E146: Did the Fed break the VC model? Plus IPOs, M&A, revaluing unicorns & more

September 22, 2023

TLDR: The group discusses recent IPOs and M&A activity, including Cisco acquiring Splunk for $28B and Instacart going public. They also analyze Fed actions on interest rates, questioning how this affects venture capital models and unicorn companies like ZIRP-era unicorns.

All-In with Chamath, Jason, Sacks & Friedberg

Enhancing Physical Health through Healthy Habits: Maintaining a healthy lifestyle, including exercise and proper sleep, can lead to increased energy and overall fulfillment. Caution should be exercised when considering unconventional approaches to physical fitness.
Maintaining a healthy lifestyle, including regular exercise and proper sleep, can greatly impact our energy levels and overall well-being. The conversation between the individuals highlights the various methods they use, such as cold plunges and infrared saunas, to enhance their physical health. While there is some discussion about off-menu options like testosterone and human growth hormone, it is suggested that caution should be exercised when considering such approaches. Additionally, the mention of individuals like Jeff Bezos and potential political figures emphasizes the importance of physical fitness and its association with success. Ultimately, taking care of our bodies through healthy habits can lead to increased energy and overall fulfillment.
Desiring Change and Fiscal Responsibility in American Politics: The conversation emphasizes the need for meaningful improvements, fair evaluation, and bipartisan support in addressing the fiscal crisis and ensuring effective leadership in American politics.
The speakers in this conversation share a desire for change and fiscal responsibility in American politics. They discuss the potential of Vivek as a candidate and his ability to bring meaningful improvements to the government. The lack of fair evaluation and limited national debate opportunities for certain candidates is seen as a loss for America. The focus on avoiding World War 3 is a central issue for one speaker, while another emphasizes the importance of bipartisan support in addressing the fiscal emergency. The need for a Manhattan project-style effort to find a solution to the fiscal crisis is also acknowledged. Overall, the conversation highlights the shared concerns for change and effective leadership in American politics.
The Importance of Bipartisan Cooperation in Addressing the Fiscal Crisis: Bipartisan collaboration is necessary to implement meaningful budget cuts, but the current political landscape presents challenges as both parties are hesitant to cut military and social spending. Market forces may eventually force fiscal restraint.
Bipartisan cooperation is crucial in addressing the fiscal crisis. The current political landscape makes it challenging to implement deep cuts in government programs or entitlement reform without the support of both parties. Historical instances, such as Reagan and Tipp O'Neil's collaboration and the sequester, demonstrate the potential success of bipartisan agreement. However, the current scenario is complicated by the fact that both Republicans and Democrats are unwilling to significantly cut military spending or social spending. The mounting debt service costs and the need to refinance a considerable portion of debt highlight the impending need for fiscal restraint. Ultimately, it is likely that external factors or market forces will impose constraints on the federal budget, as seen in Japan's bond auctions.
An Inspiring Summit with Moments of Camaraderie and Technical Difficulties: Despite technical issues, the summit offered inspiring moments, intellectual stimulation, and a sense of camaraderie among attendees, leaving a lasting impact on Chamath.
The summit had moments of inspiration and intellectual stimulation from various speakers. Chamath Palihapitiya was impressed by Graham Allison's knowledge and could spend hours talking with him. Toby Lutke stood out as a brilliant and unique entrepreneur. Larry Summers made a thought-provoking statement about achievement and self-esteem. These were the three most inspiring and positive moments for Chamath. However, there were technical issues during Gwyneth Paltrow's interview, which made it difficult to hear. Overall, the summit provided insights, but there were also humorous anecdotes and moments of camaraderie among the attendees. Despite some minor inconveniences, the experience was rewarding and left a lasting impact.
A successful conference with impressive speakers, thought-provoking discussions, captivating entertainment, and the impact of diverse voices coming together.: The conference demonstrated the significance of diverse perspectives and the potential for viral impact in creating an engaging and memorable event.
The conference exceeded expectations and brought together a lineup of impressive speakers. From Ray Dahlio's insightful perspective on history to Graham Allison's thought-provoking ideas, the conference offered a range of fascinating discussions. Bill Gurley's talk, in particular, showcased the potential for viral impact as it resonated not only within the industry but also beyond. The event's parties were also a highlight, with Grimes' DJ set taking center stage and captivating the audience. Despite some scheduling mishaps, such as David Sacks' arrival just in time for the program to start, the overall experience was praised as a success. Overall, the conference showcased the power of bringing together diverse voices in an engaging and memorable event.
Embracing Optimism and Technology: A Refreshing Perspective on Global Issues: Focusing on the potential of technology and positive perspectives is vital for meaningful conversations and creating a global impact.
The speakers at the conference expressed disappointment with other events, like TED, that focused too much on divisive social justice talks instead of embracing optimism and the amazing potential of technology. They emphasized the importance of observing the greater cycle and having a positive perspective on the world. The conference managed to capture this spirit by prioritizing important global issues and avoiding unnecessary virtue signaling and woke culture. Attendees were intellectually stimulated and left with a desire to explore more, read more, and engage in meaningful conversations. The conference was a success due to the excellent teamwork among the panelists, who asked great questions and connected themes between talks. Looking ahead, there is excitement for future events and the opportunity to continue this positive dialogue.
Flawed IPO Structure in the US: The current structure of IPOs in the US, which involves limited supply and lack of lockup, has resulted in poor outcomes and downward pressure on stock prices, especially for tech companies.
The current structure of IPOs in the US is flawed and has resulted in poor outcomes for recent IPOs. Unlike in Europe and Asia where a significant portion of the company is sold, anchored by a few investors, and locked up for a period of time, American IPOs typically involve a small percentage of the company being sold to numerous organizations with no lockup. This limited supply creates a spike in prices, but when retail investors enter the market, mutual funds and hedge funds quickly sell, leading to a downward pressure on stock prices. The banks, responsible for constructing the IPOs, could have implemented better strategies by selling a larger percentage of the company, finding anchor buyers, and creating lockup structures. Overall, this flawed IPO construction has led to unsuccessful outcomes, especially in the face of rising interest rates and changing valuations of tech companies.
Implications of a Potential Shift in the Software Market: The financial challenges faced by consumers could mirror the struggles seen in the enterprise sector, impacting the IPO market and highlighting the importance of long-term company performance.
The past year and a half has seen a software recession in the B2B or enterprise segment of the economy, while the consumer sector has remained strong. However, there are signs that this may soon change. The consumer is now facing high credit card debt, soaring interest payments, and unaffordable mortgages, which could lead to personal financial restructuring similar to what the enterprise segment has gone through. This has implications for the IPO market as well, with limited partners cutting commitments to managers and a decline in IPO activity and dollar volume raised. It's important to remember that the success or failure of a business should not be solely determined by its IPO performance, but rather by the overall performance and value of the company over time.
The distraction of stock price in IPOs and the importance of assessing a company's true value: CEOs should focus on running and growing their business, rather than getting caught up in short-term stock price fluctuations. True market value should be the ultimate goal.
The focus on stock price during initial public offerings (IPOs) can be a distraction from the true value of a business. The debate and concern over price volatility on day one often overshadows the assessment of a company's fundamentals. The direct listing approach, as seen with Spotify, offered a new way to go public, but its success was largely influenced by its novelty and a single bank's expertise. Subsequent direct listings, like Slack and Coinbase, followed a more predictable pattern, with an initial peak followed by a decline. However, the ultimate goal should be to find the real market value of a company, regardless of short-term price fluctuations. CEOs must navigate the noise generated by less sophisticated investors who equate stock price with business quality, but ultimately, a CEO's focus should be on running and growing the business.
The Importance of Fundamental Value and Capital Efficiency in Long-term Investing: Focus on the fundamental value of a business and invest in capital-efficient companies to achieve long-term success in the stock market. Avoid making emotional investment decisions based solely on stock prices.
The fundamental value of a business is more important than the stock market price if you're a long-term holder. Many people focus too much on the price and let their own psychological desires impact their investment decisions. It's crucial to look at the actual numbers and not rely solely on emotions when investing. Additionally, this conversation highlights the importance of investing in capital-efficient companies. Companies like WhatsApp that are able to achieve success with minimal capital raising and dilution tend to be more successful in the long run. Instacart, on the other hand, has had to raise billions of dollars, which can lead to higher dilution and potential challenges.
Challenges for late-stage investors in startups: high valuations and inefficiency, lower returns compared to alternative investments, and limited partners shifting preferences towards earlier-stage investments.: Late-stage investors in startups may face losses due to high valuations and inefficiency. Limited partners now prefer earlier-stage investments and seek evidence of competitive edge from venture capitalists. Some funds may experience reduced commitments or be cut from investors' portfolios.
Late-stage investors in startups, particularly those who invested in 2020 and 2021, may have faced significant losses. This is due to high valuations leading to inefficiency in these companies. Moreover, the returns on venture capital investments may not be as great as previously believed, especially when compared to more liquid and less volatile alternative investments. Limited partners (LPs), who provide funding to venture capital firms, are now showing a preference for earlier-stage investments and seeking distinctive strategies. LPs are looking for evidence of competitive edge and differentiation from venture capitalists, such as a strong track record or a unique proposition. As a result, some funds may experience reduced commitments or even be cut from investors' portfolios.
Concerns arise over Instacart's heavy reliance on advertising and stagnant transaction volume, potentially impacting revenue quality.: Instacart's advertising-driven model and declining take rate pose long-term challenges, while Klaviyo shows promise with strong growth and margins.
Instacart's revenue is heavily reliant on advertising, which raises concerns among investors. While their ad revenue is growing, their gross transaction volume remains flat. This shift towards an advertising-driven business model may negatively impact the market's perception of their revenue quality. Additionally, the take rate, or percentage of the transaction that Instacart can retain, is expected to decline over time due to competitive pressures and suppliers' increased pricing power. This makes it crucial to model the health of the business with a declining take rate and a focus on growing market share. Comparatively, Instacart may appear cheap in relation to Uber and DoorDash, but long-term issues may arise in terms of competition and regulatory challenges. Klaviyo, on the other hand, is an interesting software business with impressive growth and margins, making it a potential standout in the future.
Klaviyo's impressive growth and capital efficiency highlight potential, but heavy Shopify dependency poses a risk: Klaviyo's success is evident through its strong growth numbers and customer retention, but reducing dependency on Shopify is crucial for long-term success and investor confidence.
Klaviyo's business is strong and showing great potential for growth. They have managed to achieve impressive numbers, with an ARR of $650 million and a 56% growth rate. It is projected that they will reach $1 billion in ARR next year. Additionally, their revenue retention rate of 119% indicates that they are not only retaining customers but also expanding their customer base. Klaviyo has also demonstrated capital efficiency, having only burned $15 million while raising several hundred million dollars. However, there is a vulnerability in their heavy dependency on Shopify, with 70% of their business relying on the platform. It is important for Klaviyo to mitigate this risk and continue building alignment with Shopify to ensure long-term success and investor confidence.
Airtable: The Swiss Army Knife for Businesses: Airtable is a versatile and customizable tool that allows businesses to create unique solutions tailored to their specific needs, making it a valuable choice for many industries.
Tools like Airtable are like a Swiss army knife for businesses, offering a versatile and customizable approach to various use cases. It's similar to how people use spreadsheets for different tasks because of their flexibility. Airtable allows businesses to create unique solutions tailored to their specific needs, avoiding the limitations of traditional project management tools. While there may be more specialized options available, the convenience and adaptability of Airtable make it a valuable choice for many. This pattern of breaking apart major products and creating dedicated marketplaces has been successful in other industries as well, as seen with the evolution of platforms like Craigslist.
The tension between best-of-breed and all-in-one solutions in the market and its impact on job roles and productivity.: Companies are opting for all-in-one solutions like Airtable, despite not being as good as specialized counterparts, to meet their needs without additional costs. This trend is impacting job roles and increasing productivity. The market's excessive funding and overvaluation can pose challenges for founders and investors.
The valuation reset of companies like Airtable reflects a natural tension in the market between the desire for best-of-breed products and the convenience of using all-in-one solutions. Many companies are finding that while products like Airtable may not be as good as their specialized counterparts, they are "good enough" to meet their needs without the added cost and complexity of multiple software subscriptions. This trend is also impacting job roles, as features like AI summaries in Zoom eliminate the need for designated notetakers. Additionally, companies are experiencing increased productivity from their existing workforce, with junior developers performing at a senior level and senior developers becoming even more skilled. However, excessive funding and overvaluation in the market can lead to challenges for founders and investors, potentially resulting in the wipeout of ownership stakes unless companies can go public and reset their share structure.
The dangers of excessive capital and inflated valuations: Careful consideration of capital and valuations is crucial to prevent detrimental outcomes in boardrooms and for companies, protecting founders and stakeholders from being replaced by late-stage investors.
Excessive capital at inflated valuations can lead to unhealthy dynamics in boardrooms and result in disastrous consequences for companies. When companies raise too much capital relative to their actual valuation, they may find themselves in a situation where their investors have more money invested than the company is worth. This can lead to the need for additional cash in private markets, resulting in new options being issued and significant discounts being offered in order to raise the needed funds. As a result, founders and original management teams can be wiped out, replaced by professionals chosen by late stage investors. This unwinding process can be nasty and destructive for the company and its stakeholders. It is vital to carefully consider the implications of excessive capital and unrealistic valuations to avoid such detrimental outcomes.
The shifting market landscape and uncertain economic conditions call for caution and adaptation.: Businesses and investors need to be cautious and adapt their strategies to navigate the shifting market conditions, ensuring they have enough cash to sustain operations for an extended period.
The market conditions are shifting and there could be significant implications for businesses and investors. The Federal Reserve's recent decision to delay rate cuts and the potential for even fewer cuts in the future has led to higher interest rates and less available risk capital. This has resulted in lower valuations and a challenging environment for growth stocks. The uncertainty in the market is causing investors to reevaluate their strategies and businesses to reassess their financial plans. It's crucial for companies to have enough cash to sustain operations for a longer period, perhaps until the middle of 2026. Additionally, the large deficits being incurred during peacetime further contribute to the complexities of the economic landscape. Overall, the current situation calls for caution and a need to adapt to the evolving market conditions.
The shift from capital abundance to scarcity: challenges and opportunities for founders.: Founders must adapt, focus on profitability, and find innovative ways to succeed in a capital-scarce environment. Planning for the long term and considering mergers and acquisitions can help streamline operations and reduce expenses.
There has been a shift from a regime of capital abundance to a regime of capital scarcity. This means that there is less capital available for investment and startup funding. As a result, founders need to do more with less and find ways to generate higher returns with limited resources. They need to focus on delighting customers, reducing expenses, and striving for profitability. There may be fewer companies getting funded and less LP money going into venture. This shift requires stronger and more resilient founders who are willing to adapt and find innovative ways to succeed. While there may be exhaustion and even some giving up, it is important to plan for the long term and understand that capital abundance will not return quickly. Additionally, we may see an increase in mergers and acquisitions as companies consolidate to reduce expenses and streamline operations.
Economic conditions prompt cautious consumer spending: Consumers are expected to tighten their budgets, delay upgrades, and prioritize affordability amidst economic pressures and rising costs, ultimately impacting the auto industry and promoting cautious spending habits.
Consumers are likely to tighten their belts in response to the current economic conditions. With credit card rates and interest payments soaring, homeowners unable to sell their houses, and the rising cost of large-ticket purchases like cars, people are expected to make some adjustments. This could include skipping iPhone upgrades, keeping their cars for longer periods, and finding ways to make their current homes work instead of moving. Additionally, the unionization deals proposed to automakers, along with high consumer lending rates, pose a significant risk to the established auto industry. These factors, combined with countervailing economic forces and the rise of more affordable alternatives like Tesla, may create stress in the economy that could lead to a break. Overall, consumers are likely to adopt more cautious spending habits in the foreseeable future.
The potential impact of labor deals on auto companies' future and the need for a balanced approach: Unions need to consider the long-term consequences of their demands on companies, as unsustainable costs can jeopardize the company's future and have a ripple effect on other industries.
The labor deal between auto OEMs and unions could create tremendous pressure on established auto companies. While it's reasonable for unions to negotiate for the best possible benefits for their members, there needs to be a balance between their demands and the long-term impact on the companies. If the labor deal leads to unsustainable costs, it could ultimately jeopardize the company's future, requiring a bailout from taxpayers. This creates a ripple effect that could extend to other industries. The media tends to focus on CEO pay and moral issues rather than conducting a thorough financial analysis. Additionally, there are concerns about the economy's stability and whether a soft landing is possible, especially as automation and new technologies reshape the labor market.
Innovative Technique Offers Hope for Treating Autoimmune Diseases: Researchers have developed a method to train the immune system to stop attacking protein, potentially preventing autoimmune diseases and providing new opportunities for targeted therapeutics.
Researchers have discovered a groundbreaking technique that may have the potential to address a long list of autoimmune conditions. By attaching sugar and carbohydrate molecules to a protein called an antigen, they were able to present it in the liver and prompt the immune system to recognize it as safe. This initiates a regulatory process that tells the immune system to stop attacking the protein, effectively preventing autoimmune diseases like type 1 diabetes and multiple sclerosis from developing in animal models. This novel approach opens up new possibilities for developing specific therapeutics for various autoimmune conditions. While further study is needed, this discovery offers hope for eliminating the debilitating effects of autoimmune diseases in the future.
A New Approach to Treating Autoimmune Conditions through Immune System Regulation: Introducing proteins with glycosylation into the liver can re-regulate the immune system, potentially stopping it from attacking its own proteins. This discovery holds promise for improving the lives of those with autoimmune conditions.
There is a new approach to treating autoimmune conditions through immune system regulation. Traditional methods of presenting antigens to the immune system or immune suppression are not always effective or healthy. However, by introducing proteins with glycosylation into the liver, the immune system can be re-regulated to stop attacking its own proteins. This is an exciting new modality that holds promise for treating a range of autoimmune conditions. While more research is needed to understand the side effects and effectiveness in humans, it is a significant step in the right direction. This discovery offers hope for improving the lives of those dealing with autoimmune conditions.

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