Risk Reversal OK Computer Sponsor - Current


On this episode of Okay, Computer, Dan and GGV Capital Managing Partner Jeff Richards discuss when investors’ flight from higher-risk assets may end (1:00), Microsoft CEO Satya Nadella’s 2023 outlook (4:00), innovations in artificial intelligence as OpenAI’s ChatGPT catches fire (8:00), where Jeff is seeing the best buying opportunities in tech (10:00), if 2023 will see a resurgence in tech M&A and IPOs (27:00), and the next wave of job cuts hitting the tech industry & how companies are restructuring their businesses (28:00).


Check out the articles discussed in the episode:

-CNBC TV18: Microsoft CEO Satya Nadella says there will be 2 more years of pain before a ‘massive’ tech rally

-Barron’s: Tech’s Bill Is Coming Due. Investors Aren’t the Only Ones Who Will Pay.


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And as always we want to hear your feedback. Please hit us with any comments at contact@riskreversal.com, and follow us at @OkayComputerPod.


Show transcript:

Dan Nathan: [00:00:38] All right. Welcome to Okay, Computer. I am Dan Nathan. I am joined by Jeff Richards, a managing partner at GGV Capital. I think Okay, Computer listeners are very familiar with Jeff now. Jeff, welcome back. [00:00:50][12.1]

Jeff Richards: [00:00:51] Thank you. [00:00:51][0.3]

Dan Nathan: [00:00:51] All right, let’s get into it, man. You know, you and I have had a lot of conversations over the course of the last year on this podcast. I think directionally you’ve been really correct on a whole host of trends. I think within that, the public and the private tech markets one of the things that I’ve said to our listeners on many occasions why I really enjoy our conversations is that I gravitate towards people who invest in the private markets but have a really good handle in the public markets. You’ve been investing all the way back to the late nineties, but you’re also a very active personal investor in the public markets, right? And so I always find that connection really interesting. And again, I learn so much about the kind of lag between what’s going on in public and how it kind of informs some of the things that you guys do in the private markets. But let’s talk a little bit about where we are, Jeff. And I think that one of the things that a lot of investors who don’t stare at FactSet screens like all day every day like I do and talk about it, you know, whether it be on podcast or on CNBC, I think they really think that a lot of the damage in the markets was done primarily in 2022, and we had an S&P 500 that closed down about 20%, the NASDAQ closed down a little more than 30%. But a lot of the hardest hit stuff, primarily in technology, had started correcting at some point in 2021. Right. And so some of the themes that we’ve spent a lot of time talking about for the better part of 2022 were already firmly in place once interest rates started going higher. And investors, both public and private, started focusing a bit more on valuation. Talk to me about where you think we are year over year on that, because I think we talked about this in January of 2022 and I think at the time you felt like we were probably just getting started. [00:02:33][101.5]

Jeff Richards: [00:02:33] Yeah, I think, look, it that’s kind of played out. You know, there’s a very strong, as you know, and I’m sure most of the folks in your audience know, it’s a very high correlation between rates and multiples in the public market. You know, one of the top five most valuable software companies right now in terms of multiples is a company called VeriSign, which is growing at only 5% per year. But it’s very profitable. And what you’ve seen is investors basically retreat from high growth, high risk, long duration and long duration, meaning it will take a while for this company to generate profits and retreat towards things that are a little less risky, both in tech and outside of tech. I mean, somebody tweeted out recently the multiple on IBM, which is barely growing and hasn’t done much innovative, honestly, my lifetime, it was trading at 16 times EBITDA, Google’s trading at 13 times. So we’re in just a crazy distorted market where things that are barely growing but look very safe and in many cases may pay a dividend or have some yield or are attracting a lot of investor capital. And you saw it all last year with people leaving, you know, in your personal lives. We’re all probably a great example where if you were earning zero in your bank account or money market account two years ago, you were encouraged to put that money into higher risk assets. When you’re earning 2%, 4%, maybe even north of 4% yield everyone from your grandmother to your uncle to your brother, to your buddy who invests has taken risk off the table and put it into lower risk assets. I don’t think the fundamental long term outlook for tech has changed. I still think we’re all bullish on the cloud. We’re bullish on things like AI five ten years out, but you’re just getting punished in the near-term from a valuation standpoint if you’ve continued to make that trade. And I feel bad for folks that were investing in 2021 when tech multiples were at an all time high thinking, oh gosh, we’re going to go up from here because those folks have really taken a beating. And I think, you know, maybe one of the advantages that we have as private market investors is we have diversification, we have time diversification, we have stage diversification. I’ve got series A companies that we invested in and $1,000,000 in RR with ten employees. And I’ve got late stage companies that are feeling the brunt of valuation impact. But because we have stage diversification, we can take a very long term view on investing. And I think that’s helpful in the public market as well. [00:04:45][132.0]

Dan Nathan: [00:04:46] There was a conversation I think kind of speaks to this a little bit. We started the year out with Microsoft CEO Satya Nadella. He was in India and he sat down with CNBC, India and he had this conversation. It was not a preannouncement. It wasn’t anything. A lot of investors here in the U.S. took it as like a soft preannouncement having to coordinate with a brokerage house that downgraded the stock. And I think it’s important to remember that there’s like 55 analysts on Wall Street that cover the stock. And I think three of them at the time had a hold rating on the stock. I mean, it’s universally bullish. And this is a company that while Satya, I think took over from Ballmer seven, eight years ago, what he’s been able to do as far as changing the narrative and kind of take hold of a secular shift, and I know this is something you could talk in to your blue in the face on. It was kind of interesting listening to this conversation with him last week, and I just kind of want to quote it. Here, he said. I would say the next two years are probably going to be the most challenging because after all, we did have a lot of acceleration during the pandemic and there was some amount of normalization of that demand. There is a real recession in large parts of the world and so the combination of pull forward and recession means we all have to adjust. And so I think there was an emphasis, though, also on the U.S. that the next two years are going to be really difficult here. [00:06:03][77.0]

Jeff Richards: [00:06:03] I think what’s so interesting about Microsoft is they have exposure to so many categories, right? I mean, Azure in the cloud infrastructure, space is number two to AWS. You know, for those who don’t know, the majority of the world now runs their compute in the cloud that that was, you know, zero almost 0% a decade plus ago and now is 23% of Fortune 1000 compute and it will eventually be the majority of it. But, you know, they’ve got exposure to gaming. They’ve got exposure to theoretically research with things like Bing, but exposure to such a broad set of assets across tech. And so they are a good proxy. I guess the one thing I would say is it feels like public companies, CEOs right now, there’s no incentive to give bullish guidance. Right. If you’re a CEO of a tech company right now, you’d like to lower expectations for 23, which makes sense given the potential headwinds on the horizon and then hopefully outperform those expectations. I think the question for us as investors or for anybody listening as an investor is do I think companies will outperform those expectations and when might they outperform those expectations? You know, I own a lot of dividend and income producing stocks. I own a lot of ETFs that are in that category. VIG is one that I own it’s a Vanguard dividend ETF. It’s up 14 and a half percent in the last 90 days. And I think those assets were down a little bit last year as people were fearing that the guidance for 23 was going to come way down, i.e. if you were thought you were getting a 4% yield, if guidance goes down, you’re only getting 3%. Well, I don’t want to pay as much for that ETF or that asset. And now folks are starting to creep back in, A they’re perceived as fairly low risk safe assets, but B, maybe people are fearing as much of a recessionary trend outside of tech, which is really interesting, right? We’re still seeing travel, the airline CEOs are seeing record business, hotels, hospitality, consumer spending hasn’t really taken a dip. A lot of the credit indicators would suggest that maybe consumers are starting to get a little over their skis, but we haven’t really seen the shoe drop outside of tech. And so I think to me, that’s one of the things that all of us are going to be watching. I don’t think you can completely take your foot off the gas as an investor, and you’re probably starting to see some of the hedge funds and mutual funds and other folks start to work their way back into some of these safer technology assets. And when they do, names like Microsoft are going to do well. Adobe, Google, Amazon, these are the safe bets. And they also, I believe, have an underrated advantage when it comes to things like A.I.. Those companies have massive teams of people working on A.I. and are going to do well as A.I. plays a bigger role in our economy. [00:08:30][146.7]

Dan Nathan: [00:08:30] That was a really big theme, I think, like emerging in 2022 and these large language models and what we saw with this Chat GPT and I know, you know, this was a really deflationary I mean when you think about technology as this massive deflationary force, you just said all the people working on those things are going to be fewer and fewer people working on those things if they end up working really well. Right. [00:08:52][21.9]

Jeff Richards: [00:08:54] We certainly hope there’s a next wave of up and coming companies that can create a ton of disruption. If you look at what happened in 2000, you look at what happened in 08 09 out of the ashes of this kind of like correction. People take it for granted today that Salesforce is 100 plus billion dollar company, but Salesforce 2000, it was a $2 billion market cap company. It was not obvious that Salesforce was going to go on to become this behemoth. Did any of us think Microsoft was going to be $1,000,000,000,000 company prior to Satya Nadella taking over? It was kind of like, remember the Windows phone? It was sort of fumbling around with a bunch of stuff. They weren’t committed to Azure. So I think a lot of this comes back to leadership and to me, the thing you want to ask yourself is if I’m going to think about the next 5 to 10 years in tech, it’s not going to be an accident that the companies that are likely to be disruptors and become the next hundred billion, 200, maybe $500 billion companies are going to have really dynamic, outstanding CEOs. So if you look in my own portfolio, I own Snowflake, why? Frank Slootman is one of the best CEOs in Silicon Valley. I own CrowdStrike. George is amazing. I own Adobe, Johnson, who’s incredible. You have to bet on these really powerful, strong CEOs who are willing to take risks, make bets, can get the patience of Wall Street to do the things that they need to do. And look at Amazon and Bezos not bet on AWS, the market cap of Amazon today would be . [00:10:14][80.2]

Dan Nathan: [00:10:15] We’ve talked about it. I mean, the North American retailers is basically valued at zero. Let me let me ask you a quick question, because, again, you know, you just talked about timeframes in your ability to think longer term in the private markets, right. And scale some of these investments and have different things, work at different times and have the ability to take your time. But you just mentioned a couple names. Snowflake at its highs a little more than a year ago, it was $400. It’s $135 now. CrowdStrike, at its highs a year and a half ago, is $300. It’s $100 right now. And again, if you are not mark to market, that sort of valuation, volatility in a private portfolio would drive you crazy because of the illiquidity. But that sort of volatility in the public markets, having the ability to see it every day and liquidate your position if you were so inclined. I’m just curious how you think about that. How do you go back and forth between these two investment worlds? Because to me, you ever hear the expression no one ever went broke taking a profit? I’m just curious how you think about those time frames between public and private markets. And in hindsight, the idea when you sell something, do you feel like in the public markets that you were like abandoning a thesis or a management? I’m just curious, is that [00:11:26][70.8]

Jeff Richards: [00:11:26] Yeah, yeah, it’s hard. It’s hard. I do. I took some losses Q3 and Q4 of last year for tax purposes. And then you really have to ask yourself, do I want to come back in later on? Part of it for me is having conviction around the space. Is there a tailwind or a disruptive element to the space that a company is in, like a CrowdStrike number one? Number two, how good is the CEO? And then if you have that conviction, like I accumulated most of my CrowdStrike position during COVID in 2020, it dipped down to about 50. I think it was $55 a share. You know, if it gets down there again, I’ll buy more. I think one of the hardest things to do and it is hard I just read this book, which I don’t know if you’ve read, it’s called Richer, Wiser, Happier. It’s about investors written by a guy named William Green, and he profiles Munger and a bunch of other fund managers. And, you know, one of the things when you read this book is a lot of the world’s best fund managers don’t sit in front of a Bloomberg terminal and trade every day. They build a long term thesis around a company, and they sit on it for years and years and years. It’s a little bit of like how our business works. One of the features, it’s not a bug, it’s a feature. One of the features of our business is that we can’t sell most of our positions. We have a lot of companies that their valuations probably down 50, 60, 70% year over year. But we’re going to help them raise more capital and ride it out. And some of those in five or ten years will be worth 100 x what they’re worth right now, some will go to zero, but some will literally be worth 50 to 100 x. I think it’s one of the benefits of our business is having that long term approach. And illiquidity is a little more liquidity come into the late stage market the last two years was secondary and there are some platforms that are cropping up where people can more actively sell their shares. As a venture capital investor, you learn to be patient. I think I’ve told you this. You know, my cost basis in Salesforce is like tiny because I bought it in the early days because I believed in Marc Benioff and I had a bunch of friends that worked there. You know, it’s hard when they go down, but I don’t know if you’re a long term investor and you’re just kind of dollar cost averaging in. I do think there’ll be some names today that are in the 3 to $10 billion market cap range in tech that have really great CEOs and really great long term 5 to 10 year outlooks. And you will see some 5 to 10 x returns from here. The trick is buying them when nobody else thinks they’re interesting. Everybody tech is out of favor. It’s scary. It’s dicey. Your financial advisor is telling you to put money in a money market account or T-bills or, you know, some sort of dividend paying equity. And that does make sense. And people should be diversified. But we will see some tremendous returns from here. I mean, if you look at today software today, the average software company is trading at 4.9 X forward sales. Now, you could argue we should be not focusing on a multiple of sales and focusing on profits and EBITDA a bunch of other things. But just for simplicity’s sake, we’re at 4.9. The average over the last eight years is 7.3. So we’re below the average for software over the last eight years. Now maybe that was a blip, maybe it was an eight year blip. We got all the way up to about 15 X, Now we’re down to 4.9. And if you look at high growth software, so companies like Snowflake, which you mentioned, there’s a handful of those. This is all Morgan Stanley data that I’m quoting that got up to 65 X forward sales. That was crazy. We’re at 13 right now. Should we be paying 13 times forward for super high growth software company? You can argue that’s still too aggressive. I’m sure Charlie Munger would. If these companies are truly innovating and going to own these categories that are going to produce ten X returns from here, maybe that’s a place we can play, but software at five X to me feels like a good place to be investing and perhaps validated by the fact that you’re seeing firms like Toma, Bravo, Vista Equity come in and buy these companies. They’re licking their chops and saying, Gosh, at five, six, seven, eight X, we could buy these things. We know the tailwind will be there in 24, 25, 26, buy them now and and reap the windfall down the road. [00:15:03][217.0]

Dan Nathan: [00:15:03] Well, here’s the thing, though, with your snowflake and you and I are going to go back and forth on this for like probably another two years because I think we’ve been doing it over the last year. There’s no private equity company on the planet who could pay the sort of premium that it would take. It’s trading at 14 times forward sales. It’s got a $44 billion market cap. So again, do the math. It’s doing $2 billion in sales that are growing at 40% for the next couple of years. At some point that decelerates right. It’s not going to materially accelerate, Jeff. I mean, from here at 40% expected growth for the next couple of years. So my point is, is like this valuation was born into a grave. It was born into a grave when he was skipping up ten x multiples of sales in the height of the bull market back there in late 2020 and 2021. [00:15:45][41.5]

Jeff Richards: [00:15:46] And in particular, when you can get paid, I mean, there are really good names paying 6 to 10% yield right now. So would I put all my money into Snowflake at this price over the next five years when I can invest in dividend paying equities that are giving me five, six, seven, 8% or even T-bills at four, you know, or. [00:16:02][16.9]

Dan Nathan: [00:16:03] The T-bills at four is the big problem. You were just quoting that data over the last seven or eight years in the multiple sales was 7.8% versus where we are on average. But I’d say four and a half times right now. The problem is, is that interest rates were probably half of what they were right now. And so that multiple compression makes sense to me. I think it’s a pretty cloudy outlook right now for the global economy. And I think the other aspect about it is, is that we have this growing bipolar world as you think about it. And so that’s something that is literally going to close off large parts of our multinationals where they might be able to sell their high tech gear or whether it be software. [00:16:40][36.5]

Jeff Richards: [00:16:40] I mean, I don’t think your average investor right now is plowing money into the market with the idea that there’s some fundamental shift in the market in the next six months. Maybe they are. I don’t know about you, but as long as we are raising interest rates, it’s pretty hard to see, you know, your typical equity going up. And one of the frustrating things, I’ll tell you as a CEO of a public company and we have quite a few of them, is your performance of your stock has been pretty disconnected from the performance of the business over the last 12 months. You could be knocking the cover off the ball and your stock’s down 75% because its rates are driving everything in terms of how people are valuing businesses. And so I think it’s just one of those questions. As an investor, do I believe rates at some point will return to sub 5%? Maybe. Will they go back to zero? Hmm. I don’t know. But you and I both know the minute the Fed says we’re going to pause or reverse course, then these names will all have a certain pop to them. And good investors invest in good companies. And my most important advice to people is that individual investors have a long duration. Don’t take money that you need tomorrow to pay for your kids to go to college and put it into high risk tech assets. If you want to put some money into high risk, high growth tech that you really believe in, have a long term view on it. And if the stock goes from 50 to 25, you can add some more. If you have a short term mindset, it’s really hard to make money. Plus you’re going to pay a lot in taxes. [00:17:58][78.1]

Dan Nathan: [00:17:59] I agree. But you know, the tax thing to me, you know, someone who’s on a show called Fast Money on CNBC, you could zoom out a little bit, okay. And you could say, let’s recognize the fact that in my 25 year career in the business, I’ve now witnessed three massive public market bubbles, and they burst in such a massive way that the charts are really obvious. I mean, I could just throw up a Snowflake, throw up a CrowdStrike, throw up a Tesla, throw up a Roku, I mean, throw up any piece of crap in the Ark ETF or whatever. And you’d say to yourself, if you weren’t getting nervous about actually holding those stocks as they were skipping up, then you’re doing the game wrong in a way, because then you’re stuck with the island of misfit tech toys or whatever it is in your portfolio. And so I guess one of the things that I just kind of encourage people is I remember coming into the markets right as that term irrational exuberance was being thrown around by Greenspan and some others. But you know what? The funny thing is? The market went up four years after he first uttered those sorts of words. And I guess my point is, is that the people that never took a profit on the way up, they end up owning these things that have gone down 80, 90% that happened in the early 2000. It happened in a lot of financial oriented stocks post the financial crisis. And it’s happening now in the sad thing is a lot of these stocks will never come back Jeff. So people hold on to the dream cults that surrounded certain stories and certain products and certain CEOs, but they’re just never going to come back. And so [00:19:31][91.8]

Jeff Richards: [00:19:31] But that’s why I think you want to look at the companies that are in that 3 to $10 billion range. The story hasn’t developed yet. So a couple of things. One, the majority are still owned by the private investors. They still own 60 plus percent of the company. Public they haven’t built a public track record yet because they’ve only been public for two years. So people haven’t fallen in love with the CEO, the management team, the story. The technologies that they’ve built are still early in terms of their adoption cycle, and so people haven’t quite caught on to the upside opportunity for these companies. And then most importantly, you have to pick the ones that have the really, really great CEOs. I definitely would not go build a basket of tech companies valued at 50-100 billion. You’re not getting paid the risk reward in that scenario that you would be for taking a risk on some of these earlier stage names. I think the challenges those earlier stage names can also be really volatile. They have super low float. They can move with high volatility. They just don’t have huge float. It’s hard, but that’s what the returns will be. [00:20:21][49.8]

Dan Nathan: [00:20:21] I think your example about Salesforce is a great one. I mean, there’s a company that was probably left for dead in 08 09. Again, that was a valuation correction. But then at the intersection of this massive trend towards the cloud and software as a service and all the elements that that made this to be a, what, a multi-trillion dollar market cap sector, including obviously Microsoft, Adobe, Amazon. Yeah, I think it makes sense to try to find $5 billion market cap company that’s going to be the next 50 billion. I struggle to find what’s the next 50 billion market cap company that’s going to be a half a trillion. And you know, that was something that basically in late 2021, it was pretty interesting that you had Meta, Facebook that was almost $1,000,000,000,000 in market cap. You had Nvidia that was almost $1,000,000,000,000 market cap and almost like that, as soon as they almost rang the bell at the top, they dropped 50, 60% or so. That’s one of the reasons why I also feel like the likelihood that Apple, that Microsoft, that even Amazon are able to keep this trillion plus mantle makes a lot of sense. One name that starts to make me a little nervous and you just mentioned Google, and it goes back to what we’re talking about with these LLMs, this chat GPT. Maybe we’re being a bit alarmist here, but when you think about what percentage of their sales comes from search and advertising, based on that search, you say to yourself, is that a technology that was just kind of built to destroy the dominant player, that market for the last 20 plus years? [00:21:58][96.1]

Jeff Richards: [00:21:58] We all have to acknowledge, too, about Apple, Microsoft, Google, even Facebook, Amazon, they own distribution. They have the channels that everybody has to go through. If you’re a business today and you want to reach the end consumer, you’re going through Google and YouTube. You going through Facebook and Instagram, you’re going through Microsoft and LinkedIn and you’re going through Apple, and they have a hammerlock on distribution. So the only way I think that changes and they lose. This is why Buffett owns Apple. The only way that change is regulatory. Some some reason the regulatory environment changes and they force them to break up that distribution monopoly then we would see a change. But it’s really hard for an emerging company to get that kind of distribution hammerlock today. The consumer habits are built in. You have to remember, too, what happened over the last 13 years was we had the both the rise of both mobile and cloud. And so those distribution habits of how you consume information and data and content got built over the last decade. It’s going to be really hard for those to change and AI is not going to change that. The distribution model is not going to change in AI and consumption the way we consume information could change. And that’s what you’re talking about, the speculation that folks have about Chat GPT potentially disrupting that, by the way, it’s incredible. It’s super cool. I can’t remember anything recently that’s caught fire like this has in terms of the imagination and an upside that people are thinking of now in the space. The one thing that people have pointed out is where does that information and content and data come from? And as long as it’s coming from the same public sources that Google is using, it’s going to be pretty hard to actually disrupt Google. Now, your format is cool, but you don’t think Google has a bunch of things in the works that look a little bit like Chat GPT. And there was even some folks talking this morning and Ben Thompson talked about it, his newsletters, maybe this will be the thing that forces Google to stop screwing around with people on the roof and actually put out some product. I think it’s going be super cool. I do think there’s also a bunch of really cool innovation happening in AI in spaces that nobody’s talking about in vertical categories. Bill Browder’s son Joshua has a really cool product called Do Not Pay. He’s built an AI bought that helps people fight parking tickets in their Comcast bill. I mean, it sounds really simple, but like when you talk about being deflationary, he’s putting money in people’s pockets. It’s a very simple service and his AI just keeps getting better and better and better. I’m an investor in a company called Vic.ai that’s in the accounting and finance space. We’re automating bill payment and reconciliation invoicing for large companies. It’s not sexy. A.I. as you train it, it gets better and better and better. And so you’re going to see a bunch of these areas where AI gets focused that aren’t obvious to the consumer, but have huge benefits to companies and even individuals in your personal life. And I think that’s the part we’re probably underestimating. I mean, think about how deflationary Amazon has been to the US economy over the last decade, right? The fact that some van shows up at your door and drops off stuff you ordered 3 hours ago is only possible really because of Amazon, UPS and FedEx and the US Postal Service weren’t going to do that. I think the next iteration of where that half trillion dollar company comes from, we don’t see it because we haven’t seen the full effect of that new capability playing out. And we’re still thinking in the old world of mobile and cloud and social, which are really 2000, what 2008 2010, kind of era breakthroughs, the next breakthrough hasn’t happened yet. Chat GPT is just a glimpse of it.[00:25:09][191.0]

Dan Nathan: [00:25:35] I’m curious, do you think that there’s an intersection, though, in 2023, we talked about regulation for a second there for the mega players, but do you think there’s a potential to see more M&A that’s not financial M&A? [00:26:13][38.4]

Jeff Richards: [00:26:14] We had a lot of our companies that were engaged in conversations around M&A last year, and there were a couple of impediments to getting things done. One was the public acquirer stock was so volatile, I think it made it very hard for them to think strategically. I mean, if your stock was going from 100 to 50 to 75 to 40, I think it’s very hard to go to your board and say we want to do $1,000,000,000 M&A transaction that’s 30% cash and 70% stock. And so I personally saw several deals get killed that I think that was probably the driver. The buyer never tells you why, but that’s probably one of the one of the reasons. And so as we sort of settle into this normalized environment with tech valuations, I think you’ll see folks feel emboldened to make acquisitions. The second part of it is obviously the buyers had irrational views on the value of their business. And so if a corporate acquirer wanted to buy a software company doing 100 million of revenue and the seller was thinking their business is worth $6 billion, that expectation has changed a bit in the last six months. It really is only the last six months, though the private market did not adjust much in the first half of last year. It’s really just in Q3 and Q4 that we started to see some adjustment to valuation. And so I think you’ll see conversations where if a buyer came to a target and said, Gosh, we love your hundred million dollars software business, we’d like to buy it for $1,000,000,000, you’re going to have some folks on the board that say, gosh, you know, if we went out to raise capital today, maybe that’s slightly higher than where we would raise. Where as 12 months ago, they thought that was a 60% discount from what the company was actually worth. So it just takes time for valuations to work themselves into the private market. Honestly, if it’s a nine inning game, we’re only in the second or third inning. The real valuation and I think corporate buyers know this the real valuation reset in private tech is probably going to happen in Q2 of this year, Q3 of this year, because the companies that raised money in 2021 that didn’t raise in 22 and thus avoided any kind of valuation adjustment, are going to be coming out to market at some point this year. And they’ll either raise capital from private investors on terms that reflect the public market or they’ll be more engaged in those M&A conversations. And I think the public buyers will have adjusted to their stock price. [00:28:25][131.5]

Dan Nathan: [00:28:26] I’m just curious, what are you seeing now? Because you talked to a lot of private companies it seems like we’re going to see a big acceleration. If you hadn’t made any big cuts in your workforce in the back half of 2022, it seems like we’re starting to see a lot of that now. We’re starting to see a lot of public companies kind of accelerate. We know that there’s probably a little hesitancy to do that before the holidays. It feels like these things are going to start to stack up pretty quickly. And, you know, you mentioned Salesforce earlier. I mean, Salesforce is now doing their second reduction in headcount in a matter of months. And, you know, some of the data, dude, I mean, I’m looking at this right here. This is from a Barron’s article last week. So this is Meta. In 2019, they had 45,000 employees as of third quarter. Last year they had 87 alphabet in 2019, 119,000. As of third quarter 2022, 187,000, Netflix 8600 in 19 and well over let’s call it 12 13,000 out in the Amazon. This one is just eye popping. They had 800,000 employees in 2019 and they had about 1.6 at the end of last year. So when they have an announcement that they’re going to cut 18,000 jobs, that’s a rounding error man. [00:29:40][74.8]

Jeff Richards: [00:29:41] I think that’s one of the things that we have to put all of this in context, which is you look at the hiring boom, people went nuts in 20 and 21. When you talk about eliminating ten or 15,000 jobs at some of these companies. I mean, Meta’s a good example, Brad Gerstner wrote his letter encouraging them to make the changes that they’re now making. But, you know, 2019 Meta had 45,000 employees. The end of Q3 of last year, they had 87,000. So they almost doubled the size of the business. I think some of this is we have to realize that people just got ahead of their skis in terms of hiring. And so we’re seeing the same thing on the private side. I think what happened, you know, most of our private companies did some kind of a riff in Q2 and Q3. Most of that was like a ten or 15% job cut. What you’re seeing now is folks, as they’ve built their plans for 23, they’re actually reevaluating their lines of business. They’re reevaluating their margin structure. They’re sort of thinking about like, gosh, the market is no longer grow at all costs. And so I’ve got to be thinking about like, what do I want to look like as a public company potentially three or four years down the road. And I guess we’re getting there now. I don’t have time. I think there was this interesting logic of like, Oh, I can spend money like a drunken sailor now, and at some point down the road I’ll just be better, almost like a New Year’s resolution. I’ll just go to the gym and lose 100 pounds. It’s not really the way companies get built. And so. We’re seeing with our best CEOs is they are taking advantage of the market dislocation, taking some of the pressure off their team in 23 to grow at all costs and saying, hey, let’s grow at 30, 40%, not 80. We’re not going to hire anybody. Or maybe we’ll grow five or 10%. But I also want to restructure the way we’re running the business. We don’t need 12 people working on that product. We can have six. And oh, by the way, that 30% margin line, let’s get out of that and shift more of the focus to the 80% margin line. So I think you’re going to see better cohort of companies go public in 24 and 25, the ones that are at kind of series B C D now that didn’t get overfunded in 20 and 21, the ones that are now into their growth stages when they go public in 24, 25, 26. The best example that I use for a lot of founders is Veeva. Veeva was a profitable software company when it went public and it was close to profitable from the early days of the company. They didn’t build the business in some radical way that nobody else had ever heard of. They just had a focus on being very capital efficient since the beginnings of that company. So maybe we’ll see more companies like Veeva that come out into the market. And obviously the companies that are public that were spending a ton of money. You look at a company like Twilio, they’ve gotten punished. I mean, they’ve just gotten hammered. And so that is not lost on founders today who are saying, gosh, I want the Veeva multiple, not the Twilio multiple. And I think that’ll turn out in better color to companies coming public in 24, 25, 26. I still think the companies that go public in 23 for the most part, are going to be, you know, sort of your Instacart, the high profile companies from 20 and 21 that raise a lot of capital. Those IPOs are going to be challenging. And then you might see some really interesting stuff mixed in. You know, maybe Elon takes StarLink public and that’ll attract a lot of investor interest. So there could be some gems in here. But a lot of this will be companies that just their best option to raise capital. They can’t raise any more private capital. Their best option is to just go public, and there’ll be a reckoning around valuation, and then we’ll start to see these really great high growth software names that a lot of folks haven’t even heard of going public in 24 and 25. [00:32:59][198.6]

Dan Nathan: [00:33:00] It is interesting that you just mentioned the prospect, I think it was Chamath mentioned on his podcast All-In last week the potential for that. And Elon had shut that down or the idea of that down. But to my eye there was basically two companies that saw material up rounds in the last few months and that one was Openai right chat GPT and the other was Space X and I know a lot of people are very excited about StarLink. I suspect that Elon Musk would love to consider unless he really needs the capital and raising some capital personally. And I think that was the point that Chamath was making for diversification. I think he probably does better having that high growth, high valuation asset within the conglomerate and this is the story of Amazon, to your point, is take AWS out and it’s a one trick pony and you can value that, but you don’t get the benefit of doing everything else that you want to do in retail or push into drugs or whatever the heck it is. I mean, that is the kind of engine for growth and pushing into new areas. So again, that’s pretty interesting stuff. But listen, Jeff, you’ve been very generous with your time, as you always are. Appreciate you being here. I hope you’ll come back. Guy Adami says hi. We’ll have to do it together the next time. So we appreciate it Jeff. [00:34:10][70.3]

Jeff Richards: [00:34:11] Awesome. Thanks for having me on. [00:34:11][0.0]

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