:07 Pretty good, Dan. How are you? I'm doing excellent. I actually got a heavy, heavy dose of first Mark Capital last Thursday at the NYSE.
00:40:14 That is the New York Stock Exchange for some of you who are not in tune with that. You had your founders summit, the first one since when for first Mark?
00:40:22 First one since 2019. A lot of pent up demand and a lot of excitement.
00:40:27 Huge pent up demand. I basically had to stand at dinner, man.
00:40:30 No, it was it was it was standing room only. People are back and in person. And folks had said New York was dead.
00:40:38 And it was far, far from dead. Twitter memes from 2020. They're saying New York's dead. Everything's dead. IRL is dead.
00:40:47 It was all really, really April 2020. There was a bull market in New York City. It was dead. Remember that?
00:40:53 It was not pretty, but it was a great event. It actually started out in the floor in New York Stock Exchange.
00:40:57 It's really kind of funny to see a bunch of like tech founders, VCs wandering around the New York Stock Exchange, wondering, will I ever get here?
00:41:05 It's that people are excited about it. It's aspirational for folks. But to take it a step back, just to give the listeners a little bit more color on that.
00:41:12 So every year we have our CEO summit, and that's been virtualized for the last couple years, bringing together our founders and CEOs from all over the world to help them with leadership skills, stretch their mind a little bit and provide some tactical advice.
00:41:28 This year we had folks like Richard Green, the master of charisma, and Annie Duke of thinking and bets come and talk to our founders and think about what they could do a little bit better or differently.
00:41:38 And then in the evening, we flip it to the floor of the New York Stock Exchange. We invite people.
00:41:43 Ten years ago, it was people from the New York ecosystem, founders that we know, founders in the portfolio, co-investors, friends.
00:41:52 And it was a bit of a New York thing. And subsequently, we had people in from all over the world. We had people flying in from Europe.
00:41:58 We had people flying in from the West Coast just for this dinner. And it made it fun and exciting for everybody.
00:42:03 It was awesome. All right. Let's talk about what's going on in the markets here because, listen, we all know the stuff that had been correcting, whether it be crypto and NFTs and recent IPOs and SPACs.
00:42:14 I mean, the list goes on and on and on, right, like high valuation sort of stuff. And it's been going for more than a year right now.
00:42:20 And it seems like things kind of really crescendoed maybe towards the middle of August in a lot of these.
00:42:25 And I think a lot of people who had kind of said, OK, things kind of overshot to the upside in 2021 and maybe there's some kind of rational behavior and a resetting of expectations were probably starting to think a couple weeks ago that things were getting a bit overdone in the near term.
00:42:40 And so we had these really weird blowoffs and a bunch of big macro assets. One were interest rates. The other was the US dollar. We're seeing all these weird disconnect.
00:42:49 We saw the Bank of Japan intervene to defend their currency for the first time in like decades.
00:42:55 You know, we saw what just happened in the UK with the pound. It went to parity with the dollar. Right.
00:43:01 So a lot of like crazy macro things happening that many of us are like really left scratching our heads because we stare at either the stock market all day long.
00:43:10 So talk to me a little bit about how you're thinking about that. How is the sentiment into that?
00:43:14 And we'll talk about it because you obviously have a very, very good handle on what's going on in private markets and valuations.
00:43:20 But you're also for someone in VC, in my opinion, you also have a really great handle on the public markets and the intersection of the two.
00:43:26 And we looked at a lot of different assets. We just spent some time with some of our assets in crypto and thinking through where we are on that trend.
00:43:33 We're investing in some companies that as technology touches real estate. And what does that mean for the home market?
00:43:39 And basically every asset class has gotten beaten up, in some cases crushed. And NFT volume is down over 90 percent.
00:43:47 In terms of purchasing power, you'd have to make twice as much to purchase the same house today using real dollars from a short nine months ago.
00:43:56 The interest rates have doubled or mortgage rates have doubled for the first time in decades.
00:44:01 And everything has kind of turned upside down. And I think the logical question is, are we oversold?
00:44:08 What's going on? And as we speak, the market's up 900 points today. Is there a rational correction to possibly an overcorrection?
00:44:15 And I think that's what we're trying to figure out.
00:44:17 If you look at the stock market as a lens to do that, the S&P 500 in particular, and again, the S&P is made up of 500 stocks,
00:44:24 but five mega cap tech stocks make up nearly 25 percent of the weight of it.
00:44:28 So for all intents and purposes, the way those stocks go is the direction of the stock market.
00:44:33 There have been five moves of greater than off of a relative high this year to date right now.
00:44:39 So we're three quarters into it of more than 10 percent.
00:44:42 So I mean, there's been a lot of volatility. People often associate volatility with negative returns.
00:44:48 And oftentimes, this is like a trader's paradise if you're in public markets.
00:44:52 But how does that flow through that sort of volatility where it's upper left, bottom right, though, the trend?
00:44:58 How does that flow into public markets?
00:45:00 You and I have talked on The Pod a lot about valuations and really how they got a little out of whack.
00:45:05 And there was a lot of things going on last year that kind of, with interest rates as low as they were,
00:45:11 people, investors, kept on pushing themselves out the risk spectrum, right?
00:45:14 Out the risk spectrum and into all other assets, right? I mean, that's why-
00:45:17 Anything that wasn't bolting down.
00:45:19 Even those were. Anything I could buy, if my cost of capital is zero, I'd like to own that.
00:45:26 And therefore, those got way out of control.
00:45:29 And now, as the pendulum swung back, what you're seeing is people starting to kind of dip their toes back in the water.
00:45:35 And I think just a normal human condition, you can only adjust so much before you even want to overcorrect.
00:45:41 So, I think the public markets, I'm not sure where we are today.
00:45:44 The market's up today as we're taping on a Monday afternoon.
00:45:48 But it might adjust back.
00:45:50 But, you know, as you think about the private markets, in times of high volatility, what you don't want to be is in the liquid assets, right?
00:45:57 Because if, you know, let's say the market corrects or overcorrects, you know, the ability to fix your mistakes.
00:46:03 And as we just talked about, Annie Duke was just speaking at our CEO summit.
00:46:08 And it's your willingness to take risk is directly correlated to your ability to adjust that risk later to fix it.
00:46:14 So, this is a mutable decision.
00:46:16 You make it very quickly.
00:46:18 You know, I'm going to choose to have, you know, salmon for lunch because if that's really bad, I could have chicken for dinner.
00:46:24 But if you buy a house, it can't be fixed in a course of hours.
00:46:27 So, if on the continuum to your question of public market securities, if you make a bad decision, that's fixable in a couple seconds.
00:46:36 In the private markets, it takes years to correct that decision.
00:46:39 And therefore, people are waiting longer before dipping into that at liquid point.
00:46:44 So, talk to us a little bit about that.
00:46:45 Is there pools of capital out there that like if they get marked down because of what's going on in the private markets, because of what's going on with interest rates,
00:46:54 will those funds need to actually maybe if they take marks on the private side, will they have to actually do things on the public side to kind of level set or raise capital?
00:47:04 I'm just curious.
00:47:05 Is there another wave of selling potentially coming if we did see some negative outcomes as it relates to marks in the private markets?
00:47:12 There's one small corner case.
00:47:14 So, the good thing is most of the dollars in the private market are much stickier than the public market.
00:47:19 Fund lives and our fund lives are over 10 years.
00:47:22 Most VC firms, private equity firms have very long fund lives.
00:47:26 So, you're not subject to this volatility.
00:47:28 You don't need to drive liquidity in the liquid markets.
00:47:31 The one thing that's a little bit different is as the private markets have ripped, a lot of public market investors started to dabble more in privates.
00:47:40 And as they've started to dabble more in privates that are illiquid, and now you might be coming up on some redemptions.
00:47:47 We saw some redemptions a little bit over the last – call it three to four quarters.
00:47:52 You're probably going to see more redemptions if something massively doesn't change over the next two quarters.
00:47:58 And if you have 20 percent in privates, 80 percent in publics, you can sell your privates.
00:48:02 You're going to have to sell a lot more of your publics to deal with those redemptions.
00:48:05 And I think you're starting to hear more about that coming into the end of the year.
00:48:11 I feel like that's going to be a story.
00:48:13 Over this past weekend, all you heard on Twitter, at least if you were watching it, is a Lehman moment.
00:48:19 People are talking about the European banks, Deutsche Bank, Credit Suisse, and they keep showing charts of their CDS,
00:48:24 their credit default swaps, ticking up at levels they haven't seen since 2008 during the financial crisis.
00:48:29 I thought more interesting than, let's say, a couple of European banks that many investors have thought have had problems for a while,
00:48:37 at least from an operational standpoint, not from a systemic standpoint.
00:48:41 But to this point, I also saw some people comparing those banks, their CDS, to that of SoftBank.
00:48:47 And so what I thought was interesting about SoftBank is that we obviously know they're a huge investor in the private markets.
00:48:54 They take capital from huge sovereign wealth funds all over the world, and many, obviously, in the Middle East,
00:48:59 at a time where we see commodity prices, specifically oil, really volatile.
00:49:04 And so you're seeing their CDS tick up.
00:49:07 And I thought that's interesting because, again, what if they have to take some massive marks,
00:49:12 and what if they have to sell the things that are very liquid to them?
00:49:15 And so I'm just curious, thoughts on that.
00:49:17 I don't think you'll see it there, but you do see some of these things play in.
00:49:20 We were with our friend the other night, and we were talking about in the summer of 2020 how the sovereigns poured more money into SoftBank,
00:49:28 and SoftBank tried to get long very quickly and distorted the option market.
00:49:33 Oh, yeah, we did talk about that.
00:49:35 Late August, that was a head scratcher.
00:49:37 Out of nowhere, where was it coming from?
00:49:39 And it took a little bit to unwind that.
00:49:41 And you're like, well, how could SoftBank really affect the share price of the FAANGs?
00:49:47 And it did.
00:49:48 And I think the opposite will be true.
00:49:50 I think you saw a little price action on Apple earlier this year when that was the most liquid stock for a lot of tech-driven hedge funds
00:49:57 that might have had too much capital in either illiquid and private names.
00:50:01 And I think you're going to still continue to see that volatility probably through redemption season in January.
00:50:07 Yeah, pretty astounding.
00:50:08 I mean, last week, Apple, there was a couple headlines.
00:50:11 There was a Bloomberg report that iPhone, at least production for the 14 Pro, this new phone,
00:50:15 was going to be $6 million less than the $90 million that was projected or something, and the stock sold off really 4% on that headline.
00:50:23 It was unconfirmed.
00:50:24 Then an analyst at Bank of America came out and downgraded the stock, and the stock was down 5.5% at one point.
00:50:28 When you think about that on a $2.5 trillion market cap, how much market cap that is and how defensive that stock had acted.
00:50:36 At the time, I think the stock was only down 15% on the year, massively outperforming the S&P, which it is the largest holding of, about 7%.
00:50:45 And I think we talked about it.
00:50:47 I'm not sure if we talked about it here or on Fast Money or just in real life, that that was the safe haven.
00:50:52 That was the bellwether safe haven.
00:50:55 And they always think when that cracks, what happens, or was that overcrowded as the known safe haven?
00:51:02 This was a really interesting headline that I saw earlier today from Seeking Alpha.
00:51:07 Apple App Store sees worst decline in history of data as September net revenue falls 5%.
00:51:13 This is quoting a Morgan Stanley report.
00:51:15 And what's interesting about this is that they're talking about third-party data that they're getting.
00:51:19 This is Morgan Stanley's report.
00:51:21 But really, China is an issue here.
00:51:23 And so one of the reasons I want to go back to market share for a second and why this data is important is that Apple is like No. 5 in smartphone market share in China.
00:51:33 So think about that, 13%.
00:51:35 And so everything else is Android-based.
00:51:38 Everything else they're using as far as services.
00:51:41 They're using super apps like WeChat and everything like that.
00:51:44 So to me, I actually think this could be a huge issue for Apple going forward.
00:51:49 And when you think about also this nationalistic sort of thing, if a lot of production of Apple products are going to move outside of China, and we're seeing that as this kind of deglobalization trend or these issues with supply chains, does Apple continue to lose share in China?
00:52:04 And is that an issue for this company that you think it trades at a massive premium to almost every other hardware company?
00:52:09 Yeah, I think you're going to see both supply and demand pressures on Apple from China.
00:52:13 I think China is not getting any less protectionist.
00:52:17 And a lot of the things that are going on in the world makes it more protectionist.
00:52:21 Europe obviously is in worse economics rates than us.
00:52:24 I have seen the numbers for the social apps in September in the U.S.
00:52:28 They're all trending up.
00:52:30 So downloads, MAUs, DAUs, WAUs, weekly active users, daily active users for Pinterest, Snap, Facebook, amazingly are all trending up in terms of download and consumption time.
00:52:43 So you've got to think a lot of this has come from both Europe and Asia and probably China.
00:52:49 Well, that's good to hear on the usage data because I think I've told you I've been building a position in Snap.
00:52:54 And since I started buying it in late May, it had a move from about 10, 11, up to 16, all the way back to like 9.5.
00:53:01 And it was really trading particularly well.
00:53:03 And now it's just kind of made a match low here.
00:53:06 And again, I've been of the mindset many of these unprofitable names taking some severe cost initiatives.
00:53:13 And we saw that out of Snap I think it was about a month ago.
00:53:16 And originally investors kind of liked it.
00:53:18 But then I think the acknowledgment that this sort of downturn is going to last longer.
00:53:23 And you're seeing some dispersion.
00:53:25 You just mentioned Pinterest, for instance.
00:53:27 Well, that stock's 50% off of its lows.
00:53:30 And maybe we have seen at least estimates bottom out a little bit.
00:53:34 Small expected gap loss this year moving to a small gain next year, which might be conservative on probably close to 20% revenue growth, 76% margin, good balance sheet, new management.
00:53:47 To me, that's kind of an interesting story.
00:53:49 Tons of catalysts, right?
00:53:50 Improved financial performance.
00:53:52 You're seeing, as we've talked about a number of times, the best managed companies are focusing, prioritizing, cutting costs, doing that.
00:54:01 And quickly, too, which is something that you've been talking about.
00:54:03 And quickly.
00:54:04 And the best ones did it in the first quarter.
00:54:06 But everyone's kind of the memo's gotten around by now for everybody.
00:54:11 And then new products, right?
00:54:13 So you're saying, "Hey, I'm going to bring in" – and sometimes it's new management with new products like Pins or sometimes in Snap.
00:54:19 Evan, who's one of the great product people of the last 20 years, is able to launch a lot more new products.
00:54:24 So there's been even internal restructuring.
00:54:28 So platforms that have a lot of still fundamental growth in it are now focusing on the bottom line for the first time in decades.
00:54:35 Yeah, well, that wasn't a demand in a very low interest rate environment.
00:54:38 And so, interestingly enough, over the last five years, particularly prior to the start of 2021 and that period during the pandemic, we saw a lot of unprofitable companies come to the public markets.
00:54:50 And at the time, and there was a lot of people waving that flag, they were saying, "Listen, back in the late '90s, that was the way that retail investors could participate in the massive growth of some of these new platforms.
00:55:02 It wasn't waiting until they were profitable and mature."
00:55:05 Let's talk a little bit about this, because right now, I think we're all sick of a lot of these stocks that are down 50%, 60%, 70%, 80% that, to us, are very innovative.
00:55:13 They have great managements.
00:55:14 They're just not profitable based on the way in which they've been conducting themselves.
00:55:18 So, people are starting to talk again, "What does the next opening of an IPO market look like?"
00:55:23 Instacart, Mobileye.
00:55:25 These are names.
00:55:26 Mobileye, obviously, in the autonomous space.
00:55:28 And then, Instacart.
00:55:29 I don't know.
00:55:30 Do we need another food delivery company or something like that?
00:55:32 So, I guess my question is --
00:55:33 That's a little bit of an odd one.
00:55:34 But I think what you're going to see is the anticipation for one of the companies which might reopen the public markets are maybe an enterprise company that has recurring revenue, has great unit economics, is profitable, and is kind of straight out of Central Cascade.
00:55:50 So, that's not Mobileye.
00:55:51 That's not Mobileye.
00:55:52 It's not Instacart.
00:55:53 Yeah.
00:55:54 And so, we'll see if those guys are the first ones out or who else comes out.
00:55:59 But Square was the first company out during the last downturn.
00:56:03 That wasn't a perfect company either.
00:56:05 And it took its medicine, right?
00:56:07 It did a down round from its last private round but wanted to get out for a variety of reasons, including some cap table issues, but performed great in the public markets.
00:56:17 So, are folks going to wait and see?
00:56:19 Are Mobileye or Instacart going to try and get out in that window in November?
00:56:24 Or are we going to have to wait until the beginning of '23 for that?
00:56:29 Or is it going to be a combination?
00:56:30 Some of these guys will squeeze out and they might not have --
00:56:32 If you're an Instacart -- all right, so here's a question.
00:56:34 Let's say you were an early Instacart investor as a VC, and let's say you had been on the board and you have a tight relationship with that management company.
00:56:42 And they're looking around, and they're looking at a lot of their public comps.
00:56:45 Again, some people don't give a crap about this.
00:56:47 I do. I stare at my FactSet machine all day, every day.
00:56:50 I've done that for 25 years.
00:56:51 How much a stock is off of its high is important to me for a handful of reasons.
00:56:57 But you look at the performance, and what's important about this is also the way employees are incentivized, the psychology around it.
00:57:04 So, if you thought that there was a window in November, let's say before Thanksgiving, where things could cool out --
00:57:09 Yes, post-midterms, pre-Thanksgiving.
00:57:11 Right. Would you just jam this thing on the tape, as we say, with the potential that next Q1 could be a disaster for the markets?
00:57:19 And then your stock -- let's say it got cut in half.
00:57:21 Let's say there's some weird supply-demand dynamics because people are so happy about an IPO that they bid the thing up, and then it crashes afterwards.
00:57:30 Is that something that makes sense, or do you wait until there's a more suitable time where things feel a little bit more comfortable?
00:57:36 There's two schools of thought on it.
00:57:38 Probably the more old-school thought was you're better out than it, so your employees are at least liquid, because they weren't going to be valued --
00:57:46 although they wouldn't be valued any higher in the private markets, it would just be less transparent to them.
00:57:52 And if you need additional capital -- and I assume Instacart would probably need additional capital, even post-IPO,
00:57:58 because what they're talking now is doing a small or no primary and focused mainly on the secondary --
00:58:04 that if you need more capital, the capital is almost always going to be cheaper in the public markets.
00:58:09 Yeah.
00:58:10 The flip side of it is, do you really want to take your stock out, have it just getting beat up,
00:58:15 having your employees walk in every day with one eye on the ticker saying, "Hey, we got beat up,"
00:58:21 versus at least putting them in the cocoon of, "Hey, we don't know what's happening in the public markets.
00:58:26 We have a lot of cash.
00:58:28 We're just going to put our head down and execute every day."
00:58:30 It's a stylistic choice by boards and CEOs everywhere.
00:58:33 And it's kind of a no-win.
00:58:34 I mean, you have a lot more friends or a lot more colleagues that they can't wait to get public when they're private,
00:58:39 and then when they get public, they can't -- it's like, "Why did I do that?"
00:58:42 You know what I mean?
00:58:43 It's usually a one-way door.
00:58:45 Yeah.
00:58:46 No, it's really hard.
00:58:47 One of the things that -- like just the data in general.
00:58:49 I mean, I read this in The Wall Street Journal last week.
00:58:51 Roughly 80% of the companies that went public in the U.S. last year are trading below their offering prices,
00:58:56 down more than 49% on average.
00:58:59 This was as of September 23rd last week, per Dealogic.
00:59:03 And what all that has to say is that it's just not a good environment for unprofitable.
00:59:09 And a lot of those companies are kind of marginally profitable.
00:59:12 It's just investors are shooting first, asking questions later.
00:59:15 And the last thing you want to do is, if you're a private company, your stock is held by good hands for all kinds of purposes.
00:59:23 Or at least steady hands.
00:59:25 Steady hands, but their whole MO is to be patient.
00:59:28 Now, of course, they want an exit.
00:59:29 And then the flip side, the ones that are probably a little bit more herky-jerky are the employees who don't have a whole heck of a lot of experience getting a large part of their compensation or incentives in stock.
00:59:39 Now, they have to hold anyway.
00:59:41 They're part of the lockup, so they're going to have to hold anyway.
00:59:45 But at least they know that there's a path to liquidity.
00:59:48 I had a couple board calls today, and there are people getting antsy that said, "Hey, I've worked at this company five, seven, eleven years, and I'm ready to make some money on it."
00:59:58 Even if you've had liquidity plans, even if you've had tender offers, there's folks who have been there for a long time, maybe have gone through a bunch of life events, who are ready for the pot at the end of the rainbow.
01:00:10 And it might not be as big of a pot as they thought, therefore, they want it more immediately.
01:00:13 All right.
01:00:14 So, if you're a company, though, and again, you go public to raise capital, okay?
01:00:18 And again, that flies in the face of that direct listing trend that we saw over the last few years.
01:00:23 Again, that was just to provide liquidity, get that public listing.
01:00:26 If you do a regular way IPO, you were actually selling shares to the public and putting that cash on your balance sheet.
01:00:33 And that gives you, again, the potential to do M&A, increase R&D.
01:00:37 You're basically thinking about other ways in which to raise capital.
01:00:40 Maybe it's debt.
01:00:41 Now, I've seen this of late, and I'm just curious, are some later-stage companies that might be thinking about IPO at this stage of their lifecycle, but because of market conditions, because of rates, because of a whole host of things, not doing it?
01:00:54 Are we seeing that there's been a lot of talk about venture debt?
01:00:57 Is this something that you're getting questions about?
01:01:00 And how do you guys think about it, at first?
01:01:01 We are.
01:01:02 So, one of the things that we've talked about, I think we originally brought it up this time last year, or maybe even the beginning of last year, of why are people raising rounds when they have a couple of years of cash in the bank?
01:01:13 And the concept of a fortress balance sheet.
01:01:15 How do you have a fortress balance sheet regardless of economic conditions?
01:01:19 How do you buy insurance regardless of economic cycle?
01:01:22 Last year, the people that bought insurance, it was cheap.
01:01:25 This year, it's more expensive, but it might even be more important to have a fortress balance sheet.
01:01:30 So, let's say you're fully financed and you're ready to go.
01:01:33 How do you take on debt?
01:01:35 And there's a bunch of different providers.
01:01:37 Blackstone just got in the market.
01:01:38 KKR is in the market.
01:01:39 Sixth Street is in the market.
01:01:40 How do you take on some debt, which provides you some cushion so whether you're getting ready to go public, and sometimes it's a time of crisis.
01:01:49 Airbnb did a great job and it worked out for everybody.
01:01:52 Pandemic hits.
01:01:53 They thought they had plenty of cash.
01:01:55 They thought they were profitable.
01:01:56 They're not sure what's going to happen.
01:01:58 They take on debt from Silver Lake and Sixth Street and then therefore they're able to go public a little bit later.
01:02:05 Everybody works out because they didn't need that insurance, but you don't feel bad if your house doesn't catch on fire and you have fire insurance.
01:02:14 You feel pretty happy, especially when you get to a good outcome.
01:02:17 There's a very, very popular product in the market, a lot of people out in the market with this right now, both the LPs as well as the companies, of can you provide that insurance as convertible debt?
01:02:29 So if you need it, it's not as expensive as equity.
01:02:32 It's not as cheap as bank debt, but it's because it's a little bit riskier.
01:02:36 It's kind of a little bit in the middle and therefore just right for companies who might have thought they were going public in '22 or early '23 and want to buy another year of flexibility.
01:02:46 Now that makes sense to me.
01:02:47 I suspect that that was a trend as you started talking about it quarters ago when interest rates were still really low.
01:02:54 There was probably some really attractive deals to be had, less so now.
01:02:59 And now it's a really, I guess the push and pull between how much runway do you need at what expense, right?
01:03:05 Well, I mean the other thing was the certainty around runway was a lot clearer.
01:03:09 A lot of people were able to get out.
01:03:10 A lot of people were certain they were getting out in '22.
01:03:13 This time last year, none of those people got out.
01:03:16 So now there's a lot less certainty of who's going out in '23 and therefore with less certainty, there's more risk.
01:03:23 With more risk, there's a higher risk premium.
01:03:25 Therefore, you're willing to pay more for insurance that you're going to be able to safely be able to get public in '24 or '25 or get to a point of profitability and eliminate financing risk.
01:03:36 And therefore, you're willing to pay a couple extra points or take on a little bit more debt than you might otherwise feel comfortable with.
01:03:42 Right.
01:03:42 So last question before we get out of here.
01:03:44 And again, because I've met a bunch of your LPs over the years.
01:03:47 I've met a lot of the companies that you've invested in, a lot of the founders that are in your ecosystem.
01:03:52 So give me a sense of like where is your head at right now?
01:03:56 You and I talk privately.
01:03:57 We've been talking on the pod for most of this year.
01:04:00 Where is your head as far as where the macro is in 2022 as we kind of limp into Q4 a little bit?
01:04:07 You raised a fund late last year.
01:04:10 You're deploying that capital.
01:04:12 You have a fiduciary responsibility or fiduciary responsibility to lots of different kind of counterparts in this area.
01:04:17 What are the things that kept you up at night in 2020 in the first half of that year when we're in the pandemic?
01:04:23 And then thinking back all the way back to, let's say, the financial crisis where that must have felt like, you know, worlds away from where you invest and everything like that.
01:04:31 Where are you right now?
01:04:32 Like, where do you think we are?
01:04:34 And you can even frankly go back.
01:04:35 I'm old.
01:04:36 So you go back to.
01:04:37 I didn't want to do that to you.
01:04:39 I went back to 2000, 2003, which is the most analogous downturn in the market because it's pretty tech specific, although all the as we talked about, all the asset classes are down.
01:04:50 But the most punished are tech and they're down substantially.
01:04:54 And there is a lot of existential risk in the financial crisis.
01:04:57 Tech was somewhat affected.
01:04:59 And it was such a short period of time that many companies didn't have existential risk.
01:05:04 And then early days of the pandemic, call it Q2 2020, you had a lot of people who thought they might have existential risk because they were particularly affected by the Airbnbs of the world, Ubers of the world.
01:05:17 But I think now, where are we on the macro?
01:05:20 I think there's still a bit of fear out there.
01:05:22 I think people are still thinking about could there be another step down?
01:05:27 There's still people love to talk about the negatives.
01:05:29 There's whispers about what would happen if Putin talks about a nuclear option in the Ukraine?
01:05:35 What would happen if Powell went full in on interest rates and pulled a Volcker and took it well beyond five?
01:05:42 That stripped the liquidity out of the market and said the market further down, especially for companies that really need that capital and technology companies that are unprofitable and couldn't wait to receive that capital injection.
01:05:56 So there's still a ton of uncertainty in the market.
01:05:59 It's still leaving a lot of capital on the sidelines.
01:06:02 The dynamic we didn't talk about was a lot of people thought the market was going to rip after Labor Day because we had taken our medicine.
01:06:07 Everything is ready to go.
01:06:08 We didn't take all of our medicine.
01:06:10 The market wasn't ready to go.
01:06:11 And despite having a lot of capital on the private market sidelines, people are still sitting on their hands.
01:06:16 It feels like we're probably going to be in that boat through the rest of it.
01:06:20 Are you surprised that we haven't seen more private companies just close their doors and shut down?
01:06:26 Because it seems like that would have been something that a lot of people would have been like, "All right, let's ring the bell."
01:06:31 There's probably been more than have been discussed.
01:06:36 But there's two dynamics here.
01:06:38 A, it's only really been about three quarters of paying.
01:06:42 B, it's only been about three quarters of paying.
01:06:50 So even if you continue to burn, you're probably not out of cash.
01:06:54 And the companies most at risk were able to see this in the first half of the year and decrease their burn.
01:06:59 So there's probably a thin slice of what we call walking dead or zombies who might not have a future as a company.
01:07:06 They just don't know it yet.
01:07:07 So what would you say, other than maybe some high-profile companies closing down, what would you say would be -- let's take out worst-case scenarios.
01:07:16 Let's take out a tactical nuke in Europe.
01:07:19 Let's take out China invading Taiwan and us having to go just kind of bipolar world on this as far as globalization and manufacturing.
01:07:28 So let's take out some really worst-case scenarios.
01:07:30 Let's take out global food shortage because of --
01:07:33 So no more black swans.
01:07:34 We're not taking out black swans.
01:07:36 All the black swans are off the table.
01:07:39 Yeah, I mean, let's take those out.
01:07:41 So let's just say that we're going to be in a recession at least at some point probably in the first half of 2023.
01:07:47 Europe is probably already in one.
01:07:49 Interest rates are between 5 and 6 in a bear case.
01:07:53 Yeah, listen, I kind of think that the Fed has probably done a big part of what they needed to do to tamp down inflation.
01:08:01 Now it's those things that we just talked about would be the ones that would keep prices very elevated.
01:08:06 So I guess my point is like let's just say we get into a kind of more normal recession.
01:08:11 At some point, you're talking about all this cash on the sidelines in private markets.
01:08:15 It has to probably start getting deployed relatively quickly, I would assume.
01:08:19 It doesn't have to be deployed.
01:08:21 I think it's a fallacy that it's burning the money in people's pockets.
01:08:24 Your LPs, your investors are saying, hey, if you want to be conservative, we're completely fine with you being conservative.
01:08:31 No one really wants to call a bottom.
01:08:34 People really want to invest in normalized markets.
01:08:36 So if you under-deploy for a quarter or two or even three or four, but you're really waiting for the best companies that you're willing to take a risk on or to be able to deploy in a normal market environment, people are going to give you that latitude.
01:08:51 So I don't think it's burning a hole in anyone's pocket.
01:08:53 We're continuing to deploy because we like to deploy through the cycle.
01:08:56 As I think I mentioned on the show last week, we signed two term sheets last week, and we're continuing to invest in the best companies.
01:09:04 But I don't think you're getting to a normal stasis until for at least two quarters.
01:09:09 Yeah.
01:09:10 So I guess part of it is it's like we've got to see some more markdowns.
01:09:12 We've got to see some private companies go out of business.
01:09:14 We have to actually see some probably public down rounds maybe, you know what I mean, like to kind of understand how you put it in the bottom.
01:09:20 You're probably going to see some ugly mergers where the ones that have happened haven't been that publicized of like, oh, wow, that company raised X dollars and they're selling for 10% of that to a big public company.
01:09:33 And I thought that was a pretty good company.
01:09:35 That's like one thing you see like, oh, I didn't know enough about that company.
01:09:38 The economics weren't that good, but they're selling at a distressed price.
01:09:42 So my guess is there will be some distressed sales, and until there's a working IPO market, I think you're still going to see a lot of these negative things pop up.
01:09:52 Right.
01:09:53 And all of that is that we still are seeing some insanity, like for instance, you know, Adobe buying Figma for $20 billion.
01:09:59 Yeah, but that's a one-off.
01:10:01 You're still going to see – I think people are trying to draw a straight line from a single data point.
01:10:05 Yeah.
01:10:06 No, I got you.
01:10:07 That's what I do here.
01:10:08 All right, Rick.
01:10:09 We covered a lot of ground here.
01:10:11 I appreciate your time.
01:10:12 Hopefully we'll do it again very soon.
01:10:14 Thanks again to our presenting sponsor, Current, and our supporters, Masterworks and Taboola, for bringing you this episode of OK Computer.
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