On this episode of Okay, Computer, Dan talks with Jeff Richards, GGV Capital Managing Partner, about Big Tech’s ugly third quarter (1:00), Jeff’s bullishness on cloud infrastructure (5:00), how startups and small businesses are adapting to rising interest rates (10:30), finding silver linings in the outlook for 2023 (14:10), if Mark Zuckerberg’s enormous bet on the metaverse will break Meta (20:00), how much longer the valuation reset for private companies will last (30:00), and why Jeff thinks Elon Musk will turn Twitter into a much better product 12 months from now (33:45).
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Show transcript:
Dan Nathan: [00:00:00] Okay. Welcome to Okay, Computer. I am Dan Nathan. I am joined with Jeff Richards, managing partner at GGV Capital. Jeff, welcome back to okay Computer. [00:00:47][47.8]
Jeff Richards: [00:00:48] Thanks for having me. [00:00:49][0.5]
Dan Nathan: [00:00:50] All right. It’s been a little bit you and I talked, I think the last week of August. There was plenty to talk about. The markets, at least on the public side, had just had this huge rip over two months over the course of the summer into mid-August. And the Nasdaq and there’s many names in the Nasdaq, I think was up nearly 20%, but there were stocks up 50, 60, 70%. I know that you and I spent some time talking about that. Over the course of this past year, you and I have talked about the lag effect from what goes on in public markets, in the private markets. We definitely want to update that. And I think, you know, you and I are both a little bit I don’t know, left very quizzical about this Elon Musk takeover of Twitter and what it means not only just for Twitter, what it means for Tesla, what it means for the man who’s now the CEO of three really important companies. Right. And what it could mean for technology M&A going forward. So let’s hit all of that. Let’s start with public tech earnings. Here we are. We’re on the other side. I think, you know, we’re we’re close to done of Q3 earnings. And last week was pretty fascinating when you think about you know Apple, Amazon Alphabet, Microsoft, Meta all reporting. Four of them had massive one day declines, you know, hundreds of billions of dollars in market cap. Apple had this very quizzical, huge rally, 7% on a 2.3 or $2.4 trillion market cap. But it’s given a lot of that back over the last couple of days. What was your general takeaway from Q3 results, Q4 guidance and I guess investors reaction to that? [00:02:24][94.5]
Jeff Richards: [00:02:25] Well, I think, first of all, we got to put it in perspective. I mean, AWS is, if you look at Amazon’s earnings in particular, the thing that caught me is AWS is a $80 billion run rate business growing it north of 30% a year. I mean, AWS, they own about 40% of the cloud infrastructure market. Microsoft is about 20%. You know, I was chatting with one of our LPs last week. Guess what AWS revenue was in 2010. So just 12 years ago it was not the dark ages. This is not like it was. [00:02:58][32.5]
Dan Nathan: [00:02:58] It was probably under $10 Billion annually. [00:03:00][1.7]
Jeff Richards: [00:03:01] It was 500 million. [00:03:01][0.0]
Dan Nathan: [00:03:02] Yeah, yeah, under a billion. [00:03:03][1.3]
Jeff Richards: [00:03:05] So, I mean, just think about the we sort of take it for granted the exponential growth of cloud computing and mobile and all these things that are around us. But, you know, when you’re adding when you’re growing an $80 billion business at 30% a year, you’re adding $20 billion of revenue. I mean, there are only a handful of software companies in the world that are over $20 billion of revenue. So I think the scale of these businesses is quite astonishing. And I think, you know, personally, as you know, I’m very bullish on cloud. I think folks are underestimating the value of AWS and Azure in particular in the long run. TBD, whether Google and GCP sort of plays a stronger hand and catches up. But then Apple, you know, I think you have the same point of view. I do. I just think Apple is in a very unique position. I mean, they control distribution. You’ve seen what they’ve done to Facebook and SNAP with IDFA. And, you know, then you look at the way that they have financially managed the business in terms of buybacks, dividends, etc.. It’s pretty astonishing. I mean, has there been a better people knock Tim Cook, for not being the most creative person on the planet, but look at the financial performance of that company over the last decade. It’s pretty astonishing. And I think, you know, that is a safe haven, right? You want to you want a safe haven. You put your money in T-bills or muni bonds or Apple stock. And I think you see that over on the earnings over the last week or two. [00:04:27][82.2]
Dan Nathan: [00:04:27] Couple quick takeaways from from your comments here. So you know that AWS business and you mentioned Google Cloud as there. I mean, one of the big reasons why I think those stocks got hit was the deceleration that we saw in the quarter. Right. And I think you and I, you know, you can put that $80 billion growing at 30% a year. The funny thing about Amazon is, is like do the math on that. That is the entire valuation of Amazon stock. So talk to me a little bit about some of the parts for Amazon. Okay. When you think about the retail business, which is being valued at nothing. Okay. So again, you know, you and I have gone back and forth over the course of this year debating what sort of recession we’re going to have when it hits, how deep, how long, that sort of thing. And again, we’re starting to see a slowdown in enterprise. I think that was kind of one of the kickers that one of the reasons why I guess we saw that crescendo in September in the markets in general, because I think some investors were kind of, okay, it’s finally here. We’re starting to see that as far as in the Q3 numbers in the Q4 guidance or we’ve had that right. So we see unemployment start to tick up. We’re going to see these these public cloud revenue growth to decelerate a bit. Right. We can agree on that. So talk to me about the sum of the parts in Amazon and just, you know, full disclosure, I mean, I started buying the stock for the first time in a very long time. Below 100 over the last week. [00:05:49][82.0]
Jeff Richards: [00:05:49] Okay. Yeah. You’re not alone. Yeah, well, I feel lucky in that my cost basis in Amazon is is a lot lower than where it is today. So, look, I think it’s an incredibly well-run company. I think I was reading suppose somewhere where somebody actually said, look, Amazon is about it. Maybe it was Chamath on the Island podcast started to talk about how Amazon may go into a mode similar to Apple. Andy Jassy is sort of signaling that they will do they will run the business in a way that’s a little bit closer to the way that Apple does. And he was sort of contrasting it with what Zuckerberg is doing at Facebook, where he’s obviously investing tens of billions of dollars in VR. But I think, you know, you’re one you’re right. Cloud infrastructure is a consumption based business. We see that with companies like Snowflake as well. If large enterprise consumption slows down over the next 12 months because we go into some type of recessionary environment, maybe were already in it, then you should see the growth rates decline. I guess the only thing is if you’re a long term investor, nobody can move off of the cloud. It’s not like they’re going to go from the cloud to something else. And so over the long run, it’s about as safe a bet, as you can have, in my opinion, in terms of tech, over the long run, evaluations and multiples can go up and down. But I don’t think, you know, consumption of cloud infrastructure five years from now is not going to be lower than it is today. So that’s a fairly safe bet. And to some degree, it’s sort of like buying, you know, T-Mobile or AT&T or, you know, the wireless infrastructure stocks a decade ago when it was very clear that wireless was was going to be, you know, and smartphones are going to be the dominant way that we all use computing and communication. So you’re making a very safe bet. I think the question is, do they move into a mode where they do more buybacks? They do dividends, they become more of a stable, reliable platform that you can invest in, that anybody can invest in, like Apple. Clearly, Facebook and Snap are not in that category. They’re investing. They’re not. Well, I guess Facebook did do buybacks, unfortunately, at a very high price compared to where the stock trades today. But I just I just I think, you know, you’re you’re not alone. I had several folks tell me they were buying Amazon at 100 and slightly below it. It just seems like a no brainer. [00:07:48][118.2]
Dan Nathan: [00:07:48] Yeah, I think your point is a great one about Tim Cook and when you think about what he’s presided over over the last ten years since Steve Jobs passing, I mean, they’ve returned over, I think, $600 billion to shareholders during that time period. And so it’s but basically a floor on the stock versus, you know, in very difficult periods. The stock is at plenty of 30, 40% peak to trough declines in that period, I think three or four or five or so. But look at the market. Just look in this market over 2022, the stock’s down 15 or so percent versus the Nasdaq, that’s down 30%. And we know that they’re buying back, you know, tens of billions of dollars of stock. So I also like this of analogy. Look at Satya. So Tim Cook, Satya Sunder these, these kind of second acts. I mean, they’ve been tremendous. So there’s no reason to think that Andrew Jazzy shouldn’t be able to do the second. You know, you mentioned with Apple and you know, this relative strength here, you talk about the means of distribution, controlling that. That’s the one thing that I just got to say, man, if we’re thinking about regulatory action against these companies, you got to think that Apple’s antennas are up as high as they’ve ever been. And we know that this has been a pillar of the bear case for all the megacap tech. But what they did to some of these massive competitors over the last year, year and a half with ATT, you’ve got to think something’s coming their way. [00:09:12][83.6]
Jeff Richards: [00:09:13] Well, it’s funny. I saw this morning the FTC just blocked a merger of two companies, I think it was Simon and Schuster and another one. It was a $2 billion deal. When you look at the stranglehold that Apple has on distribution, it, at some point you have to believe in the future that. We won’t have just Apple and Google controlling essentially distribution for all applications, which means really everything, right? It’s search. It’s the way we consume content. It’s the way we communicate with each other. I don’t know. I think that I think you’re right. And I just don’t know at what point does the government take a serious look at it. But it feels like at some point they will. And then the question, you know, it’s like when they talk about breaking up Amazon and people say, well, gosh, if you broke up the Amazon, you’d unlock a ton of value. It’s like when eBay released PayPal from from inside its infrastructure. So you you almost wonder what I mean. First of all, that would take a very long time. Yeah, but second of all, the sum of the parts of those businesses could be extremely attractive. I mean, how much is YouTube worth if you spun that out or Android if you spun that out? So I just you know, we’re in a we’re we’re in a crazy time. This year has been a crazy year for individual investors, for public investors. I mean, I’m an investor in three hedge funds over the last year. All of them are down about 50%. I mean, these are some of the smartest people in the world who are spending their day trying to figure out what’s what to be long and what to be short and they’re just getting crushed, you know, and then you look at obviously folks like Janet Yellen and, you know, Powell, I mean, I it just feels like we’re in a very interesting era where folks really don’t know how to understand the tea leaves of what, you know, we have record low unemployment. We’re spiking rates to to drive down inflation. We’re not seeing unemployment go up. I have a theory as to why that is, but it’s just a really interesting time and it’s a very good time. [00:11:03][110.1]
Dan Nathan: [00:11:03] That is the missing piece of the puzzle. I think some of the smartest economists, strategists, we can all agree that we are going to have some sort of mean reversion as far as inflationary readings in commodities and, you know, services and some of these other areas. But wages is the stickiest thing here. And so when you think about how quickly rates have come up, we’ve yet to really feel that hit the economy. And I think that’s one of the reasons why people explained away the technical definition of recession that we had with two negative consecutive quarters of GDP earlier this year. And they really think that the proper economic recession that’s going to happen when unemployment goes up, which is again, the last piece of the puzzle happens next year. So I’m curious, what is your view on that? Because it hasn’t happened yet. We have this October jobs data that’s coming Friday morning. We know that a lot of investors have closely watched this because if it does start to tick up, it actually gives the Fed some cover to possibly take their foot off the you know, the rate hiking schedule at which they’ve been under, which is going to be supposedly four consecutive 75 basis point hikes when we have this meeting result on Wednesday afternoon. [00:12:12][68.1]
Jeff Richards: [00:12:13] Well, my theory is pretty simple. 55% of Americans work for small business. Small businesses are 40 or 42% of U.S. GDP. You’ve heard me talk about this before. And small business, first of all, a lot of them went out of business in 2020 due to COVID. They had to literally shut their doors. They weren’t allowed to operate. They bounced back and we saw 5 million new business applications in that time window. So a lot of folks left the workforce and then went and started a small business. So you had a set of small businesses that went out of business. The ones that survived got stronger. And then with inflation, two things happened. One, they couldn’t hire enough workers, so they had staffing shortages. And instead of having their bar open till midnight, they had to close it at ten. Or if they were a restaurant, they stopped serving food at 8 to 10. So they’re a staffing shortage, but inflation actually increased their profit margins because the cost of goods rose slightly. But it also enabled them to raise price in their restaurants and for the various services that they they sell to consumers. So you talk to any not any but most restaurant owners will tell you they’re making more money than they’ve ever made right now. They still have a labor shortage and they’re still trying to hire. So as long as you have the businesses that employ 55% of the workforce still trying to catch up to what would be a normalized staffing level, I just think you’re going to it’s going to be hard to see unemployment go up. If I’m a small business that normally employs ten people and I’ve been running at eight or nine, I’ve got those one or two open positions I’m still looking to fill in November of 2022. So I just don’t know how the Fed is going to solve that problem as long as consumers are shifting their spending from things like e-commerce and home improvement into the local service economy and the small businesses are trying to catch up on unemployment. [00:13:55][101.8]
Dan Nathan: [00:13:56] The pushback would be that, again, what I just mentioned is that with these rate hikes that we’ve had, they really haven’t worked their way through the economy. They’re working their way through the housing market. Right now. We’re seeing a lot of excess come out. So we think about the potential for just slower economic growth, with higher interest rates, with the value of housing coming in, the stock market being down 20% or so. I mean, sooner or later, you’re going to have a cooling off. And I guess one of my big takeaways, Jeff, of Q3 earnings was just the absolute clarity that some of these massive employers and again, this is 45% of the U.S. workforce, not that 55% that you mentioned in the small, medium business. They are clearly laying people off. Right. And so the combination, all of the above is the thing that probably leads to some sort of economic growth scenario that is probably suboptimal, you know, in 2023, you know, because we’re coming limping into 2023. [00:14:52][56.4]
Jeff Richards: [00:14:53] Yeah. The only thing I would say is, you know, for example, in the private tech market, most people did their layoffs in Q1 and Q2. So those they’re now hiring back. Even if you moderated hiring from doubling in 2021 to now, you’re only going to grow five or 10% this year. You’re not net losing jobs in most private tech companies right now. You are for the ones that avoided Q1 and Q2, but a lot of the private tech market already already did it’s it’s layoffs. Now, if the economy gets worse and corporate customers just stop buying software, for example, then yeah, I think you would see people trim trim payrolls. But I just come back to that. You know, if you think about what are Americans using to spend with those small businesses, Americans still have a record level of savings. Right. Because of all the stimulus we pumped $9 trillion, I believe is the number of stimulus out into the economy a record amount more than 2x what we did in the great financial crisis. A lot of that capital is still sitting in the savings accounts and checking accounts of consumers. And so they may not do the, you know, hundred thousand dollar backyard remodel that they were doing in 2021. But they are going out and spending $100 for dinner with that local Main Street restaurant. And I think as long as they do that and we don’t see pain inflicted on small businesses, those small businesses are going to continue to hire. That’s going to continue to be challenging for the Fed to to drive up unemployment. [00:16:12][78.9]
Dan Nathan: [00:16:13] We’ll see about that. I mean, one of the things that we definitely have heard from some quick service restaurants, they’re seeing new customers are seeing them trade down a little bit. We heard that in the spring and summer from Walmart, for instance, saying they’re seeing a trade down. So again, I think that savings rate is declining. I think that consumer credit has been spiking. I think, you know, that, you know, valuations of homes are coming in really hard at a time where the stock market is still down 20% from its highs. So, again, all of this combined with a little, you know, unemployment tick up. If we were to see unemployment tick up above 4% again, you and I could sit here and debate the macro. Neither one of us are economists and we’re barely, you know, decent pundits as it relates to the tech markets. One thing I wanted to mention. [00:16:58][44.7]
Jeff Richards: [00:16:58] Let’s not let’s not forget, by the way, we’ve wiped out $9 trillion of wealth in the market. [00:17:02][4.2]
Dan Nathan: [00:17:03] Yeah. [00:17:03][0.0]
Jeff Richards: [00:17:03] Now a lot of that is concentrated at the top. But I mean, $9 trillion is not an insignificant, insignificant amount of wealth to wipe out. And that’s not 401Ks case. That’s a lot of that’s a lot of investment equity that people have built up over the last decade. That’s been wiped out in the last 12 months. [00:17:18][15.3]
Dan Nathan: [00:17:19] Yeah, no doubt about it. But then here’s you and I look at these hammers on our wrists here. I saw what you were sporting here, this new $800 apple ultra. [00:17:27][8.5]
Jeff Richards: [00:17:28] Well, mine’s about three versions ago, so. [00:17:30][1.8]
Dan Nathan: [00:17:30] Oh, really? [00:17:30][0.2]
Jeff Richards: [00:17:31] I’m still on the old version. Yeah. [00:17:32][1.3]
Dan Nathan: [00:17:32] How have you not stepped up for this? This bad boy? I mean, this is like. [00:17:35][3.2]
Jeff Richards: [00:17:36] I’m going to. I’ve heard. It’s great. I’ve heard it’s great. In fact, I tell people my Apple Watch, they ask me why I wear an Apple Watch. I said, it’s the best way to avoid spending $10,000 on a on a fancy watch. [00:17:44][8.8]
Dan Nathan: [00:17:46] That is that is a matter of fact. All right well what were some bright spots or some, like, really decent takeaways that you have. I know you follow enterprise software pretty closely. Anything that you know, any silver linings from some things that you heard from some companies kind of as they’re thinking about, I know visibility is poor pretty much across the board here, but any any silver linings as we kind of get into 2023? [00:18:06][20.0]
Jeff Richards: [00:18:07] Well, I’d say, you know, it’s been interesting because I certainly do follow most of the software companies. Most have had pretty strong quarters. Some have have been a little lighter than on growth than they were, say, a year ago. But almost everyone has given soft guidance. Nobody gets credit for being a hero if everybody’s saying we’re going into recession and you’re the CFO or CEO of a public software company, and you say we don’t see any headwinds. People just think you’re crazy. You’re not going to get any credit for that. So almost everyone has lowered expectations for 2023, which, by the way, if that does not materialize and we end up in a soft landing, what you’re going to see is those next 12 months estimates. So let’s say I’m a software business is trading it. You know, for example, Datadog is trading at 12 times next 12 months estimated revenue if if I’ve lowered guidance and those estimates are based on that lowered guidance and I come in above that guidance guess what’s going to happen unless multiples go down further, you’re going to see outperformance in some of these names. So I think it really just depends on where we go with the economy. And like you said, I don’t have a crystal ball there. You don’t either. Yeah, but if we end up in a soft landing scenario, we have not seen a big pullback in spending in tech. I was here for, you know, the dot com bubble. I was here for the great financial crisis in 0809. We see it. We saw a very quick pullback in spending, budgets got cut, contracts, you know, nobody closed anything for literally quarters at a time. Not seeing that today. We’re still seeing spending. I’d say it’s varied. So like I mentioned, small business, SMB tech, we continue to see do well. So think of public companies like Square Zendesk Toast. You just saw Shopify report a fairly good quarter. So we’re still seeing strength in small business. We’re still seeing incredible strength in cloud infrastructures. Think of the snowflakes, the data dogs, the confluence, etc.. I’d say the area where I have concerns is sea based software. So that is both due to your point earlier about folks potentially doing layoffs. If you have fewer people to, you don’t need to buy as much software. But also some of that seat based software that people spend a lot of money on the last few years may not be driving as much productivity as they thought. And so whereas you can’t turn off cloud infrastructure because it literally is what you use to keep the lights on and run your business today. And if you’re a small business, that software you’re running today is is basically the operating system for your business. So you can’t turn it off. Some sea based software particular in categories like sales and marketing, you know, or even some of the quote unquote productivity tools may be more of a nice to have in a recessionary environment. So TBD. [00:20:37][150.0]
Dan Nathan: [00:20:38] Yeah. Now let’s go over the consumer side, though. I mean, like you just said, you’ve been through a couple of these huge downdraft cycles. When I look at the Meta, which is obviously the former Facebook here, down 72% on the year, down a little more from its all time highs. I mean, obviously, we’re coming on the anniversary of the name change and just the shift in focus and the spend on this thing that’s that’s, you know, literally named themselves after the metaverse. And you and I have talked about this over the course of this year. There’s not a metaverse. We don’t probably subscribe to what Zuck’s view of the future is as it relates to all this. But, you know, like to see a company like this have its stock, you know, just crater over such a short period of time. This was going to be $1,000,000,000,000 market cap company, you know, that really does have a monopoly and a handful of businesses where they play. They have 3 billion monthly active users, 2 billion daily active users. I mean, I got to think that they’re going to figure out how to monetize them in ways that they have not done in the past. You know what I mean? As they’re seeing, you know, like the blue page or whatever, just kind of go away. Is this company totally broken or does it kind of intrigue you at this point with sentiment so bad with this band at a level where they’ve doubled down for all intents and purposes right. And again, we just don’t know how they’re going to get back to that level of profitability and the monetization of those users. And, you know, they haven’t lost users yet, but they have the potential when you think about where the bulk of their advertisers come from. It’s not these big, you know, like CPG companies. Right. It’s a lot of small business which might play into some of the things that you have to say about the underlying silver linings, I guess, or strength of our economy if it really is going to be buoyed by small, medium businesses. [00:22:29][110.7]
Jeff Richards: [00:22:29] Well, I think you probably saw the letter that that Brad Gerstner published and sent to Brad Gerstner, who runs Altimeter Capital and owns I think he owns, like you said, he owns $350 million worth of Facebook stock. So he’s not just a disinterested party. He’s somebody who has a vested interest. And I think if I’m not, I don’t own the stock. I haven’t owned it for a long time. I brilliantly bought it when it dipped after the IPO and when it double, I sold it. So second time I did that. I did that when I was a kid with Microsoft as well. So. But Brad had a really interesting point, I think, and I’m going to paraphrase a bit here, he said, if Facebook just went back to its headcount levels of 2020, it would generate a tremendous amount of cash flow, additional cash flow. And I think it’s sort of an open secret in Silicon Valley that most tech companies over hired in 2021, certainly in 21, you know, the famous show Silicon Valley, where the guy sits on the roof and gets paid. Work from home, created a lot of those folks in tech and, you know, Facebook, Google, I’m sure even Apple and some of the other large companies have have a lot of folks that are probably not putting in eight hour days. So I think Brad’s got a great point. I think the question you have to ask yourself on Facebook is, do I believe in his vision? And again, I think that Chamath made this analogous analogy on their podcast. He’s spending more than Apple spent to develop the iPhone. He’s spending orders of magnitude more than Google did by YouTube. Like if you look at the big product bets in history, they were single billion dollar, single digit, billion dollar bets. This is a bet that is tens of billions of dollars at least and could be hundreds of billions. And so if he’s right, it will go down as one of the historic bets of all time. And if you’re a believer in the metaverse and all the things that come along with that, and I would argue the metaverse is, you know, it’s more than the VR headset, it’s gaming, it’s probably digital payments, it’s probably something tied into nfts and creative and music and a whole bunch of other categories. But in its current format, I tweeted out last week, I could have saved Facebook shareholders a lot of money. I bought my son an Oculus. He used it for about a week and it’s been in the closet ever since. It’s just the form factor today is not it’s not a viable form factor. And he plays a lot of Minecraft, a lot of Roblox. So if he’s right, it’ll go down as one of the historic bets of all time. It’ll be a 10xhere. I just don’t know. You know, we don’t see a lot of the signs of that today. And obviously, if we can win back the clock and look at the bet, the Jeff Bezos made net an eight of us and Kindle and some other things that he did. The only difference, I would argue, is the the gratification of AWS was instant. The uptake in the developer community was instant. It was consistent. It, you know, it was growing year over year. And you could see that it was something that the market was demanding. It wasn’t a push by Amazon. And so I think the thing you have to ask yourself today, is there a pull for these metaverse products or is it a push? And it’s just years and years and years ahead of real adoption. Again, I’m not I’m not I don’t own the stock. I don’t you know, other than Instagram. I just don’t I don’t use Facebook. I got off it a few years ago because I got really tired of all the political ranting and raving and during the election cycle, and I just couldn’t bring myself to do it anymore. But it’s an interesting, you know, I love one of these I love the technology industry. And one of the one of the reasons I love companies that have that are founder led is founders can make these big bets. Right. Space X today is not space X if Elon can’t make the kind of bets that he made and I’m sure Zuck is telling people in the boardroom, hey, we’re going to be an iconic company because of this bet and as a shareholder, you just have to make an educated guess as to whether he’s right or not. [00:26:05][215.0]
Dan Nathan: [00:26:05] Yeah. And listen, investors are voting with their wallets right now. Again, the stock’s down 70%. You know, I just bought some stock just below 100. I’d probably continue to kind of average in here. And, you know, again, if you think we’re kind of getting towards the end of this market cycle, especially with some of these names that are down, you know, you know, three X that of of the indices to me, I just think that let’s make a bet on Mark Zuckerberg that he’s got a second act, that he’s not MySpace. That doesn’t seem like a too difficult one for me. [00:26:33][28.3]
Jeff Richards: [00:26:34] I don’t think he’s MySpace, but I think it’s it’s a you know, it’s a cost. I mean, you could put that capital somewhere else if you asked me, am I more bullish on Facebook over the next five years or the cloud infrastructure names like, you know, GitLab, Apache Corp, Snowflake, Confluent, I’ll take the I’ll take the cloud in four names at these prices all day long. [00:26:52][18.1]
Dan Nathan: [00:26:52] Yeah, I guess I would say that like this stock trading at 12 times earnings with the kind of, you know, moats that they have right now and. [00:27:01][8.6]
Jeff Richards: [00:27:01] But is he going to is he going to cut headcount? Is he going to increase free cash flow? Is he going to do that? Is he going to do dividends? [00:27:07][6.1]
Dan Nathan: [00:27:08] Jeff I assure you that he will. There will come a time in the not so distant future where headcount will come up in the stock, will be trading back at $130. I mean, like, like like like to me like that. That’s my bet right now. And again, you know what I mean? You can yes. He’s got the super, super riding. They can do whatever the hell he wants. But sooner or later, she’s not going to to kind of like this stock just careening lower here, you know what I mean? So it’ll find a bottom probably at some point in Q4. That’s my take here. You know, but listen, you and I lived through, you know, 2000, 2001, 2002. And let me tell you something, 2002 felt really bad. It felt a lot worse than ’01. If you were on a bunch of these tech stocks and you still believed in the long term vision. But to me, you know, again, I think that this one has the potential to have a sort of bottom at some point in Q4. [00:27:58][49.6]
Jeff Richards: [00:27:59] Let let’s let me let me just throw one thing out, though. The difference in 2002 and I was a founder at that time, I had started a company in 97, essentially blew up on the dot com bubble. I started my second company 2003. The difference in that time period, the the downturn was I mean, you go back to 1990, October of 99, there’s one of my favorite stats. October of 1999, there was 400 public Internet stocks tracked by Morgan Stanley. The combined revenue was $15 billion. That’s not that’s not even an AWS quarter. So the market at that time it wasn’t a given that the market demand for cloud infrastructure, software, mobile. I mean the iPhone hadn’t even been invented yet. So as a founder at that time, you were really wandering in the wilderness making a huge forward bet on an unknown. Whereas today as a founder, you’re making a bet that the market will come back to reward risk. Right now it’s just risk off, right? Everybody and their brother took money out of the market, put it into T-bills, muni bonds, wherever they’re putting it to get yield. But at some point, as a founder today, you’re making a bet that the market will go back to placing a premium on risk and and value of these companies more highly than they are today. But the end market demand is there. We didn’t know that in 2002. [00:29:11][71.9]
Dan Nathan: [00:29:12] Yeah. You know what, the guarantee for that bet, though, also, Jeff, is that at some point in 2023, interest rates are going to start coming down. And then that’s when that risk, you know, that’s when that risk premium kind of changes. So to me, again, you and I are both drawing from some different experiences that we’ve had over the last 25 years. I suspect that history will be rhyming if not repeating. Current Ad. Masterworks Ad.Taboola Ad. Here’s an area where I know Jack shit about, but let’s talk about, you know, private funding in the tech market. There was a quote in the New York Times article in the week quoting Crunchbase that in Q3, private tech funding was about $81 billion, down 53% year over year. What’s going on? Is it just that the is it valuations? Is it you know, a lot of companies just kind of being hesitant to do down rounds. What’s kind of your general take, you know, that you saw in Q3? I suspect it’s likely to continue to play out that way in the Q4. But as you and I have talked about a lot, there was a lot of capital raised right in the VC landscape, you know, late last year, early this year that needs to be deployed. [00:32:37][205.2]
Jeff Richards: [00:32:38] Yeah, we have been having this conversation a lot with our LPs as well as with our founders to kind of try to explain what’s going on in the market. And, you know, we’re in the middle of it. I wouldn’t call myself an expert, but we are in the middle of it. And here’s my take. In Q1 of this year, you still had people doing financings that were at the tail end of last year’s valuations. So there was still a bit of a frothy market that then created sort of an artificial belief that the VC market was still red hot in Q1 when I think it was already cooling considerably. Q2 Public market valuations settle and people realize, okay, wait a minute, we can’t pay 50 times a year for these growth stage private companies. They’re going to go public at six times they are. In Q3. You really saw that hit home. And so I. Just think we’re still in the early days. We’re probably in the second or third inning of the valuation reset in private markets. I will tell you, in our own you know, in my own universe, I didn’t make a single new investment in a new company in the first nine months of this year. Now, I did several follow on investments, but we didn’t make a single new investment because there was just this huge valuation mismatch. I mean, literally companies coming in with four or 5 million of AR, one wanting four $5,500 million valuations. And I’m trying to explain to them that their public job at 300 million of AR is trading at 1.2 billion. So we just have had a big disconnect in the market and it normally takes a while to work itself through. It has now worked itself through in a lot of these companies that raised in the summer of 2021 now need to raise capital because they have less than 12 months of of runway. And so we’re starting to see some really attractive opportunities. And I think you’ll see I think you’ll see more financings get done in Q4 and Q1. All all we’re going back to is 2019, which was a quote unquote, normal era if you just look at the spike in valuations. In fact, I’ve got a chart right in front of me. You know, back in 2018, the average high growth software. So the top ten top five high growth software companies were trading at about 15 times next 12 months revenue. Just to give you a sense of how crazy that got. In late 21, it was 65 times next 12 months for the top five software companies. Those are down now to 16. So we went from, you know, literally 15 to 65 down to 16. So we’re kind of getting back into a normalized territory. And I think you’ll see you’re going to see a lot more financings get done. The other thing we’ve been sharing with folks is it’s a phenomenal time to be a growth stage founder because the public market is now telling you exactly what you have to build, whereas last year the market was so distorted, it was really hard. If you were running a 40 or $50 million software business, it was really hard to try and figure out like, what should I be building? Should I be building a go for broke, grow at 100% a year, burn $100 million business because that’s what it looks like the market is rewarding or should I be building a business? It’s capital efficient. It could be profitable when it goes public. An example I always give folks is Veeva. Veeva is a vertical software business in the farm industry, terrific company. It raised $8 million of venture capital prior to going public and went public as a profitable software company. It can be done and that company today is worth well over $10 billion. So I think we’re just going to go back to a mode where the playbook for founders is much more clear than it was in 2021. And if you’re running a 25 to $75 million business today, you get to reset the operating model for your company, recruiting the kind of executives that want to help you build that company and build a company that can go public in two or three years and I think is going to be a very attractive IPO market for those folks in 24 25. [00:36:18][220.1]
Jeff Richards: [00:36:18] Yeah, that makes sense to me. All right. Let’s talk about lastly before we get out of here now, the new most infamous private tech company. It’s called Twitter. It’s still called Twitter. Elon Musk, the CEO of Tesla, personally took the company private, $44 billion, eight and a half times its expected 2022 sales. This is a company that obviously did not monetize their user base nearly as well as some of their faster growing competitors over the years. You know, you and I don’t have to get into the you know, whether, you know, it makes sense or not you know, from a financial standpoint, I think you and I would look at many of the public comps and say it does not. I read this today, though, that Jack Dorsey, obviously the founder of the company, he rolled his two and a half percent stake in the company, worth $1,000,000,000 into the Musk led deal. He gave his equity in there. Wouldn’t have done the exact opposite, man, and just kind of closed the door on this whole chapter. It’s been public for ten years. It went public in November of 2012. The stock is basically up 100% from those levels here. But let’s be clear, if there was no if there was no Musk bid for this company, the stock would literally it probably be, I don’t know, a $20 billion enterprise value at best. So he paid $44 billion. I just think it’s pretty fascinating that guys like Dorsey rolled their equity into this deal and hoping to think that they can make a return at some point when it comes back public in 2 to 3 or four years. [00:37:51][92.2]
Jeff Richards: [00:37:52] Well, a couple thoughts. One, I tweeted out this morning, I thought Anthony Noto had a great quote this morning on CNBC. He was talking to Carl Quintanilla and he said, Twitter, for the first time in history has the right governance structure. And if you followed the history of Twitter, it has always been a company that had a little bit of management by committee. Even with Jack with CEO under Dick Costolo, it had a very strong board, never really had that sort of founder authority to just make bold bets and frankly be wrong some of the time. And so I thought that was a really interesting insight from him. And he said, I’m bullish. I think it can be worth hundreds of billions of. Because it’s got a huge you know, it has the best content on the Internet. I wouldn’t use Jack as a proxy, because, Jack, let’s not forget, Jack’s ownership stake in Square is worth several billion dollars as well. So he is, you know, whether his his family can eat is probably not riding on his his stake in Twitter. But I think look, I think Elon is arguably the greatest founder entrepreneur of our generation. Right. He created SpaceX against all odds. He did things the government wasn’t able to do with hundreds of billions of dollars in funding. He created the world’s greatest car company and probably will lead the world in self-driving cars when that becomes a reality as well. So I personally think he’s going to do some very exciting things with Twitter. I think he’s taking on a lot of social risk. It’s a very challenging platform to own or even be part of as an executive, just given everything going on in our social universe with politics, etc. But I think from a product innovation standpoint, it will be a way better product 12 months from now than it is today. That would be my bet. And whether he can monetize that at a higher rate TBD I’ve seen a lot of speculation that he’ll go into payments, he’ll go into e-commerce. There’s a lot of variations of Twitter that you could see being very popular to drive more monetization, but I’m pretty confident the product will be better in 12 months. [00:39:37][105.3]
Jeff Richards: [00:39:38] Yeah, it’s funny. I mean, I’m just going to, you know, I respect you as an investor, as a monitor and the other side of that. But I just disagree with a lot of what you said. I mean, I disagree that Tesla is the best car company in the world. I you know, I disagree that he’s some genius. You know, as it relates to Space X, I know they’re doing amazing things. I know I sound like such a jackass saying that. But he did things that NASA could do. Well, he did it with a lot of, you know, funding from the government. I’m just saying, like, to be honest with you, every single one of those companies without government subsidies was about to be out of business. I mean, but. [00:40:09][31.9]
Jeff Richards: [00:40:10] Look at where but look at where Ford, GM, Porsche, Audi, Mercedes are with EVs. They’re literally a decade behind him. And they don’t let’s not forget, they all got bailed out in the great financial crisis. It’s not like GM hasn’t had any federal support. [00:40:24][14.2]
Jeff Richards: [00:40:24] For didn’t actually but but but again, you know, Tesla was also born in, you know, 2010 as a publicly traded company in a zero interest rate environment. And, you know, again, we just spent a lot of time talking about the risk taking that existed there. And you could talk about all those companies that you just mentioned and you put all their market caps together. And I get it. Tesla’s is where it’s lost more in market cap in the last year than all of those are worth. Okay. To be very honest with you. But I just think I’ve seen a lot of those offerings. I’ve had one of those offerings from Ford. I’ve seen the Porche stuff. I just think it’s all coming. And I just. [00:40:58][33.9]
Jeff Richards: [00:40:59] I can’t wait for the F-150 lightning. I think it’s gonna be awesome. [00:41:01][2.1]
Jeff Richards: [00:41:01] Yeah, but I. But I also think that we’re also seeing the the undoing of Elon Musk. And I know that sounds kind of bombastic or whatever. I just don’t think that this guy can be the CEO of those three really important companies. And they are important. I get it. Okay. And do a great job with all of them. I don’t think Twitter’s product is going to be a better product. I don’t think it’s going to be a bigger platform than it is in a year from now than it is right now. So again, I mean, I don’t I don’t have any positions in any of this stuff right now. I’m not short SpaceX, I can’t be short SpaceX. I know he’s been selling SpaceX. I’m not short Tesla. I know he’s been short selling Tesla. Right. He just took you sold a lot of Tesla to buy Twitter at a valuation that makes absolutely no sense in any way, shape or form so that. [00:41:47][46.1]
Jeff Richards: [00:41:48] Nobody can argue with that. The valuation is clearly probably what a to x premium and where he could have bought it if it if he hadn’t put it. [00:41:55][7.6]
Jeff Richards: [00:41:56] Also think Jeff that that that a lot of people in Silicon Valley have very rose colored glasses as they think about him. And I think he’s a very dangerous guy. I think that like some of the stuff that I see him pushing misinformation on the platform that he owns that has no advisory board, I agree with that more. And I think the way that he talks to the former president of Russia, the way he actually supposedly talked to Putin, the way he thinks that not only is he not a rocket scientist, he’s not a political scientist, and he’s trying to, you know, kind of he’s pushing out, you know, Kremlin talking points here because he cozys up to the most authoritarian government in the world, which is China. So he can make and sell electric vehicles over there when he doesn’t even have a prayer of being number one, two or three in market share over there. So to me, I think he’s a very conflicted sort. I don’t think he’s the genius that everyone thinks he is. And I think we’re going to see the unwinding of him. That’s my personal take here. [00:42:51][55.3]
Jeff Richards: [00:42:51] Do you think he’ll make money on on this bet on Twitter. [00:42:53][2.0]
Jeff Richards: [00:42:53] No, not a chance in hell. And I actually think that, you know, again, all these equity guys are going to lose money. I think the banks are already losing money on the debt. I don’t think he has a chance of really improving the product. If SpaceX sets first manned spaceship to wherever the hell it’s going blows up. And you know and I’m not wishing that. I’m just saying, you know what I mean? And Tesla’s market share declines meaningfully, which it is doing in places like China. It’s gone from 25% to 15%, I know, off a very low base. But if that were to happen in Europe, you’re in the U.S.. I just think that this empire that he has is not likely to kind of, you know, be the thing in ten years that it was in 2021. So again, there’s a shit ton of hubris. There’s a lot of, you know, kind of faith put in this guy that I think is is probably unfounded in my personal opinion. [00:43:43][49.5]
Jeff Richards: [00:43:44] Well I think, look, it’s an experiment we’ve never seen before. I don’t think has there ever been a single individual who’s bought a company this large that wasn’t a private equity firm that deployed, you know, tons of resources? I can’t think of any. So it’s a very interesting experiment. I don’t disagree with all your points about him on a personal level and the social issues. The thing I guess I would share is one thing that you learn in our business, the venture capital business, is that. Outlier people create outlier returns. And we we have an exceptional founder that I work with and I often say to our team, if he was running Company X, that company is probably worth 100 times more than it is today. Everybody says, Oh, of course, there is such a wide delta between the exceptional founders CEOs and the non-exceptional founder CEOs. He’s clearly at the very top of that pyramid. He has his his his issues, but he has a very unique ability to have a vision for where a product and a company should go and drive people in a in a very ruthless way towards that. I mean, I you know, you talk to people that work at Tesla who would, you know, have meetings at three in the morning. I’m not saying it’s a great place to work, but he is exceptional at driving a driving outcomes. The the point you make about being CEO three companies we’ve also never seen. [00:45:00][76.6]
Jeff Richards: [00:45:02] I mean listen Jack tried to do it with Square and Twitter and it didn’t work particularly well here. So again, I mean, listen, I you know, again, you’re much closer to all of this than I have. I’ll just tell you, my 25 years, I’ve never seen a meme CEO or a meme stock or a meme company. I’ve never seen it kind of make itself into the next cycle. I suspect we won’t see it here. I suspect that we just kind of hit peak Musk but, you know, I’m not not rooting against him as an individual, you know what I mean? But I just think that all of this kind of excitement and exuberance around him and everything that he touches is not particularly natural. So to me, you know, I wouldn’t be betting. I wouldn’t be betting for it, I guess, at this stage of the game. [00:45:44][41.7]
Jeff Richards: [00:45:44] Well, it feels like to me most people are betting against it. I mean, most people are skeptical of his ability to pull this off, aside from, as you mentioned, the folks that put equity into the deal. You’ve got Sequoia Capital, Andreessen Horowitz, you know, folks like Ken Griffin at Citadel, Larry Ellison. [00:45:57][13.6]
Jeff Richards: [00:45:58] Well, you say so. But, you know, Tesla still has $722 billion market cap company that’s down 35% on the year. And again, you know, that’s down just a little bit more than the Nasdaq. So, you know, the way I think about it is, is that, you know, you throw Twitter in there, I mean, find SpaceX you get value that or whatever you want? I mean, the TAM is, you know, it’s infinite, right? Like if that is a well, why wouldn’t he go and spend a lot of time with space X less time in a commoditized business that is Tesla less time and just I don’t believe that he cares about humanity. I don’t care that he’s doing this for the public good or whatever, like go do something meaningful. That’s my take. But who am I to suggest that? Well, listen, Jeff, Richard, I always appreciate your coming on, okay, computer. I love your take on the private markets, on the public markets. And of course, Elon Musk and I love going back and forth with your stuff. So thanks. [00:46:50][52.1]
Jeff Richards: [00:46:50] Thanks a lot man, great to see you. Thanks for having me on. [00:46:52][2.0]
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