Venture Capital Archives

In Conversation With Brad Feld (StrictlyVC Insider Series 2017)

Earlier this month, Connie Loizos of StrictlyVC and TechCrunch gave me the opportunity to sit down with Brad Feld from Foundry Group at her latest “Insider Series” event. I love these events because everyone attending is genuinely interested in investing in startups and everyone has a genuine desire to learn from others on how to improve, how to get better. And, who better than to learn from someone like Brad? You can see a video of our chat above. I focused our talk on two categories — (1) advice for people just getting into the game of investing in startups (covering branding, stage focus, and more) and (2) drawing out lessons from Foundry’s first decade in existence. It’s hard to meet a newer investor in the ecosystem who hasn’t just met Brad, but also received direct and meaningful help from him. My favorite part of our chat is when we talked about competing for a Series A investment against firms where he has friends — and I loved his answer. More or less, he said that Foundry wants the founder to pick, and is ultimately happy for them whether they pick Foundry or a friend/rival firm. It’s a subtle, deep, zen-like approach that I still need to think and reflect on. So, thanks to Brad for making the time for all of us, and thanks to Connie for the opportunity!

Edited Transcript (not full)

@semil: We have only a little bit of time. I know there are a lot of people here who want to meet Brad. So, excuse me, I’m going to talk really fast and get to some audience questions. Can you handle quick fire?

@bfeld: Let’s go.

@semil: Okay. on the Snap IPO itself, what it does it mean for the tech industry, investing, and is the consumer window closing?

@bfeld: I am not a Snapchat user because I’m too old. I mean I have one, but I don’t have this on my phone. I don’t have much emotional connection to the company. I think it’s really good that it’s going public, and I think more… I’m sorry. But other frameworks or school of thought is I think more IPOs are good. I don’t really think there’s a window per se of consumer, not consumer. This is the endless discussion. “Oh, there’s no more opportunity to do x ever again in the history of mankind.”

@semil: Fred wrote that a few days ago in not such a direct way, but he all but – in my reading of it – closed the door on Consumer Internet, Digital Media.

@bfeld: Well, so let’s define what Consumer Internet, Digital Media is. Will there ever be a new product that is ubiquitously, used from a consumer perspective, that is in the universe today that we’re thinking about? Absolutely. And is it something we haven’t thought about yet today? Absolutely. Is the ability to raise a bunch of money on a relatively smaller user base in a perspective view of the future available to people? Probably not. So, the shift is, instead of it being a whole bunch of people trying to get money into stuff, and a whole bunch of things getting created, focusing more clearly on what you’re doing as an entrepreneur that’s playing ahead of the next wave of what’s going on. And we go through this over and over again. I mean, every single layer of whatever the new hot, trendiest thing is… 4 years ago, or 5 years ago, I was on a panel that some other publication – not to be named – and the panel is about Big Data, right?

@semil: I remember that.

@bfeld: The headline that, of course, got printed was Big Data is bulls**t. My comment was is that calling Big Data five years ago is going to be microscopic data in 20 years. So, the dynamics of all these things are continually changing and gets renewed. The idea that there’s somehow a window that’s closed is doing a disservice to anyone who has a creative vision about the future. The notion is the way that things have been funded for the last five years and the opportunity space that exists may not exist going forward. But that doesn’t mean the next things aren’t going to be creative.

@semil: In this current boom cycle over the last seven/eight years, have VCs in general been too friendly?

@bfeld: No. There’s two different pieces of friendly. Friendly piece #1 is warm, cuddly teddy bear. And most VCs who are warm, cuddly bears are actually warm, cuddly polar bears, which means that they’re really wonderful until something goes wrong, and then don’t **** with them. The other version of friendly is passive about dealing with terms, and about the only one setting expectations at some point in time in the context of companies. This phrase that’s maybe 10 years old now, founder-friendly, it’s like a problematic cliché. What does it actually mean to be founder-friendly?

The far extreme of that would be a phrase I use all the time, which is, “Give first,” and this idea that you want to enter into a relationships non-transactionally. You put energy into something – it’s not altruism – you expect to get something back. You just don’t know when, from whom, over what time period.

The extreme case of ‘founder-friendly’ would be, “Hey, here’s 5 million bucks, no contract, no nothing, and send me back whenever.” Obviously that’s not how it works. You get this marketing illusion of what founder-friendly is as a way to obfuscate what the true character of the people are. My advice to entrepreneurs is to recognizes that it’s not a situation that’s generic. The archetype of VCs is not a singular archetype. There’s not a founder-friendly VC — there’s a whole bunch of different personalities in the context of where they’re investing, how they behave, how they interact with you, that defines it. My view is on the dimension that I care about, which is my job as a VC is to help you win period. And as long as I support the person running the company, I work for you. I don’t think VCs are far from that end of the spectrum.

@semil: There’s a lot of chatter about non-Bay Area / non-tech companies buying tech startups as sort of a bail out, if you will, or reinvention. Do you think a lot of that is chatter or do you think we’ll see more of that over the next few year?

@bfeld: Big industrial companies buying tech companies for way too much money because they don’t know what else to do? Yeah. In each cycle, and the whole world that we’re living around is in cycles, and it doesn’t matter what that cycle is doing and whether it’s sloping up or sloping down. You have big movements that are directional. Those big movements, when they happen, are often happening after it’s too late to actually have the appropriate impact of it.

I’ve been doing this for 30 years – I’ve been investing for 20 years – and there are continuous cycles of non-technology companies entering into the world of trying to buy technology companies, going back well before I started even my first company, and a small number of those companies extract really significant value out of that because they buy at the right time, when they occur, when they’re able to do something with it.

And, then a whole bunch of companies don’t get the value for their investment. It will depend on which category, right? You could talk about the auto industry, you could talk about the consumer products industry, you could talk about retail. I think there are different phases of the cycles. They are doing different things. They’re spending different money for different reasons, all of them chasing innovation.

The idea that chasing innovation and creating innovation within their companies, doing it in a way that is acquisition-only, is kind of nonsensical. It’s a strategy. The strategy we’re using at Techstars when we partner with large companies and build accelerator programs, not for the large companies, but for companies that are building things around the ecosystems of those large companies. It’s a very inexpensive way versus spending capital and buying a team of people that’s effectively a startup and run your product. So, all of those things can work and all of those things can fail. It happens over and over again.

If you’re an entrepreneur and you’re trying to time that, you will get f****d. And, if you’re an investor and you’re relying on that, from an investment perspective, it won’t work. You will either get lucky or you won’t. If you get lucky, that will feel good. You’ll start to believe that that’s an extrapolated trend and then the cycle will change on you again.

@semil: Say you’re entering the world of startup investing today, you’re managing a small fund, medium, or part of a larger fund, what would your advice have been let’s say 10, 15 years ago versus now in 2017?

@bfeld: My advice probably 10 or 15 years ago would have been irrelevant, because I don’t think I had enough time doing that. If you go back 15 years ago, I was in the middle of working through one of the biggest sh*t shows that got created in the venture business, which was the collapse of the Internet bubble, and I was part of a firm called Mobius which grew from four people to 70 people in three years and raised almost $2 billion over that period of time, and had one awesome fund, one terrible fund, and one fund that depending on what happens might make some money.

My horrifying year was 2001, where everything fell apart. If I wind the clock back 15 years, I don’t know that I would have had good advice. Even 10 years, which was when we started Foundry Group in 2007, we started Techstars in 2006, I had a bunch of deeply held beliefs, frame of reference, things that I had been involved in that I had done wrong, or that I had participated in that had been done wrong. The younger Brad would have had probably some opinions and hypotheses, but wouldn’t have been able to give advice.

Interestingly, one thing that I do feel like I could give advice on is how I went from being an entrepreneur to angel to VC. And the way I did that was deliberately from entrepreneur to angel, I sold my first company, and I took almost all of the money I made… I sold it in 1993, made a couple of million bucks, bought a house, and then took all the rest of the money, except $100,000, and invested in 40 companies over three years, $25,000 to $50,000 at a time. In ’94 and ’96, particularly a good time to be investing in internet startups.

@semil: But you put your own capital risk. You didn’t seek other people’s money.

@bfeld: I’m not an angel. That’s my money. This is a mistake. I then started working with this very large organization called Softbank, a Japanese company, had a few people in the U.S. that were making investments, and they didn’t have a big team in the U.S., so they leveraged the U.S. team by having some affiliates. For those of you who studied history, there were me, Fred Wilson, Jerry Colonna, who became Fred Wilson’s partner at Flatiron, and Rich Levandov, who is now a partner at a firm called Avalon. We were the affiliates. Softbank was investing tons of money really fast, we were all very busy doing deals. Softbank then ran out of money, and the four of us started what became Mobius Venture Capital, originally called Softbank Venture Capital.

The four of us were accidental partners. It was not a deliberate choice.It was a reaction to a moment in time, a lot of stuff happening, us working together, and three of the four of them worked at Softbank. But then we created a venture partnership and we didn’t do the work of really creating a firm basis for what we then grew very, very quickly, and the predictable thing happened. So, the advice I would give is really simple, is to be deliberate. And this is especially true in this environment where it’s relatively easy to raise a very small fund, it is harder to raise the next level fund, and then it’s harder, again, to turn that into something that’s more than a single partner, that’s sort of scale up from angel. And if you look at the 500 or so funds that are in that cycle right now, an awful lot of them are not going to be successful. And so as both investors and entrepreneurs, the idea that it all just continually goes up is a mistake. So, this notion of being deliberate gives you a starting point for deciding what you’re going to do over a very long period of time.

@semil: On that note of proliferation of seed funds, is there any more room for more funds, either geographically, sector-based in the U.S.? Clearly there are going to be more funds started, but what’s kind of the end game?

@bfeld: I don’t think that supply of capital is the problem, especially globally. There’s always a supply-demand imbalance no matter where you are, no matter what time we’re at. Generally speaking, the only layer of capital that a particular geography can impact is the seed stage. If you’re in – pick any city – and you’re trying to impact your city, as part of the city, whether you’re an entrepreneur, investor, or government, or something else, your goals should be focused on that seed stage. Because pretty much every city in the world there is a bunch of rich people, and they give money to things like museums, and symphonies, and whatever. Those rich people could give the money to startups instead, and at least under the current tax code, they get the same tax deduction if the startup fails that they get if they give it to a museum. So, it’s just think about it as for-profit philanthropy. The worst case is that it turns into something and they get 10, 15, 20, 100 times their money. But they’re building the economic fabric of that community. So, that layer could be impacted. The growth layer, once you got a business that’s working, that money will travel anywhere. Then sort of $2m to $20m million financing, it turns out that’s a b*tch everywhere, including here. There’s never too much of that even here. And the challenge of that later is really difficult.

@semil: And that’s a function of fund size, right?

@bfeld: That’s quite a function of a lot of things, right? You have a place where… I’m going to say this carefully. There’s an enormous amount of work at the whole cycle around investing. The work at each stage is very different. When you’re at the seed stage versus you’re at that $2m to $20m million stage, and then you’re at the growth stage, getting good at doing that work in the $2m to $20m million stage, it’s really hard. It doesn’t necessarily translate, if you’re really great as a seed investor, to all of a sudden being really great at that stage (Series A, etc). And if you’re a growth investor, almost by definition, you’re probably not going to be really good at that stage (Series A) because the characteristics are so different. So, there’s a lack of supply of people who are really good at it, and because of that, in the short term you might be able to have a surplus of capital at that stage, but in the long term the capital is going to go to returns. So if you raise capital at that stage and you can’t get returns, you’re not going to raise future capital. Or you’re going to realize you’re not good at that stage and you’re going to move up or down on the spectrum side. I want to be careful because I don’t want it to sound like, “Oh yes, there’s seven good people and there’s a whole bunch of shitty people.” It is probably the place (Series A) where there’s a biggest constraint of capability.

@semil: Let me spit that back into another way. Are you saying there are funds and they’re composed of managers who have the skills, capabilities, backgrounds to handle writing a $2M to $20M check, but that also have a fund size that allows them to do that?

@bfeld: Yes, that’s right. If you have a very, very large fund, if you have a billion dollar or more fund, it’s very hard to write checks of that size. We experienced that in Mobius. And, it’s two things: one it’s just hard to do the velocity of deals; the other is cognitive dissonance. I remember so vividly that moment when I went home at the end of the day and I realized that I had have massive cognitive distance. And it’s when somebody said, “Oh, it’s only $5 million. Let’s just do it.” And everybody said, “Okay, it’s only $5 million. No big deal.” For me, as a startup entrepreneur who raised no money, my first company was self-funded, $5 million?? What are you talking about? But I participated in that. The cognitive dissonance was I’m like, “Yeah. Okay whatever.” I’m like, “Wait, wait, wait!” Right? So, you lose sight of it as the fund scales up because it’s just incredible. By the way, $200 million fund the equivalent of that is, “Oh, it’s only $1 million dollars.” And if you’re really good, you make a deliberate decision across several million dollars.

@semil: For Foundry Group, I know that fund size typically has been $225 million. Has there been the same number of core investments in each of the vintages?

@bfeld: Yes, each fund has about 30 companies, plus or minus one. I think, 28 to 31. And each fund that we’ve done we’ve invested over three years, again plus or minus a quarter. We do not have a consistent pace, so we like to say we do about 10 investments, 10 new investments a year, but it’s not one a month. We’ll do a whole bunch in January, and February we’ll look at each other and say, “I’m out for a while.” Somebody will see something and they are back at it in May again. So, it’s not that we’re too busy. It’s just sort of a notion of it’s lumpy based on where our interest and proclivities are. We’re not trying to match against an allocation. We’re trying to get paid. Wed had one year where we did 14 investments, and at our annual meeting, at our advisory board, we had a couple of very vocal investors. One of them is a partner of ours now, Lindel, who is a large investor. Lindel said, basically in the advisory board meeting the equivalent of, “Will you guys slow the f**k down? You said 10; you did 14. You’re going to hurt yourself.” Now, you’re going to get bad returns now that you’ve done bad investments. You don’t have to do… this fast is not good for you, not good for your soul.”

@semil: New people entering the VC world, how would you advise them to create a brand and attract deal flow today? Could someone just starting and maybe they have an angel portfolio?

@bfeld: I’m going to separate attracting a deal far from building a brand. Attracting deal flow is a function of knowing what you like, who you like, and how you like, and then spending a lot of time doing those things. And the reason that’s so important is that if you spend your time doing those things, and you’re aligned with what you like, how you like, who you like, you nourish yourself.

The effort of getting started and finding deal flow is really hard. It’s very easy to find people that want to raise money. It’s certainly hard to find things that are worth investing in. And so, you have to be doing it with essentially whatever you can configure in your favor when you’re just starting out. I think that the idea of you have a really good network, and your network just brings you stuff, well two things. One is your network runs out of things at some pace, but it never brings you everything. It doesn’t filter. If you say “No” to certain things, your network stops bringing you things. If you say “Yes” to everything, you’re becoming an investor. It’s sort of figuring how to build that feedback loop.

The brand is extremely personal, because I’ve seen seed investors be successful who knowing those who they are, other than the companies they invest in, and they’re very not visible. Then there’s people like you who everybody knows who they are. So, you put a lot of effort into writing and talking about your ideas and getting known. I think that’s good. You could be deliberate about it, very disciplined, or you can let it be your personality. My view is that you do it as your personality, you’re very much you.

Now, lastly I’ll say about building a brand is that all the bulls**t marketing stuff doesn’t work — instead, be authentic, be transparent. That really just means do and be yourself in the context of how you’re interacting with people, and let your brain, after whatever you want it to be, emerge from that, and people will sort it to people who are attracted to you and people who are not attracted to you. And that’s okay in this world because the goals shouldn’t be that you’re trying to invest in every single company. The goal is that every time you write a check you think it could be a great company.

@semil: Let’s assume for a second that we’re close to, or at some point, there will be a down cycle. I think a lot of people myself included, haven’t actually seen it…

@bfeld: There’s no way Donald Trump is going to be elected president.

@semil: And so, at some point it will happen. Myself included, we’ve read about it, we haven’t seen it. How do the LPs and VCs behave in the cycles that you’ve seen when things have changed very quickly?

@bfeld: Well, it’s a combination of overreaction and total denial. So, those two things happen simultaneously. And we actually have a pretty good taste of it in Q1 of last year. There was a two-month period when the the public markets went down. All of the later stage, hedge fund growth capital at very high prices, those guys stopped playing, the crossover guys stopped playing. All of a sudden, you had these companies with $5 million-a-month burn rates that were counting on raising it in the next round. For a two-month period, the world was going to end, and then it didn’t.

@semil: And they were huge, multiple billion dollar funds raised in Q1 as well.

@bfeld: Well Q1 of 2016, the first half of last year was the most money ever raised. It’s a good point. You have a dislocation of activity based on time. Anybody here who played the MIT Beer Game? Nobody, I must be on the West Coast.

@semil: Looks like there’s one person.

@bfeld: Yeah. Did you go to MIT? There’s a very famous game from the 1980s at MIT, which is called the Beer Game, and it’s a four-stage… it’s a game that everybody that goes to business school plays, and it’s a four-stage supply/demand, sort of supply chain game. One end of the spectrum is the retail purchase, and the other end of the spectrum is the people making the hops or whatever. And there’s four steps, and you have demand that raises you on the front-end. Each turn up serves one, and know what the other ones are. You think it’s a 50-turn game, and so you sort of build inventory and do things as though it’s a 50-turn game, and it ends on a random turn. It could end at 21 turns, it could end at 37 turns, and it’s amazing. No matter what people do, the same kind of behavior occurs, which is that when the demand is high you create an over-production cycle that has time lack, that’s roughly a length of the supply chain. It’s roughly a four-turn lag.

So, if you’re playing it optimally, take a quarter, so four quarters behind what’s happening. Now, you got all these VC funds that have tons of money, and everybody is saying that the world is ending. Who does that benefit? It actually benefits the VC funds, because the entrepreneurs they all want to raise money on terms that they can raise money on because they’re afraid they’re going to run out of money.

Or maybe it doesn’t benefit the VC firms because the people who have the money are not the ones that were the early stage investors. So all of a sudden, the early stage investors are getting capital piled on. It’s not consistent, and so it’s holding these two notions together.

The challenge is the denial dominates. You want to hope it’s not going to suck, and you sort of push off your behavior longer. And what happened at the beginning of last year, a lot of companies slowed their growth, slowed their hiring rates. A lot of companies lowered their burn rates. Some companies raised money opportunistically. A lot of people just sort of focused on their business. And this year, a lot of those companies, many of them are having very shallow growth in years.

Interestingly, if you push the denial out long enough, and the problem stays, so the problem that we had last year continues out, that they had in the first two months last year continues after 12 months, all of a sudden you start to have structural problems, and then you have this massive overreaction. Then all of a sudden, everybody turns upside down and stops doing something. So, it’s interesting to reflect back on 2000. I think 2000 had an extraordinary amount of venture capital raised some of you probably know. But at the time, it was like that was a peak amount, and that was really the signal of the oversupply of capital.

Now, I think there’s a different dynamic going on this time around, both in terms of the globalization of the activity, the amount of activity democratization of innovation, so it’s not just geographically centered. But you had the same kind of problem, which is that you will have an oversupply in certain stages of whatever, and you will have a macro dynamic that somehow impacts that. And ultimately, you always have plenty of tears. The question is whether when it is painful for whatever period of time it is painful, you have the fortitude to actually keep building.

Last comment for our people. Does anybody remember 2008/2009? Wasn’t that supposed to be the end of the universe, the end of our entire financial systems? Startups didn’t even notice it. But for startups, they were just starting to emerge again. So, it’s so interesting how as humans we calibrate our cycles. You’ve never been through a downturn, but anywhere it just wasn’t really a downturn that directly impacted you because the world you were living in wasn’t the one that had this massive downturn.

[Unfortunately, we weren’t able to record the last bits of the chat, where Brad and I talked about how Foundry “competes” for deals, and what they’re planning on for Foundry Next. Sorry about that. Also, the audience members asked Brad some personal questions, and I must say, even I was surprised by Brad’s answers — very deep and profound. Perhaps for another fireside chat!]

Investing Notes From The Upfront Summit (2017)

How many years now — three? I had to check my back catalog, and lo and behold, I just wrapped up my third Upfront Summit. Every year, it’s an absolute blast, and each year becomes more memorable than the last. After two full days on the ground in downtown LA, hours of fascinating content, a who’s who of lobby conversations, celebrity sightings and conversations, and much more, I will now try to follow up my 2015 recap and 2016 recap with a 2017 version. A brief disclaimer — this will be written from an investor’s perspective, so will not aim to capture the entire conference and content itself, which is huge.

1/ The Four T’s Permeated Nearly Every Discussion – Tech, Trump, Trade, and Travel: The Upfront Summit is a technology conference, put on by a VC firm (thank you everyone at Upfront!), and now with three visits under my belt, it has been amazing to see how this event has grown and morphed into a national event. Last night as the Summit closed and I was having drinks with Greg from Upfront, he asked, “so, what did you think?” What I told him is that this is likely the preeminent “gateway” conference for a high concentration of influential pistons from within the technology startup world — LPs, who supply the capital; VCs, who allocate it; founders, who use it to create value; and the Press, who cover all the ups and down — to be in the same place for 48-72 hours, debate ideas, share deal flow, and hang out more naturally, especially for those who escape the Bay Area’s growing echo chamber. The Summit feels like a gateway because it isn’t just about technology, and that was evident from the carefully-selected programming, ranging from issues around mental health, failure in business, and some of the uncomfortable truths which have dominated the news for the past few months.

So, we have tech. Most everyone would talk about the new Administration and our new President, too, naturally. Not every panel, but it felt like nearly half of every conversation touched on the new world we all live in. Tech and politics seeped into the entire event. So, too, did the subjects of trade, which certainly affect many investors and startups, as well as restrictions placed on travel, and the free flow of ideas and people. Tech, Trump, Trade, and Travel, it was on everyone’s mind and permeated nearly every inch of panel conversations (not all) and off-stage, as well. The conference programmers did an outstanding job making this event much more than just tech — it was about how the tech industry interacts with society, from mental health, to fake news, to online bullying, and so forth. I’m sure more folks will be writing about this over the next few days.

2/ What’s On LPs Minds? There are only a few events where a vibrant network of LPs and GPs mingle for days, and Upfront Summit is outstanding in this regard. I don’t have years of experience under my belt here, but I do observe some of the changes year to year since attending. First, most LPs don’t seem to care about the pomp or headlines around markups in their fund’s portfolios — they go right into wanting to know the underlying details of the companies in question. Second, most LPs generally feel reluctant to add a new manager because their plates are full, and in fact, some have cut their own portfolio, even where performance was solid, in order to concentrate their portfolio more. Third, many who rushed to back spinouts over the past 5-7 years, backing Funds I and II, are now coming up on a decision for Fund III — if notable exits take longer or continue to be one-offs, it could mean things open up a bit for new managers to slot in.

And fourth, the biggest item I heard discussed, both on stage but mostly off stage, deserves it’s own section in this post….

3/ Geographic and Inflationary Stress On The Traditional Venture Model:

This is a tale of two — or many — cities. Many Bay Area investors joke during the Summit they want to move to LA, but I think quite a few mean it. I feel it every time I go down there. Maybe this is for another post, as I need to digest it more, but the variety feels even more expansive than what can find living in New York City. Again, this is for another post….

In chatting with many LPs, this was the first year where tons of them were notably curious and poking around about “how to invest in L.A.” It wasn’t a question of “Should we?” but rather, “How should we?” The region is so large, and with more people moving to the state and area, it’s not far-fetched to think there will be an explosion of LA-focused micro-funds like the Bay Area. A small fund covering the Pasadena area can’t also cover Venice, and vice versa. On the heels of a potential Snap IPO, new liquidity, more media attention, and LA becoming a multi-industry town, the ingredients seem to be in place for the next generation of creatives to make cool things. From the LP POV, looking over a 10-20 year horizon, the region feels extremely ripe and vibrant compared to every other region, including for some, the Bay Area.

Let me break it down…

As you may have noticed on this blog, I wrote almost a year ago that venture is a hyperlocal game, and that when a large chunk of the VC business model is predicated on exits, and most exits are driven by local firms, and most firms here have a history of making large acquisitions, it can be easy to think of the Bay Area as the only game in town.

Of course, that is no longer the case in the same way. Sure, the Valley exceeds on the metrics many measure, but with so much money in the ecosystem, so many new companies, rising local inflation for labor, office space, and the cost of mobility, valuations have gone up while ownership for most funds (not all) has decreased — it all puts a tremendous strain on the traditional VC model. Now, no one needs to shed a tear about that, and it’s partly why new models like Y Combinator, First Round, and AngelList have been able to thrive as innovators.

But…the money behind the money, the LPs, they care about this. They want active managers for their capital in different verticals and different geographies, and they want them to eventually have some decent level of ownership in the companies they allocate capital to. That’s their job, right? In conversation this past week, many expressed real concern about the concentration of money tied up in the Bay Area. As valuations rise, and the cost of living (which managers may need for living expenses) rises in step, it puts a big strain on the traditional model.

There are other creative solutions. There are investors in the Bay Area who have stayed disciplined and grown their funds size carefully; many will now get on a plane to find a deal at a more attractive price “out of market”; and many are more than happy to push back on price and negotiate a deal rather than just have a one-sided marketplace. These tactics will help reward the folks who execute on these types of creative solutions successfully.

In aggregate, however, we may be on a path where a new model has to emerge to make it work. It could already exist with AngelList and their infrastructure to handle fund management; it could be micro-regional funds within the Bay Area itself, which is already starting to happen as I can name a few (and I’m sure more new ones on the way). Where this all sorts out, I do not know. But, on a macro level, it is on LPs’ minds, that’s for sure, and while they will continue to keep investing in the Bay Area (no question), there’s healthy skepticism regarding just how brutally concentrated the rewards (like AppDynamics getting snatched up by Cisco in an all-cash deal) could be over the next 5-10 years. The rest of the country is wide open, though — more and more LPs seem to be open to a regional “bet” here and there, are certainly open to vertical-specific funds which have GPs with the right industry contacts. The “spillover” from the Bay Area to the rest of the country will be fascinating to see unfold — and perhaps it is also part of the solution.

Unpacking Cisco’s Last-Minute Acquisition Of AppDynamics

It’s like a trick play in sports, like a flea flicker, or fake field goal kick, or a surprise bunt and suicide squeeze — the list goes on and on, but for AppDynamics, the dramatic sports analogies are plentiful. Set to IPO this week and begin trading at or slightly below its last private valuation price, AppDynamics was just scooped up by Cisco in a $3.7B transaction. Let’s quickly unpack the key takeaways from the deal:

1/ A success 10 years in the making: The company announced its initial round of VC funding nearly nine years ago, April 2008 to be exact (link to press release). If we assume that both Greylock and Lightspeed split the round, and not factoring in any dilution or clauses, and if we assumed a $30M valuation at that time for the company on the high end, on a gross basis this would represent nearly a 123x gross multiple on that round. (In fact, according to CNBC’s Ari Levy — a darn good reporter — the VCs above each own about 21% of the company, presenting a $770M return for each, presumably.)

2/ Enterprise outcomes scaling: Many observers will comment that not only are there not many relatively new tech companies which have truly scaled like Google, Facebook, Amazon, etc., on the enterprise and B2B side, we have Oracle, LinkedIn, Workday (the last two as Greylock wins), and a few others, but not many that get into rarified air of having a multibillion dollar outcome that sustains. Given that trading for AppDynamics on the public exchange wouldn’t have been predictable, this allows investors to cash out immediately without waiting for the 6-month lockup and also juices employees’ holdings significantly.

3/ Cisco transforming before our eyes: Cisco is over 30 years old, a huge $150B company built around network architecture. Now with AppDynamics and their team, Cisco can offer its customers richer data and deeper business insights as the company transitions from a network and hardware centric company toward more software-defined (and, read: recurring SaaS and cloud) service and delivery models. Recall that just six months ago, Cisco laid off 5,500 workers (about 7% of its workforce) in an attempt to shed costs, free up cash, and reposition the company to take advantage of a software- and cloud-driven architecture.

4/ Another benchmark for SaaS founders/VCs: A hot early-stage SaaS deal can escalate in price quickly. For example, a large VC firm which invests in a hot SaaS company at a $300M post-money valuation may be hoping it turns into the 10x outcome like AppDynamics, but those are rare. Let’s now consider that according to their S-1 filing, the company boasted just under 2000 customers, many from the Fortune 500, and top line revenues of about $150M last year, so the public market might have valued them at 10-12x revenues, whereas the private market nearly doubled that implied value by being able to ingest the team, tech, and distribution advantage it has from its current market foothold. Like any big priced outcome, we should expect SaaS VCs to use this as a data point to both justify paying up for a great team and tech but also used to justify staying away from high-priced deals which don’t show a similar path.

5/ “The Art of The Deal:” This is the juiciest part of the story, to know how the deal went down. I wish I did know, but my guess would be that the execs and board members who are supremely networked at the highest levels of the Valley were able to run a dual-track process to position the company for IPO while also courting suitors (like Cisco, which boasts over $70B of cash on its balance sheet) to take a look now before it would become costlier and more of a hassle to acquire a public company. Just like LinkedIn opted to take the cash and live inside a larger web scale platform, AppDynamics made the call to take the same approach, taking what is presumably a majority-cash offer as a better deal than the pomp of ringing the NASDAQ bell later this week.

This begs the question — aside from true outliers like Airbnb, Uber, Snap, etc., will most (not all) companies that actually IPO be adversely-selected? An open question for debate as 2017 unfolds, but to the folks who built AppDynamics up over the last decade and the folks who crafted the art in this deal — well played, folks, well played.

Talking Tech, Politics, Policy, and More with Keith Rabois (Transcript 1/18/17)

As we have done in the past before, Keith Rabois made time to share his thoughts on how tech and society at large may be altered with the new Administration which assumed office this week. While I don’t always agree with Keith, having read his perspectives for years now, he is more often right about things and quite frequently. We also share a personal interest in observing politics (from different sides of the spectrum), so we got together a day before the inauguration and recorded a conversation on a range of topics. Below is an edited, partial transcript of our discussion. The opinions expressed here belong to each individual only.

Introduction and Personal Biases

@semil: Keith has always been great at making time. So, let’s see January 18th, two days before the inauguration.
@rabois: It’s crazy. Isn’t it?
@semil: It’s crazy. I wanted to dive into a lot of topics. As brief context, you were an early supporter of Ted Cruz. You were classmate to Ted Cruz.
@rabois: I actually I didn’t support Ted. I was a classmate in law school. Actually, technically a supporter of Scott Walker, which shows how well our predictions and endorsements, how far they go. But, I didn’t endorse anybody after that.
@semil: Got it.  I want to be clear about my biases too. This is difficult topic for many people. From my point of view, my bias is that I would’ve wanted the Democrats to win. But I completely understand how this happened and we’ll try as best as we can to take an apolitical approach here and focus more on analysis.

On Retaliation Toward Tech

@semil: The number one thing to kick off with, and you mentioned this in the conversation you had with Emily Chang (on Bloomberg) a little bit: given the personality of the new Commander-in-chief – and this sort of harkens back to how Nixon was – and given the tenor of the attack from, let’s say, Silicon Valley/tech and entrepreneurship – that includes investors, executives, founders – should people be on alert for some type of retribution or some type of retaliation?
@rabois: Most of the large companies post the election results have changed their tenor, changed their attitude. They are trying to dial back the ledge that they walked over. I think it is very difficult as a public and traded company to take up a partisan position, and most mature industries don’t in fact. For example, Wall Street gives lots of money to Democrats. Wall Street doesn’t probably love the fact that Democrats tend to regulate Wall Street and, all of a sudden to deregulate it, but they are very careful to not to get themselves in the middle of the bull’s eye. And I think Silicon Valley, being kind of a newish, more recent power, hasn’t realized the consequences of being wrong, and being partisan.
@semil: At a time when we have Twitter, Facebook, and everything is now semi-public.
@rabois: The contributions were public and have been public for a long time, but the attitude of employees, the bigger… the “___ Trump” homepage. You just can’t do stuff like that and not pay consequences when the other party particularly controls both sides – in the Congress, House, Senate and the President – and so everybody is reacting from Jeff Bezos to Eric Schmidt. They are all trying to become friends.

On Peter Thiel

@rabois: One of my friends said to me that, in many ways, Peter Thiel saved technology, because had Peter not been a Trump supporter, and had he not shown that there is at least some diversity of views in Silicon Valley about politics, I think the desire, the President being somewhat vindictive just from purely public statements and attitudes, and the traditional views of the Republican party, I think given the contribution level, given the expressed outrage, absent Peter’s intervention, I think technology would have a real problem right now.
@semil: And do you think Peter is like a bridge?
@rabois: Well, he’s up on the bridge as you saw sort of famously with this tech meeting that Recode has been covering substantially and vigorously. But, the reality is there’s very few people in technology with access to what would seem to be the President of the United States. Most companies want that access. The larger the company, the more they want the access across multiple verticals: financial services, healthcare obviously.

Peter made one of the great asymmetric bets in history. If you think about this from a classic, venture, startup perspective; everybody thought he was crazy and wrong and it turned out he was right. That’s a good incentive and accumulates to a lot of money, accumulate to a lot of power. This is actually a metaphor for what happened. I occasionally get accused of being part of the PayPal mafia, and people sometimes forget the history of PayPal. All the people that worked at PayPal were complete misfits and had no establishment contacts to Silicon Valley whatsoever. Yet in about from five years from 2002 to 2007, we went to become central casting in Silicon Valley, and almost accused of being the establishment. What happened was in 2003, 2004, 2005, nobody thought that there was another wave of technology innovation coming, because there was a nuclear winter in Silicon Valley, and particularly on the consumer side.

All founders who needed money sort of gravitated to Peter, Reid Hoffman, and to some extent, Sequoia and people like me, and it turns out there was another way. Some of our best turned out to be pretty good. We moved from outliers to central sort of central force in two to three years.
Peter’s bet on Trump has made him from an outlier in politics to a very central force in politics overnight. Now, he has to decide how to use that, how to leverage that, and see what happens. But it could have the same dynamic where Peter becomes a top one, two, three, four, player in politics just like he has been in technology.
@semil: Do you see him having ambitions on an elected official basis or on a more appointed position basis?
@rabois: I think he cares about influencing specific policies, and the question will be can he do that from afar or not. A lot of people have the desire to do that from afar for lots of great reasons. It’s very, very, difficult to do that. In practice, it doesn’t work so well.
When you become President of the United States, there are so many bubbles that get created around you. Some of it’s security bubbles, some of it’s a political bubble where people try to crowd out other people. So, it’s really difficult to influence the President from afar.
So, I think at some point he may have to think about taking a more active role. For now, I suspect he’ll try to influence from afar and by placing the right people in the right places.

Fighting Words From Tech Incumbents vs Tech CEOs

@semil: Do you think there’s a difference when it comes to talking publicly about politics between the Bezos’, Eric Schmidts of the world, or sort of large tech incumbents versus the startups and the VCs that back them?
@rabois: Startups can clearly be more reckless. I mean, startups are like Pirates, and the Apples and Googles are like the Navy. For startups, nobody really cares, for the most part, what the attitudes of the founders are and whether they endorse a particular candidate. But as a publicly-traded entity, you just can’t be partisan and expect to be a publicly-traded entity. You have shareholders.
Mark Zuckerberg at Facebook actually handled it very well when there was alleged controversy around Peter. He said, “Look we want to be a company that has a product that is used by billions of people. If we are going to be used by literally billions of people, we can’t alienate half of the United States. That makes no sense whatsoever.” So, I think he and Facebook probably navigated a very complicated morass quite well.

On The Tech Sector as a “Boogeyman”

@semil: I’ve read this narrative– I personally disagree with it, but I wanted to get your view which is, “The tech industry, either at large, or the startup industry – since there’s such a concentration of wealth here – will turn into kind of a bogeyman or a target as well.” I tend to think of tech as more aspirational and people use the product and services on a daily basis, but do you think that that negative narrative could increase or grow during a new administration?
@rabois: It could, but I don’t really believe in the narrative. The evidence is against the narrative. For example, when I travel back to high school where I grew up, which is very far removed from technology, people really want to be in technology and are really interested in what I do, and how to find routes for actually now outpace their kids, which is a little embarrassing of using in technology. I’m dating myself badly here. Secondarily, I’ve seen public studies of sort of different industry reputations, and tech is always the number one or two most highly-regarded industry in the world. So, it depends compared to what? And tech is not perfect. Tech has lots of flaws. But when you compare human endeavors to other human endeavors, to other human endeavors, tech stocks up by any metric quite well.

On Entrepreneurial Responses To A Trump Administration

@semil: Do you think that there’s any room or place or… requirement isn’t the right word, but obligation for entrepreneurs or companies to either be part of the next wave coming up, or building products and services to either amplify or combat policy that they don’t like?
@rabois: Absolutely. One of the things that we do here at Khosla Ventures is we filter all our investments by impact. There are lots of things that can make money that we don’t invest in, or aren’t interested in, and then when we find something that we think has potential high impact on society, in a positive direction, we are more likely to invest. So, it’s absolutely the right and positive thing for people to build companies that are sort of the change they want to see in the world. I think it’s also… one interesting thing about Trump winning is I think it will encourage more political behavior, more activity by non-professional politicians. So, I think more Silicon Valley people may run for office, more technology entrepreneurs may run for office, because it’s now established that it’s at least possible for someone who hasn’t spent his or her life in politics to be extremely successful. I think that will encourage more people to run for different levels of office – whether it’s the House, the Senate, the Governor or President – and I think that’s a great thing, to have more talented people, from more diverse set of backgrounds, running for office than 40 years in politics.

On Fake News

@semil: What’s your point of view on the fake news debate? There’s a debate around Facebook and news, and then just generally around filter bubbles. And what could entrepreneurs do to fix that if it is a problem? One of the issues I am finding is we think of incumbent companies as “you can disrupt them.” The issue with the incumbent companies that are built on top of the Internet or mobile networks is the network effects kick in, and they seemingly get stronger, and you have the founders either in control or close by. So, what can people do? Clearly we have free will to pick and choose where we get our media from, but that’s probably not the case of where people are going.
@rabois: I’m skeptical about this fake news debate for two reasons: One, I’ve seen no evidence that any voters in the United States are less informed than they were in any prior election in the American history. I’d like to see some comparative data that shows there’s been some decline in knowledge about the world, knowledge about policies, knowledge about candidates, and there’s none of that evidence. Two, I think that this is mostly the last gasp of the traditional media trying to reinsert themselves as a gatekeeper. Basically, what the Internet does classically across all industries is it eliminates gatekeepers, and you eliminate gatekeepers and get a wider array of opinions. Some of those opinions actually may thrive, that the gatekeepers would have filtered.

Naval [Ravikant] posted quite elegantly about this. I have read all the Startup Boy blogs about politics – they are incredible – and so I think that’s just one of the bigger drivers, the people complaining about fake news or all mass media types, not normal people. Then, the third is I think it’s a hard problem. I think you can discriminate between hoaxes and what I’d call hyper-partisan behavior.

Hoaxes are easier to filter, easier to eliminate, although people still buy the National Enquirer. There’s demand. That’s another point, that throughout history, the National Enquirer has been publishing fake news, hoaxes, for decades and it’s sort of unpopular.

We’ve had wars based upon fake news intentionally. If you take the American history, you learn about the Spanish-American War and how the first newspaper publication sort of manufactured the conflict. So, this is nothing new as far as I am concerned, but I think there is a way to eliminate intentional hoaxes versus my interpretation of facts that leads me to a conclusion, that may or may not be “true.” I think that is a problem and technology companies want to stop that.

On Deregulation

@semil: Do you expect deregulation and do you expect it in a couple of industries, or literally are we looking at all of them and thinking about them?
@rabois: I’m a conservative. I would wish we would deregulate and relook at regulations across all industries. I doubt that will happen. I think it will be concentrated in a couple of verticals mostly driven by a very senior leader in the government who wants to take on the agenda in that vertical. I think it’s generally good for startups. Startup’s thrive on chaos, unpredictability, and flux in the system. And so when you do regulate something, it creates a lot of uncertainty, which maybe be bad for society, or difficult for society at large – and incumbents have challenges with that – but it’s a great opportunity for a new company to take advantages of the tectonic plates shifting.

On Reexamining Everything With Fresh Eyes

@semil: It seems like the incoming administration’s brand is to say “unconventional rule-breaking got us here,” and so it is probably a license to look at everything with fresh eyes.
@rabois: I think there is a license to look at things with fresh eyes and you can see some of the appointments the administration is making clearly reflect that. Some are a little bit more traditional.
@semil: Any ones that you would mark as traditional versus like a revisiting?
@rabois: Well I think the… for better or for worse, the Secretary of Education, the Administrator of the EPA, are examples of an attempt energy, possibly, examples to rethink from first principles, which will be interesting to see how that plays out I suspect the SEC is a pretty traditional appointee. So, it varies. I think in foreign policy, nobody really knows. I think there’s conflict among several of the senior people that are on the foreign policy team. So, how that plays out and how…
@semil: That will be a Netflix show.
@rabois: Yeah, and how the president arbitrates those disputes because they have very different views. I just was watching the new UN ambassador’s testimony this morning, which in my opinion is perfect and awesome, but she disagrees with several other people, including the President, on several things. So, that would be an interesting sort of administration to watch.

I think it’s healthy that he has hired effectively a diverse set of views. So, take Russia for example. Lots of people on his staff think Russia is evil. Other people think Russia is a great ally and should be trusted, and will be a great counterweight to China.

Those are pretty different views, and I think it’s a smart thing to have a divergent set of views in the Cabinet, but someone is ultimately going to have to make a decision because the rubber will meet the road at the policy level at some point.

On Impact of Social Media on Domestic & Foreign Policy

@semil: On this idea or license to rethink from first principles – let’s say the EPA or any other agency – what has enabled us to go from within a 40-year period of building up and trusting institutions all the way to today, in what seems like erosion of that trust and a license to question all of that. How did that happen so quickly?
@rabois: Social media has played a lot of a role now, particularly Twitter, in allowing people who want to critique the establishment, giving them a platform and an opportunity to develop an audience, and not have to run through people who have filters. The filters tend to take that stuff out. Filters tend to eliminate critiques of the establishment, and those filters are gone. Whether you use Twitter, or whether you use Facebook, or whether you use Reddit, which are really the three major choices. All of those have a lot of people with new ideas, new data, to publish “them” and distribute them, and attract a following, and that changes the debate.

You’re going to see this for better or for worse. I think in some areas it will turn out really well, that we’ve rethought policies from the first principle. For example, two of my own pet peeves, I have never thought the One China policy makes any sense. However, the foreign policy establishment within the United States has made it impossible for 40 years to revisit that conversation, and then one day Trump woke up, made a phone call, or returned a phone call, and started tweeting about it. And that’s changed 40 to 50 years of American foreign policy, which I think has been for the better. Or two, Trump is proposing to move the US embassy in Israel. That’s fundamentally changing the American foreign policy since the mid 1980s, which was the position, and I think that’s a good thing from my perspective.

On How This “Change” Will Feel

@rabois: There’s a lot of positive examples of rethinking things. The President-Elect is probably more like a bulldozer, and maybe a bulldozer without a refined GPS, and it depends on what you think of the general terrain. If you love the general terrain, he’s going to bulldoze over some things people like. If you don’t think the general terrain is safe or secure or prosperous, then it’s going to be great to have this bulldozer. Because when you bulldoze, who knows what plants are going to emerge? Some of them might be awesome crops. It’s going to depend upon your pre-existing views about the general status of the United States, and general policies, whether you like Trump or not.
@semil: And if this wave continues, whether Trump is leading it or not over an eight-year period, the effects of that will be felt like over the rest of everyone’s business lifetime who is watching this.
@rabois: Absolutely. The consequences are sometimes hard to tell in the short term. Things that look crazy or wrong in the short term turned out to be brilliant, and things that look smart sometimes look disastrous. The classic example that everybody is familiar with is, the government gives us all this advice about what food to eat. It’s basically been wrong for 30 or 40 years, and had you ignored the government’s advice on food, you’d probably be better off, than worse off. That’s why we have all these obese Americans, as people actually listen to the government. Government policy can be terrible for society and it may take 10, 20, 30, 40 years to see that. Sometimes government policy that’s wrong at the time, in short term, may look to be brilliant later.
@semil: And it will obviously affect people at different generations, at different times, right? So, it can seem unfair in the beginning and then sort of, in some cases, gets better or worse overtime.

On Healthcare

@rabois: [Healthcare] is a pretty popular topic. Everybody has an opinion on it. But fundamentally, whether you like Obamacare or not, there are some structural problems with healthcare in the United States. Certainly not ideal. They’re certainly better things that we can be investing in that will lead to better lifespans, better outcomes for lots of people. At some point, the American people and the American politicians are going to have to address some of the root causes. So whether repealing Obamacare makes things worse in the short term is part of the question because, obviously, people care about their health care. But the question is: What happens in 2 years, 4 years, 6 years, 10 years? If things got worse for 2 years, but we are fundamentally on a solid plane for the rest of my life, that might be better.
So, there’s these short-term and long-term trade-offs, and then you layer that all out in politics, which is there are voters who care more about different time dimensions.
@semil: And the branding of what policies are in place.
@rabois: Yeah. Exactly. So, there’s multiple variables.

Obamacare and Replacements

@semil: In the immediate term, to get micro for a second, what do you think the Congress will do in terms of the desire to, let’s say, “repeal Obamacare”, but then have something in place? What will happen with that?
@rabois: Well, I think they are kind of stuck in this crazy box, which is a function of procedural rules, as I was kind of Tweeting about a couple of weeks ago. It’s easy to repeal Obamacare because there’s a way to do that with only 51 votes in the Senate, and there’s not a way to create a new Obamacare. A replacement with only 50 votes, you need probably 60. So, the structural desire to repeal and replace almost can’t be done in one step, which creates this perversity of the only structural way, like procedural way, to do this is may be to have to do a repeal first, without being able to replace technically. But the uncertainty of that to people, to the market, may be too dramatic for people to handle, so the Republicans may need to rethink how to do that, and how to do something that could get 60 votes, or somehow survive a filibuster at the Senate. It’s a very complicated challenge there, because of the filibuster rule that’s still possible.

On Immigration

@semil: Let’s move on to probably the most emotionally-contested issue, which I would say is around immigration. Obviously, in the campaign, a lot of stuff was said that is frankly crazy and scared a lot of people. What are we going to see now with Sessions in place? What should people expect? Will it be more along the lines of people wanting to follow rule of law and saying like everyone needs to be through a system? Or could it go over into another extreme?
@rabois: I have a counter-intuitive sort of point of view on this – is I actually think that for skilled workers, H1B, traditional immigrants, it’s going to get easier and not harder. Then for unskilled workers, it’s going to get harder and not easier.
@semil: Which is what happens in a lot of other advanced countries.
@rabois: Actually…right. There’s also a logic to that. President Obama, for his own political reasons, linked the two together, and that’s why the term was called Comprehensive Immigration Reform. And his base, the Democrats in power, would not allow any of liberalization of H1B visas without linking it to unskilled labor, particularly from Mexico. So, he insisted it’s all or nothing, and that’s why he got close to it. He actually got close to getting all, but wind up with nothing because of that insistence on linking the two things.

Republicans are going to delink those two things. They’ve always had the votes. The Republicans in DC have always had the votes to liberalize H1B visas and there’s a lot of Democrats who would support that. I think it’s possible that we see America becomes a shining city on a hill, where if you are talented and you have degrees, technical degrees particularly, it’s easier to get into United States legally, but otherwise it’s going to become more difficult.

Even Trump in some comments made his point, which is it is insane that we allow people to come here to get graduate degrees at Stanford, down the street, in CS, in Electrical Engineering, and then we kick them out of the country. That makes no sense whatsoever.
@semil: Should we expect a likelihood that the INS is one of the places that’s going to be rethought.
@rabois: Agencies have different latitudes set by the Congress of filling in the gaps. It’s not clear to me that the INS has a lot of latitude, versus like the Department of Justice, versus the President, and versus the Congress. A lot of these caps are set by congressional action. So, some agencies, like the SEC, famously has incredible discretion. Insider trading has never been defined by the Congress. So, the SEC gets to try to define it, subject it to a lot of court review, but they’ve been given a wide latitude to do what they want. Whereas the INS, I don’t think has nearly as much latitude.
@semil: So in terms of potential financial regulation, the SEC may have more powers vis-a-vis Congress and the executive branch, but when it comes to immigration, it’s actually flipped ?
@rabois: I think it’s been flipped. Obama has done a lot by executive action. Conservatives, at least, have been very critical of that. So, how that plays out in the Trump administration, whether Conservatives or Republicans support the use of executive action, which they had been very critical of, if they are not hypocritical, they really shouldn’t be having the President set immigration policy directly.

New Administration and The Media

@semil: Let’s look at the new Administration’s relationship with the press at large. So, traditional incumbent media and sort of the BuzzFeeds of the world, and the next BuzzFeed. The Cheddars of the world…
@rabois: I don’t have that much to add to it, we need to see it play out. It’s very clear that the President understands that the media is not necessarily his friend, and I think the more disruptive you are as a President, the more adversarial the media is going to be, particularly if you’re Conservative. I mean, there’s lots of studies that show how biased the people who go into mainstream media are, and they cover things disproportionately from a Democratic perspective, but it does appear very clearly that Trump is not going to take this like sitting down. He’s going to punch back. I think one of the things that fueled the rise of Trump was actually more Conservative people saying, “We want someone to punch back for us because nobody is supporting us. Nobody is defending us against attacks from the liberal media.” The best articulation of this that I read in summer of 2015, not ’16, was in the Atlantic of all places. And Trump has the personality to be a fighter, and he’s going to push back on the people that are critiquing him, and that no one knows how it’s going to play out.
@semil: And he has nothing to lose now.
@rabois: Well, he does. I mean, as you become President, you have social capital, like your political capital. As you expend political capital, it may get depleted. Now if you expend it wisely, it may get increased just like social capital does. So, it’s not like he has some inherent, unalienable ability to do this. It depends on how he uses it, against who does he use it. Lady Thatcher had a bit of this dynamic. She’s obviously very different from Donald Trump, but in many ways, her relationship with a lot of the media in the UK was similar, and her willingness to ignore the media, or push back on the media, was roughly comparable, at least the closest proxy I can think of in my lifetime among the major democratically-elected leaders.

On NATO and Foreign Entanglements

@semil: Regarding foreign policy: One of the things that’s being rethought from first principles is NATO, and other entanglements or obligations that the country has. What should we expect vis-a-vis NATO and in Europe? How could that play out and what are the potential upsides of that and also the potential risks?
@rabois: I do you think you see a distancing of the US from continental Europe. It depends a little bit on the election. So, France is going through a major election this year where it is possible that a true Conservative, Reaganist kind of a Republican-type person gets elected, which will radically shift French politics. So, that might create a realignment. Germany is going to go through an election that’s going to be quite contentious.
@semil: Europe also seems to have a lot of structural economic issues that have been sitting there for years.
@rabois: They have been simmering and the EU has masked some of this. They have structural economic issues. Nobody in Europe basically grows. None of those economies grow.
@semil: They have huge unemployment.
@rabois: Yes, unemployment particularly among [young] people. Then you have this immigration and the associated risk of terrorism, and things like that, and insecurity. Then you have in some parts of Europe a vibrant anti-Semitism that has to be confronted as well.
So, you have serious fundamental problems. It’s not an easy job for anybody. Generally, European economies are heavily-regulated, heavily-taxed. A lot of growth in that dynamic where people are unemployed, and there’s a lot of union power, at least in some of the markets. It’s going to be very challenging. And so I expect a distancing of the US from Europe as they sort out the mess, and the countries in Europe sort out their messes in the US-favorable way, which France probably will. Who knows what happens in Germany? That might lead to some shuffling of the deck. I think our relationship in the UK are probably pretty strong, and so hard to tell how this plays out.

On Globalization’s Future

@semil: Does globalization continue to thrive in the same way it has?
@rabois: No. One of the things that people got wrong is everybody assumed it would. This is a classic Peter Thielen point, and I certainly wasn’t aware of this either. Everybody for the last decade or so assumed that we are in this inexorable trend towards globalization, and it looks like that may be false. Everybody just assumed the world is increasingly interdependent, increasingly globalized. There’s just one arc of history and that’s where we are going. For the last 15 years. Almost nobody would take the opposite view. It’s only about the last two years that many people, from economic commentators to conservative leaders, to liberal leaders, like very left-wing leaders, have been taking that view, and it’s seems like there’s a trend against globalization and interdependence. That may be one of the bigger mistakes in history. I think Peter got it right. I think Peter picked up on this a long time ago, but I don’t know too many people that are arguing this more than six to nine months ago.
@semil: If you’re right in that started a reverse or sort of unravel two years ago, what do the next 5 or 10 years look like if that pace continues?
@rabois: I think it’s somewhat contrary in perspective. I think it depends upon old school factors, like what’s the natural resources that are particular to our economy. So, countries that have a lot of self-resiliency and potential self-resiliency may do fine. Countries that depend upon an intricate wave of networking and trade may suffer a bit. But generally, globalization has been good. If you believe in comparative advantage and all these things you learn in ECON 101, globalization is good for everybody. I think that’s mostly right. But moving towards a homogeneous future is clearly going to be wrong.
@semil: When you combine the pace of globalization that went on plus the shifting value to knowledge work, and work with certain types of machines, it left a lot of people behind, and those people vote.
@rabois: Those people do vote and it’s conflating several things. For example, one can be pretty pro-globalization, and still think China is cheating. You can stitch together different views. For example, I think we should probably be a little bit more tough on China in some of the things they do, but I’m still, generally as a person, pretty globalist. Other powers are clearly is manipulating many markets in attempting to take advantage of power vacuums and we’re doing nothing about it.

On World Superpowers

@semil: Are we potentially entering an area of a tripolar world where you have U.S, Russia, China?
@rabois: China definitely. Russia is a debatable proposition. It’s not clear that they’re an economic superpower. They’re a historical power, they’re a landmass power, and their population is a power. But it’s not clear that they can get in economic competition with anybody – like China and the United States – and produce things of value, at scale, in a way that leads to long-term power.
You can make a case that Russia is playing the political game very well, Putin’s playing his chess pieces quite astutely. But today, they have no long-term future on this level.
@semil: That may also be a clue as to where he focuses.
@rabois: Absolutely. As I said, he’s playing chess pieces quite astutely. He doesn’t have a lot of great chess pieces, but he’s playing them better than anybody else at the moment. I’m not sure that Russia can be a superpower, other than by political manipulation. The underlying, fundamental engine of that country just isn’t on the same scale in any dimension as the United States or China.
@semil: I’m thinking we might see some aggression.
@rabois: Potentially. What do declining superpowers often do when their economic engine isn’t capable of keeping up with the true superpowers? War and aggression is the more classic moods. They also get more and more desperate, and they do things that are riskier.
So, it could be a pretty precarious and dangerous situation, but I just don’t think over the next 10, 20, 30, 40 years you can make a case that Russia can keep up with the United States, or China, absent some artificial sort of sweeteners.

On Election Hacking

@semil: Let’s talk about this idea, and it leads back to tech that there was interference with the US election 2016. I know that there’s been interference across many other elections, historically, but this time it turned into more of a political issue. This has been one of the issues, for me, where I feel like I keep up pretty well with the news, but I can’t follow a piece of this. I’m totally lost. I’m waiting for the Wikipedia entry in two years. Walk us through what would you’ve read and what you think has happened, and what the implications are 1) for the US as a country, in terms of its own cyber security defenses, and also what tech incumbents and startups can do as an opportunity around that?
@rabois: Sure. Cyber security is a great area for technology innovation. We have like three or four companies in our portfolio. The most prominent is called Cylance in LA, doing extremely well.
More and more companies will invest more and more money in protecting themselves against emerging threats. We have an interesting and innovative one called PatternX, it’s like artificial intelligence-based. There’s going to be a lot of innovation in this area. I mean, it’s just a good and costly thing for VCs to invest in. It’s a great thing for Silicon Valley to compete on.

The actual election, I have a somewhat nuanced view: to me, this isn’t anything new. I think this is what political enemies do, they attempt to influence outcomes in countries they’re hostile to. The only difference was the Obama administration, for whatever set of reasons, would never admit that Russia and Putin were potential enemies. They didn’t treat Russia like a potential threat, like which Romney and others warned about – Senator Rubio as well – and so they were surprised and shocked that a friend would do something like this.

Whereas if this had been in the middle of the Cold War, nobody would have been surprised or shocked, if using propaganda or other means, the Soviet Union was attempting to influence outcomes here, or vice versa. I mean, we had Radio Free Europe broadcasting into the Soviet Union. Our propaganda, it turned out to be true propaganda, but propaganda.
@semil: My bias is I’m an Obama fan. I can’t understand how he didn’t inform people. Because it seems like at a certain point, a part of the job is to just inform people of what you’re hearing. My calculus is maybe everyone thought Hillary would win.
@rabois: There’s probably some truth to the Hillary’s-going-to-win kind of attitude, but I think it’s more ideological in the sense of not really believing that Russia’s the enemy. You saw his famous clip [of Obama] against Romney, which is “The ’80s called, they want their foreign policy back.” He just doesn’t understand at all that there’s hostile enemies in the world to the United States. He keeps, across every dimension, repeating every mistake in the Jimmy Carter administration. I saw Senator McCain said that exactly this morning, which is funny because I did Tweeted it a few months ago. I’m glad that he’s using my thoughts pulse.
@semil: He’s probably got you on his Twitter list.
@rabois: Yeah. He’s got my talking plates down.
Obama, for whatever he’s done in American domestic policy, and whatever positive examples he’s set – I think he set several people will remember for a long time – on foreign policy, unmitigated disaster period. No exceptions.

On Cybersecurity Opportunities

@semil: On cyber security and technology, will we just see a ramp up of vertical security funds, people moving into security, as a new area?
@rabois: I don’t know about vertical funds because, as you know, from raising funds and researching that stuff, it’s hard to move on a dime. It’s hard to create funds from scratch, move, and all of a sudden start being in business. I do think there’ll make an emphasis on it.
I’ve mentioned that one of my goals for this year is to help start or jump start a new company. One area, probably the single area I’m most interested in, is in cyber security and I’m actively working on something in that area right now, and trying to pull together some pieces.
So, I think you’ll see a lot of, and I’m not a historically cyber security person, I just think that there’s a clear set of opportunities, a clear set of DNA and skills, that should combine together at the right time, the right place, and so I’ll apply these. I’ll be spending a lot of time personally on that this year. But, I think you’ll see a lot of lot that opportunistic investing, opportunist founding.

On Bringing Jobs Back

@semil: I hate using these buzzwords, but I have to. The combination of robotics and automation that drives it are going to take a lot of jobs away. I think this month already, and we’re about halfway through, I got three pitches for really talented robotics engineers trying to do something in agriculture, all different models. You could just see it coming. We have really smart people working on it. Part of the campaign that put the new administration in power was sort of on bringing jobs back. That was a marketing message. What’s going to be the reality over the next five, 10 years?
@rabois: We’re clearly going to be seeing increasing use of robotics in agriculture and in other fields. What’s not obvious is what the sort of second-order effects are, with a dynamics system or static analysis, which is just… I mean, you know, Marc Andreessen when he’s Tweeting would always Tweet these graphs, which show, at least historically, every time there’s been a massive industrial movement it’s created more jobs net, than have been sacrificed.

Now, that doesn’t mean in a compressed period time, like in the first month or first year. But overall, technology has empowered people and create better and higher-paying jobs through every sort of epic of history. Maybe this is different, maybe it’s not. I think you can debate that, but it’s not as superficially obvious as, “Tech’s going to replace jobs. Hence, there are no jobs. Hence, everybody gets paid less.” I think that’s probably the wrong narrative.
@semil: You’re saying that there’ll probably be a transition. There’ll probably be new jobs emerging that we don’t know of yet, and that in any sort of change, which has been kind of a theme in our conversations, there’s going to be a lot of people that don’t like it because of the inherent uncertainty in it>
@rabois: It certainly is an interesting dynamic. Fundamentally, when you have uncertainty, you get the worst of all across bridges. You have people who fear the change – because they’re happy or satisfied where they are – and yet you don’t yet see the benefits. So, there’s few supporters and a lot of enemies.
Whereas, let’s take a different one that’s going to play out probably differently: self-driving cars. Self-driving cars are interesting because people can immediately grok the potential benefits. A lot of times, we see flux in innovation, that the pool of people that see the benefits can realize it, that want it, that demand it, and crave it, is pretty small. So, you have all the old people voting against it and not enough new people.
Self-driving cars. Because 40,000 people die every year. Because driving is a pain in the ass. Because driving is wasted time. All these reasons that causes traffic, and all this stuff. Fundamentally, cars are expensive. Whatever the case is, people don’t like their cars and would love to have self-driving cars emerge. A lot of people.

So, there’s people on the positive side championing more than you usually see for a type of breakthrough. So I think self-driving cars almost surely do emerge and I think because the regulatory structure where it’s possible to innovate in some states, but not all states, get evidence of the decrease in drunk driving, get evidence in the decreasing death. Then, other states will have to keep up once the evidence is clear.
@semil: The argument people use there is if you extrapolate out to different sorts of automobiles, that you’ll end up with trucking.
@rabois: Yeah.
@semil: And that turns into a political issue.
@rabois: I think it does because trucking is still very large. I mean, there’s this analysis that suggests that in 30 somewhat states trucking is still the largest profession. It seems very counterintuitive to people who live in Silicon Valley, I admit. But 2) I think trucking is right for quick innovation. Whereas there’s usually two drivers, I think you will see as one driver, one machine, and that cuts the job. Now, that said trucking is suffering a recruiting shortage at the moment.
@semil: It’s one of the toughest jobs.
@rabois: It’s a tough job for obvious reasons. But if you look at the new people becoming truckers, it actually has slowed down significantly. So there is like a drivers shortage kind of bubbling up anyway and that may modulate the effects of this transition. Yes, there’s a lot of truckers. Yes, some of them will potentially be exposed. But there’s not a lot of new people that want to be truckers and so the ability to ship things is dependent upon new truckers emerging, and they’re not emerging.

Some Predictions and Democrats’ Future

@semil: Okay. Let’s move into some more personal predictions. Let’s see here. Okay, two-term president barring any health issues. Two-term president.
@rabois: Wow.
@semil: Can the Democrats… I mean, this is a separate question. Can the Democrats find someone to counter in this short period of time?
@rabois: Well, they get a 2-year pass, so you don’t really need to know until after 2018. That’s a long time politics and the dynamics will be different, and Trump will often run on his record. Right? To some extent, the dynamics of re-election are a little bit different, is you’ll have to have at least some key accomplishments. You may have some negatives, but you have to have some key accomplishments. That’s something pretty important. Usually, the reelection is mostly a referendum on the current President, not the alternative candidate. That said, the Democrats have an age issue, which occasionally I will re-Tweet about usually, is all the leaders in that party are ancient. When I mean ancient, I mean they’re in their 70s or 80s, and it’s not clear who the next generation is or could be. Whereas at least on the Republican side, obviously Trump is 74 or whatever he is – or 69 or 70, whatever he is – but most of the leaders in the congressional branch, and the House and Senate, are quite young, like 40s and early 50s. So, there’s like a bench.
@semil: If you wind the clock back a year, I think there are few sins in the Democrats, in terms of strategy, but not having a deep bench thought that they could unify very quickly. The problem was they unified around the wrong candidate in that sense. Whereas the Republicans had a very deep bench where people thought it was going to get ripped apart.
@rabois: Yeah. Well, 17 people ran for the Republican nomination. We make fun of them, and lots of people make fun of them now, but on paper, the credentials of the 17 people running were quite impressive. You’re talking about Governors from Texas, from New York, from Illinois, from even Michigan, from every like large state you could imagine.

The Republicans had an interesting field. Most who are up and coming, meaning in their 40s and 50s that were running on the Republican side, but it was a pretty vibrant competition. Trump to his credit, and people underestimate this, has managed to destroy the elites in the Republican Party and the Democratic Party at the same time. That’s precisely whether you think it’s good or bad. It’s incredibly oppressive for one person to literally destroy 17 people on the Republican side and then go over into the other party and win too. That’s a shocking disruption in some ways. But I think the Democrats have a bench problem. But they have another two years to kind of figure that out. I mean right now, their initial reaction to losing hasn’t been incredibly invigorating, but I don’t think they’re on the clock yet until 2018. In 2018, we’ll then start the clock and we’ll see what kind of person is the right antidote to Trump. But he’s going to have to accomplish some things. Otherwise, almost any Democrat can beat him if he accomplishes nothing.

Most Promising and Most Troubling

@semil: What about for you, what seems the most promising to you in terms of the change that’s going to come, and the most troubling? If you had to isolate one on each.
@rabois: The most promising is one or two things that I already sort of alluded to. One is that I feel friends around me who want to get more engaged in politics, maybe actually even be willing to run for office, and I think that’s very liberating that people no longer believe that unless they devote their entire life in the time they’re 28 to 50, to politics, that they can’t run for office. So, I think that’s an incredible development that Trump has fueled. The second thing is, I think, rethinking first principles, at least, in some dimensions. There’s just sort of a lot of corrosive accumulation of debt, intellectual debt, that sort of accumulated over the years in politics. Trump, for better or for worse, sometimes not even knowing why, is sort of unlocking new thinking and new opportunities there, and some of that might turn out to be a very good thing.
@semil: What’s most troubling to you about the change that could come?
@rabois: Well, I think it is a little reckless in some cases. For example; one thing – and a little detail that not anybody will know – is generally when the President of the United States speaks on foreign policy, there’s a separate approval process for his or her speeches that it goes through, compared to a domestic policy speech. The whole point of that is to make sure the President doesn’t accidentally say the wrong thing. There’s, in fact, a different speechwriter that usually works on it, but also there’s a speechwriter who is classified with national security clearance, and then there’s an approval process that’s totally different than when you give a domestic speech. So, it’s very easy to make a mistake, like the wrong word, the wrong word translated in the wrong way, causes problems. Clearly, Trump is going to be Tweeting, and so I doubt those Tweets are getting the same level…
@semil: Is that convention or is that law?
@rabois: It’s convention, but it’s done for… not every convention’s bad. Silicon Valley, right? A lot of conventions are bad and dumb, and that’s what we get paid for doing.
@semil: Part of the reason I was asking for that clarification is I asked a bunch of friends on Facebook… again, to be clear, I was not voting for Trump, but I was trying to assess during the campaign what things in the campaign did his sort of campaign did that were illegal, and I couldn’t find.
@rabois: Yeah, I don’t know that.
@semil: All of it was like challenging conventions, right?
@rabois: Yeah. He’s challenging convention, but not all convention is bad. I mean, we get paid in Silicon Valley for exposing convention, change of convention. But just like to be reckless to rebuild every part of a company, from scratch, and so in the Valley like none of us would counsel our founders to rethink every part of building a company. I think rethinking everything and changing every convention, and disregarding them all might also be dangerous too, but you want the upside. Even the upside is some of the recklessness leads to revolution, and revolution can be powerful and empowering.

On Carried Interest

@semil: Sort of a nominal issue compared to things we’ve been talking about. What about this idea around carried interest and what will happen? I don’t really follow that.
@rabois: The carried interest debate is fundamentally around whether the carry that VCs get, which is the compensation that’s a huge fraction of our job is taxes, long-term capital gains, or regular income. It’s historically been taxed as long-term capital gains and that’s allegedly fueled the entire industry of venture capital. There has been both Trump and Hillary Clinton brand on campaign that they would eliminate this alleged loophole. It’s not really a loophole because it potentially expressed some flaw, but this alleged loophole… and Obama also did nothing about it. And the reason why it becomes problematic is it’s also used by a lot of hedge funds the way it’s currently drafted, and I don’t think venture capital or hedge funds are the same. But so it’s unclear or whether there’s going to be any change to the law. It’s kind of a silly change because the system we have is working. If you just look at venture capital, even if you change the amount of money the federal government would raise is fairly small, because there’s not that many venture capitalists, and it does create risk to the venture capital system.
@semil: And most don’t even get in the carry.
@rabois: Well, yeah. That’s true too, right. Unless you’re a successful venture capital investor, you don’t get a lot of carry, or any. Unless you’re getting carried, it’s obviously not taxed. Now, one potential impact is Trump is, at least, allegedly going to lower personal income taxes into the income tax rates. If they get reduced and the capital gains rates stay the same, the spread between the two may get compressed, in which case the difference doesn’t matter.

So where all of this policy matters is if there’s a big difference between personal income tax rates and long-term capital gains treatment, that obviously creates incentives, and incentives are pretty important to people. But if you harmonize the two or the gap becomes small, then the difference doesn’t matter as much. For example; this isn’t going to happen, but if Trump implemented a flat tax at 15%, it wouldn’t matter what the capital gains rate was because it’s going to be the same or below.

In any event, nobody is sure what’s going to happen. I think most of Silicon Valley thinks that they can discriminate between hedge funds and venture. I can think of lots of ways to do it, some which have already been proven in law. We went through this era from 2008 to 2012 where small business investments were exempted from federal capital gains treatment, between 25 and 75% exclusion, so there’s a precedent for that, when you invest in companies that were worth less than $50 million. So we could live as venture investors pretty easily, if you just exempted investments below, let’s say, $100 million of value, qualified them for capital gains treatment, I think everybody could be happy.

On A Trump Bump

@semil: One more market question: Do you expect, like many people, a Trump bump in terms of the economy? I mean, we’re already seeing a little bit.
@rabois: Well, the economy’s clear. The markets are clearly have not collapsed, which many people predicted would happen. Because of the implicit volatility and unpredictability, usually markets are afraid of that, and you haven’t seen any of that. I think the reason why, in so far as I can detect it, is the markets were baking in a lot of increased regulation and micromanagement of the economy by Democrats and Hillary. As soon as that went away, you were discounting by the volatility and potential recklessness of the President, but this overhang of we’re going to over-regulate the United States, and overtax the United States, went away as well. So net-net, the markets have been and are actually are pretty positive.


Post-Script, we discuss some non-political topics…

On OpenDoor

@semil: Let’s talk inside-baseball, non-politics, Trump-related. Give us a quick update on OpenDoor.
@rabois: Yeah, so OpenDoor company is growing. It’s still rather fast and sometimes shocking that you wake up and there’s like over 200 employees that work there. We’re going to need to move to like our third office or something crazy like that. Growing the team. We’re recruiting very actively. We finally added a CFO, which is nice for a company like ours. Very, very, happy. It’s got the opportunity to be one of these incredible companies. We have a lot of work to do, though. The problems only get harder, the challenges get harder, and people align in the team correctly, and figuring out what DNA you need to add. All that stuff gets more challenging as you have more product market, fit not less. So, lots of work to do. Lots of stress to confront, but very optimistic.

On Non-Tech M&A of Startups

@semil: What about this idea that they’ll be some kind of bailout for Silicon Valley, from non-tech companies through M&A?
@rabois: You’re definitely seeing some of that play out right now where I think there are… just, you know, you talk about asymmetric of these observations is when Andreessen wrote software is going to eat the world. You’re seeing that now play out that software is eating every industry. Some of the incumbents are realizing that and saying, “Okay, well how do we buy some software.” And some of these incumbents have a lot of money certainly on their balance sheet, or market cap, and so they can leverage some of that even from a defensive perspective, at the level of offense.

On Big Startups Crashing

@rabois: I think that may be a savior for a lot Silicon Valley companies because I think 2017, personally, the first six months is going to be a disaster. I think you’re going to see the Pebble story, the Beepi story, the ProductHunt story play out every week.
@semil: There’s so many more coming.
@rabois: Oh my God. I think there’s going to be literally at least one a week of a high-profile company that absolutely crashes and burns into maybe a talent acquisition kind of style thing. Basically, any high profile company that raised money over two years ago with a high burn rate that hasn’t raised since is probably in deep trouble. So, I think that this is going to be a very depressing year in many ways.
@semil: You think there’s going to be this kind of weekly drumbeat of, “Oh there’s a company that I know or maybe it was a customer of, or had friends that,”…
@rabois: Absolutely.
@semil: …that raised a lot of money.
@rabois: In 2013, 2014, particularly.
@semil: Those stories will compound on each other.
@rabois: There’s going got to be at least 50 of those companies out there. I think we’ve just seen the tip of the iceberg on this.
@semil: If you’re right on this, that seems like it would take, in terms of the energy in the ecosystem, or the sort of exuberance, it could last a year.
@rabois: Yeah. I mean, it’s a little bit of tale of two cities. You’re also going to see Snapchat thriving. You’re going to see, as we’ve talked about, OpenDoor growing. They’ll be the companies that have done very well over the last two-three years strike. There’s clearly companies with massive momentum that are changing the world and going to continue to thrive. To prove your point about network effects and lock-in, that will only get better. But, I think the companies that have a high burn rate, that couldn’t get their marginal cost structure to be correct, and that raised capital at a high price, are in for a very high-speed collision with a wall this year, and particularly the first six months. It takes two or three years to wash this stuff out the system. Because, generally, you raise money that can last for two, three years, but nobody wants to fund those companies. Nobody’s looking to fund a broken company at the moment. People all want… and so far as to paying a high price, or spending a lot of dollars, they want a high upside, high growth, high potential company, not something that might have missed its window.

On Non-Tech M&A Trends

@semil: One question for myself is to benefit on that. I haven’t been around that long, but it seemed like in the past when venture capitalists would help bridge a connection from one of their portfolio companies – so let’s say a local technology company – then I’d say, “Oh well if you’re looking for a security solution. Here you go.” If we see more non-tech, let’s say across the U.S., or even global companies that are not inherently technology companies, finance companies, how can investors add value in helping broker or sort of plant the idea for those types of sales?
@rabois: It may be an interesting point of leverage for venture investors to forge relationships on a sustained basis with large Fortune 500 potential acquirers that are not technology-based, because founders generally won’t have that network. We can justify across a wide set of companies and say, put on for example, have what’s called the Customer Day by some, put on a slate of let’s say 15, 20 of our portfolio companies, have a significant executive presence from Target, or name your favorite non-tech company, come and meet the most interesting companies, see which ones they might want to partner with, invest in or acquire.
@semil: It just seems like even with some of the best VC firms here, their networks necessarily don’t expand to the large CPG, or oil and gas.
@rabois: They may hire some people to help with that. In healthcare. So for example, we do a lot of healthcare investing at Khosla, so actually 20, 25% of our portfolio is related to health.
So, we’ve intentionally spent a lot of time forging relationships with senior leaders in traditional healthcare companies. As you invest in a vertical or a domain, you may want to have your partners or complements to your partners spend a lot of time forging those relationships.
@semil: What are the backgrounds or specs of those types of people that can bridge that gap or help understand that? Because you’ve got to understand what’s happening here, but then they have to have those personal relationships.
@rabois: This is a tricky hire. It’s a challenging hire because, fundamentally, what we need is someone who understands that the key strategies for those companies, like the top two or three things. At least, you’re not going to spend $600 million on one of our companies, unless it aligns with the CEO’s top two or three initiatives. So, someone who has that level of visibility of insight into what are the top challenges for this company or versus that company, and then b) understands technology and the landscape here well enough to be able to identify which companies might fit. So, it is a challenging hire.
There are some people occasionally that have worked at a variety of tech companies and grew up in CPG, or something like that, or vice versa. You can find it, but it’s not a natural combination.

What’s Over- and Under-Hyped?

@semil: Got it. Okay, so last question, and thank you so much, Keith for your time. Right now what would do you see as the most overhyped thing in tech startups, and the most under-hyped thing?
@rabois: Overhyped. I still think the VR is mostly overhyped. I like AR a little bit more in terms of its use cases and potential adoption. Under-hyped…
@semil: Just expand on that. Do you think VR is overhyped in terms of its time to hit the market or just in general as a consumer?
@rabois: I don’t think it’s a consumer platform. It’s an entertainment device, whereas AR actually can become a consumer platform. The only question is: Is the AR here? This is something we’ve never thought and haven’t thought about yet, but that, to me, is like a no-brainer. Then under-hyped? I’m not really sure mostly because I don’t tend to think that way, meaning I’m sort of like a founder-driven investor, so I don’t have a lot of micro hypothesis about the world. I generally wait for a founder to walk in and teach me about the world, and so I don’t have like, “Oh I would love to find X.”
@semil: Let’s ask about it and I’m that way too. What are you seeing now. Any trends of founders coming in, let’s say, that are under 25? Then maybe, they still haven’t sort of… I feel like now we’re going to… the people who are 25 and over, they may have started one company, maybe two and there’s still some gas in the tank. What about people coming in under 25? Are you seeing any sort of differences in between them?
@rabois: They’re interested more interested in healthcare, which is interesting. Three or four years ago when I started investing here, I started investing in healthcare and not everybody was interested like we were doing recruit for our portfolio. There were some people who were interested, but you had to talk to a lot of people that’d be like rejections. “Oh, it’s regulated. Blah, blah, blah, blah. There hasn’t been any massive companies created for a long time,” blah, blah, blah, all these excuses. Now among young founders, there’s a lot of interest in healthcare innovation. So, that’s great and we like to endorse that. Clearly, they ask about AI, and want to talk about AI, and machine learning, and all that stuff.
@semil: That seems like just now going to be baked into everything.
@rabois: Yeah. that’s … my personal opinion is an independent AI based company doesn’t make a lot of sense. Not all the partners agree with me. But fundamentally, I think it’s a use case. It’s powering a specific use case, a specific vertical with AI, where you have proprietary data and access to propriety data, and you have a very specific value proposition that has economic transformation that you’re unlocking. I don’t believe in a general AI sort of startup, barring, extraordinary circumstances. Then, we have invested in a few, so there are times where there’s extraordinary circumstances. But if I was counseling a younger founder in Milwaukee and say I’d stand up and say, “Go find a real problem to solve, and then show me how you’re going to use proprietary data and AI to solve that problem in a way that’s 10 X better than what people do today,” that’s a company.

Unpacking Atlassian’s Acquisition Of Trello

Wrapping up my first CES/Vegas retreat, I boarded the plane to check Twitter to see — lo and behold — that Trello had been acquired by Atlassian for $425M in a great, quick early-stage venture outcome. There’s quite a bit to unpack here, so I’ll just leave a few thoughts here but would love to hear more from the crowd about the implications of this move:

1/ Accidental Happenings and Side Projects: I do not mean to suggest Trello’s success and outcome is accidental, but rather that it doesn’t appear (from afar) that Trello had a normal birth or childhood. Trello was created inside Fog Creek Software, co-founded by Joel Spolsky, and then spun out in 2014 and funded by a mix of seed investors and early-stage VCs. Spolsky became CEO of Stack Exchange and was Chairman of Trello, and I believe another Fog Creek founder ran Trello. As it started to grow, someone else ran Fog Creek. This may be fodder for another post at a later date, as the genesis of this outcome seems both accidental and also a bit looser, more creative than the traditional business rigidity with which we read about in countless startup “how-to” blogs. (Fun update: Per my friend, Sean Rose: “when Trello was still part of Fog Creek, it was funded via Fog Creek employees opting to have their bonuses go to the project.”)

2/ Cross-Platform Architecture, Mobile Card Format, and Business Integrations: Slack launched cross-platform from day one, on web and mobile. I am not exactly sure of Trello’s history — it seems if they were web-first, mobile responsive, and then launched for iOS. Additionally, the interaction model of Trello featured boards (like Pinterest), which displayed nicely as cards in a mobile app. Finally, the Trello team had quietly built many storage and business process integrations into their offering, giving some of them away as a hook and charging larger teams for the privilege to stack them up. (Trello also didn’t have thousands of integrations, but enough to make customers happy — more integrations likely doesn’t mean they’re all useful.)

3/ Consumerization of Enterprise: This has been an “eye-rolling” buzzword, but we have to accept it is an apt descriptor. Following the success of prosumer designs in apps like Slack, Asana, Wunderlist, and others (more on this below), Trello’s design delivers a lightweight experience to users with enough infrastructure and power to fuel large teams across many different platforms. Trello simply feels like a consumer product, something that may have been designed inside Google or Facebook — but much better, cleander.

4/ Capital Efficiency: Assuming Crunchbase and my sources are correct, Trello is (relatively) a modern case study in capital efficiency. Having only raised about ~$10M, Trello seemed to not only grow its team (over 100) and its user base (19M+) quickly, they also marketed a three-tier freemium product that charged more to small businesses and even more for enterprise customers. In VC-math terms, Trello likely produced a 8.5x realized (mostly in cash) exit for its investor in less than three (3) years (which positively impacts IRR) and didn’t have to raise round after round of capital. Compared to some of its peer products like Asana and Wunderlist, among others, Trello has been relatively capital efficient relative to its exit value. (A reader notes that it’s spinout from Fog Creek also adds to its capital efficiency.)

5/ Enterprise SaaS consolidation: For years now, we have witnessed different varieties of M&A across enterprise SaaS, whether it’s an incumbent like Salesforce scooping up new products or private equity shops buying small-cap public companies, there’s more and more pressure in the environment for the larger companies to expand their offerings to grow, as well as financial incentives for buyouts led by managers who can profit from creatively rolling-up disparate end-point solutions. In a world where collaborative products like Slack or Facebook @ Work or Microsoft Teams are growing and/or boast infinite financial resources, other growing incumbents (like Atlassian) need to prepare for a long-term product and mindshare battle and scooping up Trello is a good step in that direction. As Fred Wilson predicted a few days ago for 2017, “The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.”

6/ “If I Can Make It There, I’ll Make It Anywhere” – Another solid exit for the NYC startup market, and there are bigger ones to come. Despite Trello being young and a SMB/enterprise product from NYC, it recently internationalized to a few non-English-speaking markets worldwide. As a bonus, while I don’t know the team, from what I hear from friends, Spolsky, Pryor, and their team are well-respected and seem to have done things the right way — their way. Congrats on building a great product.

Looking Ahead To 2017

It’s that time of year, a time to look ahead to the next year and wonder what it may bring. Earlier this week, I reflected on what I’ll remember from 2016. If this past year taught us anything, it’s that crafting precise predictions is a difficult, if not impossible, task. To that end, I view this annual post as more of a “Here’s what I’m expecting to happen that impacts my work in 2017” versus saying, outright, here are my predictions. (Re-reading my “Looking Ahead To 2016” post from last year, the part about VR was surprisingly prescient, yet not for the core reason I initially believed.)

I suspect 2017 will be like 2016, another year of things we couldn’t predict. I could tritely state, “we live in uncertain times.” But, right now, I don’t think it’s cliche or hyperbolic — we simply don’t know what will happen (normal uncertainty), but I believe that most observers are underestimating the amount of domestic and potentially international change that is floating in the air. That volatility in uncertainty will undoubtedly change how people plan or act, and that could have unforeseen ripple effects. To that effect, I’ve been thinking more about technologies, networks, products, and services which could thrive (or are already beginning to thrive, in a way) in a world of increasing uncertainty, and I’ve settled on this list, in no particular order:

Mainstream products and business processes become augmented with automation and artificial intelligence. I know the term “AI” is overused right now, but that doesn’t mean it won’t have an impact. A decade ago, Pandora’s algorithm would personalize radio stations for us, though we had to do some initial work. In today’s buzzword bingo, that could be labeled as AI by some, but what happens when our products at work will anticipate actions or act on our behalf, or when an assistant who has gotten to know me suggest topics to write about, or edits as I’m typing up a post like this, and more? There will be countless forms that fit nicely into world of increasing uncertainties, and this type of oversight and augmentation may help many users when making decisions or trying to optimize for the best solution. I suspect that we will see a significant uptick here in 2017.

The larger, incumbent VC firms have enough cash and leverage to weather uncertain markets. Many of these larger funds raised mega-funds across 2015-2016, many of them managing over one billion dollars in their latest vehicle. The investment period for those funds may grow longer, and these vehicles are set up in a way such that the LPs are contractually obligated to make their capital calls, even if a global financial crisis hits. That empowers these firms with a powerful line of credit if uncertainty rears its head and is indirectly good news for founders, too.

Startup exits will continue to flow from non-technology companies. Just as automakers and offline retailers opened their wallets to cut big M&A deals, I suspect that trend to deepen and intensify. We can expect technology to transform every industry over time, but in the immediate term, I try to think about industries which are under intense competitive pressures, perhaps even existential fear. That fear could motivate actions which make for a new kind of exit environment. I wrote a bit about this in my 2016 reflections post, which you can see here.

Digital currencies will be offered as part of a sophisticated investor’s portfolio. This goes beyond Bitcoin. With so much political uncertainty worldwide, coupled with advances in technologies like blockchain and others, the tokens/coins issues to help fund and maintain these products could generate huge returns for the early or helpful backers. People are already buying these tokens, of course, but I think it will go a step further and new types of hedge funds that have been created will allow for some indirect but high-beta exposure to a relatively new and obscure asset class. In an uncertain world, for creators and many citizens in less stable places worldwide, these new products present a vision for the future that excites many — while at the same time, it allows others to participate without permission by swapping currencies.

(Honorable Mention: Voice as a user interface. I suspect we will see much more and I need to write on it separately. I am not sure how it fits into the uncertainty theme above so maybe best for another post.)

Trying To Stay Grounded As A Writer And Investor

If you’ve read this blog over the years, you may have noticed a slight shift in topics discussed, mainly from technology products, services, and markets to eventually include my half-baked views on the financing environment for startups. I just scrolled through my archive in reverse-chronological order and noticed a ton of these posts for 2016, an increasing number in 2015, and going back to 2012-13, I was entirely writing about mobile product development, new startups, opening markets, etc.; fast-forward to 2016, most of my blog posts were about my experience as a fund manager trying to understand the market.

A personal blog hopefully should be a reflection of what the author is experiencing during that time. For me, it has shifted over a bit from just analyzing the market to investing in it. To that end, you may have scratched your head on more than one occasion, wondering why I was writing about about “LPs” (limited partners, those who fund small and large VC firms), or why I was sharing my own personal advice of building a path to Series A readiness, or why I would chronicle and interpret what some vocal LPs were saying publicly.

I didn’t notice this shift was occurring until recently, as I had someone catalog all of my posts into topics. Now with that analysis, some hindsight, and lots of wine, I realize what happened: I was writing more about the nuts and bolts of investing and the VC business as a way for me to interpret and share my own findings, but in the process, I focused less on the actual products, services, and new companies which should be the ultimate focus. In that two-year (plus) span, I met all sorts of limited partners, tried to learn about the nooks and crannies of fund management, and much more. In those moments, I needed the conversations, time, and writing to reinforce what I had learned about fund management, managing reserves, fund models, throttling, pacing, and tons of other things related to managing funds that can’t just be learned by reading online. It needed time to sink in. For someone coming from limited industry and investing experience, learning about the source of capital was eye-opening as traditionally these sources have been quiet, understated, and not public.

That has all changed now. Just like there is more competition among VCs to invest in companies, there is more competition among money sources to invest in investment funds to invest in startups and technology. As a result, we’ve seen this once-quiet part of the ecosystem get more vocal quickly. And, that created an opportunity for me to meet them faster, and learn from them more quickly. And, I wanted to document and share that learning with folks in the ecosystem, and especially for founders that I would work with — I try to always spend a few minutes as a deal is closing to share with founders how I’ve started my funds and what LPs expect of me, so that they have a chance to understand my incentives and motivations. Sometimes, founders have asked me tons of questions about this, and I’m more than happy to go into the gory details if they care to know.

Fast-forward to this week. I am on a trip with family where, for the first time in as long as I can remember, I have a good chunk of time off, I don’t have meetings for over two weeks, and I have the time and space to think about what I want to focus on in the future. One thought (of many) that’s occurred to me is that I want to spend more of my time and brain energy focusing on the actual products, services, and technology markets that I used to write about back on Quora in 2010, or back on TechCrunch from 2011-13, before I started investing. That said, I am also happy and proud that I was able to write so much about the business of VC and learning from other investors and LPs — they all enabled me to learn faster, to try and catch up to peers and elders who have notched many years of experienced.

Perhaps there’s a simpler answer: Before moving to the next level in this video game, I needed to understand the business of investing and learn some harsher lessons first-hand. It is in my nature to always try to learn, but there’s also a point in which one must one apply what he or she has learned, and that point is coming up — and as it does, I will look forward to writing and thinking about those aspects a bit less, and freeing up more of my own RAM for going back into the topics which started me on this journey, writing about how Twitter could leverage location-based data, or how Quora could reinvent search, or how Pinterest helped solve a discovery problem, or how Turntable was a fun product, and many more. I need to work hard to regain that point of view, that naivete, that excitement about exploring a new world and writing about it here. I hope 2017 will be a new chapter in this respect, and I hope you will hold me accountable to it.

Entrepreneurial Resilience And Creative Metamorphosis

Back in early 2015, mobile live-streaming hit the scene, with products Meerkat and Periscope taking different paths — Meerkat hit the market, raised a big seed followed by a Series A led by Greylock, while Periscope was scooped up by Twitter to be integrated into its platform as an answer to the forthcoming, home-brewed “live” product from Facebook.

Both Meerkat and Periscope teams built products to change the world, specifically how individuals could communicate 1:1, in groups, or as a public broadcast mechanism. Facebook, with its girth, appeared to use its distribution advantage and in-house product chops to win the space. Twitter helped out with an assist, taking far too long to properly integrate Periscope into its core clients, and not keeping up with Facebook in terms of both front- and back-end issues. And, Meerkat, built by the parent company, Life On Air, opted for the VC route, staying independent, going up against a Goliath and Twitter. As 2015 ended, there seemed to be clear winners and losers in the race to claim the mantle prize for mobile live video.

Or, so it seemed…

Raising a big round of venture capital from a notable firm for a hot consumer product will draw a lot of attention — both good attention and bad. After the hype peak, Meerkat streams just tailed off into the trough, left to doggy-paddle with its $10M+ in venture capital. A friend of mine who is very close to the company would remark to me that he wasn’t sure what would happen to Life On Air — a good team, perhaps not “great” in the eyes of a potential acquirer like Facebook. Tech blogs cast off Meerkat, and it just seemed like fact that the company would likely slowly wind down. It’s so hard to become relevant, even for a few days, and once a product loses cool, loses momentum, it’s basically impossible to regain it.

But, unless one spends a lot of time with a company, founders, and early employees, it’s hard to know what the team is made of. Now that we know Life On Air, in retiring Meerkat as a product, quietly built up a new live mobile video communications app, HouseParty. This new app builds on lessons learned from the Meerkat days alongside new features to cleverly lock-in and expand one’s social network. Nothing yet is decided, but Life On Air has done well enough to recently score a $50M investment from Sequoia.

From afar, one explanation for Life On Air surviving and finding this new space could focus on the creation and iteration on product feature development. Yes, surely the team must have terrific mobile product chops and the brass tacks to build a system that could handle. But, I like to think there’s another explanation — an explanation that’s less analytical, less quantitative, less growth-hacky. I don’t know the team or the individual players or the backstory, but I like to think these folks have special entrepreneurial gifts that enabled them to stand quiet and resilient in the face of brutal competition and the Tech-Twitterati hype vortex. (For a good, recent backstory on Life On Air, read this piece by The Verge’s Casey Newton.)

Money has been relatively easy to come by for investors and founders alike over the past few years. There is some good from this, as more people can enter the ecosystem, more founders can have a shot, and we have more product experimentation. There is also some bad, which I’ve chronicled before — and one of those bad elements is that when money is easy to raise, we can all take it for granted. More specifically, we can have investors who place bets that would break a fund model and be against their own LP interests; and we can have founders who can take money off the table before their own employees and investors, or not have an incentive to exit their company properly if they know another investor is just waiting to fund his/her next startup. Imagine the range of options before a team like Meerkat — “hey, take some money off the table!” or “Hey, just wind this down and here’s $2m for the next idea” and so on. Yet, they carried on and went forward on their quest to change the world through product development.

If there is one trait in others that makes me nearly choke up, it’s when I think about the focused resilience individuals and groups can demonstrate in keeping their energy channelled on the same project over many years. I think back to the unconventional rise of Whatsapp, or how ThredUp pivoted its way to profitability, or how Orchestra transformed to Mailbox, or how Bippy became Tophatter, or how a fund like USV was born from the ashes of Flatiron, and many more. An important distinction: An individual’s resilience across a career is rare, but even rarer is when resilience rears its head on a specific project, product, or company. It’s for that reason I felt compelled to write about Life On Air — I don’t know you, but I salute your entrepreneurial resilience and creative metamorphosis, and I will be rooting for you.

Here’s What I’ll Remember About 2016 Startups, Tech, and Investing

Q3 and Q4 of 2016 were the quietest months on my site, a true blogging drought. I apologize for that, but work and life got in the way. But, that will change soon, starting now, as I now have time and energy to get back into the swing over the holiday, and am putting together a new process to write on a more frequent basis in 2017. I hope you get something out of it, and of course, if you disagree with anything I write, please do let me know!

So, now 2016 is about to end. Good riddance? I’ll avoid the larger political storylines and stick to reflecting on what happened to startups, the VC market, and myself this year. Briefly, here’s what transpired and why I think it’s important:

Large M&A By Both Tech And Non-Tech Incumbents: While technology companies like Microsoft paid $26B for LinkedIn or Salesforce shelling out $750M for Quip, 2016 was a year in which M&A led by incumbents outside of technology world dominated headlines and surprised observers. We all understand intuitively that technology will flow, like water, to seep into every industry and reinvent it over time — what we didn’t understand was how much fear certain industries may feel, such as automotive manufacturers or traditional retailers, may have felt. To that effect, we saw Unilever shell out $1B for Dollar Shave Club and Walmart drop $3B+ for; while Ford Motors purchased Chariot and, of course, GM purchasing Cruise Automation for over $1B. There weren’t many notable exits in 2016, but these outcomes were huge and were concentrated wins for a small handful of teams and investors. And, while tech investors understand the game of selling startups to traditional technology companies, the specter of having a new buying class of non-tech incumbents presents both a challenge — most venture firms don’t have as deep network penetration into these industries as they do into tech — and a huge opportunity, one that could represent potentially even bigger outcomes than previously imagined. (Incidentally, this could in fact be accelerated with the incoming administration’s desire to ask U.S. corporations to repatriate overseas cash holdings, where the cash could be spent tax-free in buying new assets.)

Mobile Video As A Mainstream Consumer Behavior: Native SMS clients on our phones, like iMessage, or third-party communications apps like Facebook Messenger, Slack, and others satisfy many asynchronous use cases — we share our location, pictures, screenshots, emojis, and much more, and it all works without really having to use new apps. Even my parents prefer texting now over email, and they love email. But, there’s one big behavior missing from these native clients, a behavior promoted by Facebook with “Live” and Twitter with “Periscope” (though these seems to have been the 101st product feature they’ve flubbed), a behavior Snapchat brilliantly exploited with Stories, a behavior which Facebook ruthlessly copied via Instagram Stories, and a behavior Snapchat upstaged everyone with in launching Spectacles, their own custom eyewear/camera hardware. In 2016, we saw some of the biggest venture capital firms in the world plunk down some serious cash to invest in startups such as Tribe (Sequoia), Marco Polo (Benchmark), HouseParty (Greylock, Sequoia), and (Greylock, GGV), while other existing apps added group or live video capabilities, such as Kik and Facebook Messenger, among others. So, I can understand why new mobile products tuned for live video are attracting new users, and it will be interesting to see what new behaviors and networks emerge as a result of this small but interesting opening provided by traditional messaging apps. (Notable Mentions: 1/ Voice as an interface, a full year for me with Echo and Dots, and I cannot imagine going back; 2/ Pokemon Go with Niantic Labs, but that seemed to be less of a trend and more of an amazing phenomenon.)

Buzzword Bingo Alive, Well, and Actually Quite Real In Early-Stage Investing: I recently ran a Twitter poll where I asked the crowd which of the following technologies felt the most like the web felt in 1997-99 — blockchain, AR/VR (shorthand for augmented and/or virtual reality), AI/ML (potentially misleading shorthand artificial intelligence and/or machine learning), and others like voice interfaces, automation (remember bots?), and others. It’s not a statistically significant poll, but I was surprised to see each answer garnering roughly the same percentage of votes among the crowd. So, while we may hear all these buzzwords to the point of rolling our eyes, for many, these trends are real, tangible, and very close on the horizon — and in some cases, already in the market and delivering real value. Only time will tell which waves will barrel onto shore like social networking or mobile messaging or on-demand transportation and logistics did, to name a few. When these waves come, it will feel fast to us, even though we are expecting it. If you’re reading this, there’s a good chance that you already believe that you’ll dabble in buying various app coins, or that your glasses will display real-time information, or that an autonomous agent will answer your emails and learn your preferences and language behaviors, or that your young child’s first computing interface may be through voice and natural language. We know the buzzword waves will come, we just don’t know when. Those who do time them well will be rewarded handsomely.

More And More Money Flooding Into Tech And Startups: It would’ve been rational to assert that money should’ve gotten tighter and more expensive after the major stock market correction in Q1 of 2016; or at least after Brexit this past summer; or at least after one of the greatest political upsets in American history; or at least after the U.S. FED signaled the first interest rate hike (along with a few more for 2017)… but, no. The stock market keeps going up, flirting with the 20,000-mark, and more and more funds worldwide with very different motivations have a desire to invest (in)directly in the technology world, investing right into companies, backing new funds, providing private-market liquidity for fashionable stocks, and helping structure “special situations” that have arisen as a result of the hangover caused by the 2014-15 startup investing frenzy. As a result, we have more sovereign wealth in the Valley, more corporate money, more family money, which in turn create more funds, more funding rounds, and more… you get the idea. Money has been cheap for a while, and those who have it often want to park it in technology. I often wonder how lucky I was to move here in 2011, oblivious to the fact that, right around that time, the entire world economy was shifting to being driven by technological change, and that change had epicenters in Silicon Valley and across The Pacific in China. By luck, I get to live right smack in the middle of one and have indirect exposure and learning to another in my venture partner role with GGV.

In a nutshell, this is what I’ll remember about startups, tech, and investing from 2016. I know there’s a bunch of other big headlines (like Fake News — blah), but this is what I focus on and affects how I do my work. Soon, I’ll have more to share of what I went through personally and with Haystack in 2016 (maybe tomorrow night), and I will take a few days to think about what I’m preparing for in 2017. Stay tuned and Happy Holidays to you and yours!

Transcript: Chamath Palihapitiya @ Post Seed 2016

(Below is the full transcript from my fireside chat with Chamath on Dec 1, 2016 in San Francisco. Below is the full transcript, including audience questions. We covered topics related to the election, how the Bay Area may be treated by a new administration, changes in healthcare, the impact of social media and our elections, and much more. Enjoy!)

Semil: Yeah, so this is going to be a treat and Chamath, thanks for making the time to spend with us today. Happy Holidays.

Chamath: Thanks.

Semil: Until Christmas comes.

Chamath: I’m going to make myself comfortable.

Semil: Yeah, make yourself comfortable. It’s a fireside chat. I’ve had the pleasure of having a public conversation with Chamath a few times, and I try the technique every time where I… I’ll sort of feed him in advance, maybe want to talk about something, each time he’ll say, “No, let’s just go.” And so I actually created a little list of things, so I’ll let you, Chamath, pick.

Chamath: You should talk about hard things.

Semil: What we’re going to talk about first. I’ve got six topics. You choose first.

Chamath: Election date news, globalization, trade immigration, role of Silicon Valley, filter bubble, and tech news, Twitter, etc., sports and athletes. Well, I feel like one, two, four, and five are the same.

Semil: Here, I’ll start out with a more specific one.

Chamath: These are shitty topics. These are not hard.

Semil: Okay, let’s start out with… so I’ve listened to your podcast about the election. In as dispassionate view as you can, which I know is hard, is the election good or bad or neutral for Silicon Valley and tech?

Chamath: I think it’s a multi-faceted answer. I think in… well, I think broad based, I would say, it’s actually quite good. It’s probably the best thing that probably could have happened to us for the following reason, which is there’s a type of conversation that I think that’s happening now that probably wouldn’t have happened if Hillary had won. Part of it, I think, centers around this idea that we have cocooned ourselves into this nice, beautiful, little existence that’s frankly just detached from reality.

Then separately, we were never forced to really understand the scope of the problems that we should have been working on. The real implication of that is I think you’re going to see this probably in two or three years where when the capital cycles start to change. There’s just been so many really poorly constructed businesses and business models that are going to be under pressure. So I think all of those conversations can now happen because of the election.

So in many ways, I think it’s probably the most useful thing that could have happened. At a more moral and ethical level for a lot of people, I think it creates a lot of doubt and fear, and that’s unfortunate. But I think the net balances can be positive if you look at it that way.

Semil: And what do you think the new… what’s your view on the new administration’s relationship either with Silicon Valley or with the technology industry in general? Is there a role for The Valley practically to play?

Chamath: Yeah, I mean I look… I mean I think you can look at the President Elect’s tax plan. I mean it’s nothing but good news. If you actually are somebody… well, let me actually take a step back and talk about sort of the roles I see.

My big kind of like clarifying moment that’s happened sort of in the last few months along the following dimension. We do these really intensive portfolio reviews inside Social Capital where we go very deep inside of our companies, and part of that is because over the last five years we took a lot of these capabilities that we had at Facebook, which is where I and a bunch of my partners come from, and we built it into frameworks.

At first, we were worried that those only applied to Facebook. That all the things we did in machine learning, all the things we did in data science, all the things we did around data acquisition. But over time, we found that they applied to all these companies. We deployed in all those companies that we work with, companies at Slack and Intercom, companies you know, and we collect these artifacts. Now these artifacts have been building up over years, okay?

Incrementally what we did was we did..this is a long-winded answer, but I’m getting there…Incrementally what we did was we took all those capabilities and we stuck it on the Web. We built this thing called a “magic 8-ball” framework that we said, “Founders, get your shit together. Get your head out of your ass and understand your business.” So you come to our website, it’s like three or four clicks deep. But the point is, since we put these series of blog posts out, we’ve had, as of this morning, I looked, 3,400 companies run a magic 8-ball. The magic 8-ball is effectively GAAP for a startup, right, generally accepted accounting principles.

So if you’re a public company, how could you compare, for example, a public company in healthcare with a public company in oil and gas? Well, there are rules, and it’s called GAAP, and it’s how you basically report out your earnings, create balance sheets, and it allows you to make an apples-to-apples comparison across industries.

Similarly, we felt that that would be possible in startup time. What is the difference between an enterprise software company and a consumer network of that business? Well, today the easy answer is everything. They’re all different. Our perspective is actually they’re all quite similar. You just don’t know what to look at. So we tried to create this framework.

So the long story is we’ve collected this entire corpus of information. In a quarter, we’re going to actually release a benchmarking tool out to founders that will allow you to understand how you measure on these very deep nuanced metrics across thousands of companies. So how are you doing on LTV to cap? Is that important? Maybe it is. How are you doing on fixed-mount retention? Is that important? Maybe it isn’t. What about if you’re in the top 8%, 90th percentile in a certain category, and the bottom fifth in another category? To know that is really powerful because you can now start to fix your business in there.

So first thing in a portfolio review, and I’ve been thinking that something is amiss, and what I see is degrading sales efficiency in some of our enterprise SaaS businesses. This thing clicks and I go off, and I’ve been thinking about it, and I will come back to the following framework, which is there are really only three kinds of companies that get created in Silicon Valley. Two are valuable. One is a category of complete dog shit.

Category one is what I would call “bits to atoms.” So you’re building something in software that then gets translated and manifested in the real world, in physical atoms, right? So what are examples of … let’s use scaled companies, okay? Amazon is a fantastic bits to atoms company. It started off as completely virtual e-commerce, but now they build more things in the physical world. They’re buying boats and planes. They’re building robots. They’re building fulfillment centers.

Tesla. Another bits to atoms company. They have fantastic software and capability, but it manifests in batteries and engines and cars. Literally raw material comes in the front of the Gigafactory. Model X’s come out the back. Apple, for better or worse, translates really great software into a fantastic, physical product. SpaceX. And we’ve done a lot of these bits to atoms companies and what I’ll tell you about these companies is they’re fundamentally defensible because they are hard, they’re not obvious, and most founders don’t have the patience or the wherewithal, or the sources of capital caps to go build them. And so, as a result, they’re quite bleak.

Those businesses in this new administration will absolutely thrive because you’re going to have the administration that is going to be very pro-United States. They’re going to seek out companies and markets and businesses that basically promote Americans’ excellence in things. If you are building physical things… so for example, we have a company in Los Angeles that is constructing what will be the biggest, high-precision 3-D printer in the world. We’re using it to actually print the stage two rocket. So what is like a 65,000-part build will get reduced literally to two or three parts, which is preposterous, okay, but it’s happening.

But what I say is even if that works or doesn’t work, the point is we can create a renaissance in 3-D manufacturing in the United States. Airplanes, fuselages, wings, all kinds of things, propellers for windmills. You name it. To think that the current administration will not be all over that business is naïve. Of course, they would.

So the fact that technology businesses can actually create a renaissance of things that can build this stratification of job growth, right, not just $200,000 software engineers, but all the way up and down the stack, is a really powerful concept. That will win.

There’s another kind of category of business that I think is fantastic, which is what I call “sticky bits companies.” So what are those? Those are marketplaces. Those are network effects, and specifically in enterprise, those are top-down system of record sales companies, okay? So what are examples of those? Facebook is an obvious one. Snapchat is one. Slack is another one. Those are really, really interesting kinds of businesses. Why? Because they’re very hard to disrupt once they get going. There’s an inherent flywheel and momentum that creates a usability mode, or an acquisition mode, or some kind of a mode that we can’t necessarily just overcome with capital.

Then, quite honestly, there’s everything in the middle, which is everything else. What you realize is that’s a lot of companies. Some prior enterprise companies fall into that category and they haven’t realized it. I thought that they were fantastic because their revenue traction was like this, and I thought, “My gosh! This is great.”

Chamath: A million of ARR. $3 million of ARR. $5 million of ARR.

Semil: How does that change the strategy when you’re doing a portfolio review and have… do you communicate that to… how do you communicate that to the founders?

Chamath: I’ll get to that in one second.

Semil: Okay.

Chamath: So you hit a wall, and I think the reason is because those companies benefited from the fact that you could sell software with a credit card right? But it was naïve for us to think that all of a sudden somebody else could come in behind us with the same strategy to disrupt us. Before you had 10, 15 years to build a business. Now you have four or five years to build a business. That’s not enough time and you have to load your business up with sales and marketing, and HR, and PR, and product marketing and customer success. All this infrastructure that is secondary of what you really have to do, which is the fundamental core product market thing.

Those businesses, I think, are in real trouble and the reason why that’s in real trouble is, again, I think it’s somewhat related to what’s going to happen over the next five or six years. This administration has made clear, which I think is a fantastic thing, they are going to pump trillions of dollars, trillions of dollars. Literally with a T. Infrastructure spending, massive capital projects. That is going to be a renaissance of, I think, middle income job growth. But what it’s also going to do is going to inflate equities to a degree we probably haven’t seen in a while.

And so if you can get 15%, 16%, 17% IRR in the public market, why would you ever put your money into 10-year, illiquid venture capital for the same IRR? It doesn’t make sense. So I think what actually happens is the following. Bits to atoms companies thrive because there’s a manufacturing and US-first message that works. Sticky bits companies, because they’re capital light, highly sticky. The businesses in the middle must get very precise very quick because those companies will need to go and raise capital, but they will be faced with the following capital dynamic, which is that the public markets… like we have as much public market exposure as we do privates. I struggle everyday now to think about how I deploy incremental dollar into privates for the same effective return when I shouldn’t really just put it into the publics because I know the publics are going to riff. Because when President-Elect Trump forced $2 trillion of money into the public markets, I’m telling you the Dow is going to go like this. The S&P 500 is going to go like this, and it’s liquid.

So those dynamics, I think, need to be understood, and we typically don’t even think about that. We don’t technically think about what does Washington do or what could New York do to affect us? But that is what it’s going to do. It is going to change the capital cycle because it is going to change the risk reward. The last seven years have been that money is free, the public markets gyrate sideways plus or minus, and the only return – perceived return – had been in private, illiquid investing.

The public markets are quickly catching up. Debt is going to catch up because we’re going to see interest rates rise. All of these things have an effect in the real rate of return you can generate in your asset class, which, by the way, is not going up. It’s actually flat to going down, and the reason is because for the last eight years we have all this money flood in and what used to be a $5 million rate is now a $10 million rate. What do you think happens with that? It’s not as if the outcomes are also doubling. The outcomes stay the same. The prices go up, which means the return shrinks.

So these dynamics, I think, are now going to come to the fore and the next four to five years is how all of this stuff goes up. But that’s a very long-winded answer. But that’s why I think… that’s why I think Trump needs the Silicon Valley. It is a wakeup call, a sobriety check, on rational company building, thoughtful business model construction, strategic operational guidance of the business, and that is in short supply.

Semil: So… and that is a very interesting take and this topic is going to pique as interesting, but I was curious from your experience at Facebook, and in all the results and sort of, I guess you can call, controversy around Facebook, and filter bubbles, and stake views. What’s your point of view on that controversy? Is there anything Facebook shouldn’t do?

Chamath: So I don’t want to talk about Facebook, but I will talk generally about social media.

Semil: Sure.

Chamath: I owe everything to Facebook. I’m low to those guys. Let’s just call a spade a spade. They have a difficult job, almost impossible job, but let’s take a step back and not talk about that. Let’s talk about…

Semil: Let’s take it in feeds. So, Twitter, Reddit.

Chamath: Well, let’s actually talk about social media jobs.

Semil: Sure.

Chamath: It is fair to say… and I think you can always… you can actually put Google in this category as well. Social media, we’re using generated content, is modern feudalism, okay? So let’s call it that. You have 1.8 billion Internet-connected individuals all around the world that are fastidiously doing the work, doing the hard work for companies that now are tens of thousands of employees deep, not much more, to then monetize and then share that within themselves.

Okay, so for example, let’s look at Google. That’s a $517 billion market cap company. The core escape velocity was page rank, but how did page rank work? Page rank didn’t work because Google all of a sudden judged the quality of the search index. You did that work, and Google was just able to harvest that signal, right? So, you did the work. They built the $517 billion system.

Most social media UGC companies, you upload the content, you annotate it, you create great, brilliant experiences, you don’t get paid. The company that owns it gets paid. So the first thing we have to acknowledge is that there is a compact that has existed for a while that we probably didn’t anticipate. In that compact were some expectations, and now it’s all coming home to roost.

There was theoretically an expectation that us, as a consumer, was owed some amount of truthiness, quality, and SLA. That was never in the SLA. That was never in the compact. The compact was you’re going to do the work and we’re going to make the money, and that happened. All the incentive systems, and this is not a company-specific thing. This is an entire industry classification thing. That is just the truth of what happened.

When we look at what’s happening now, I think what we have to realize is those companies are in the job of making money. When you look at how products are constructed, so now let’s talk about feeds in general and let’s compare it to newspapers. So let’s take media of the past, newspapers or television.

They were time bounded or physical space bounded, right? So in the case of television, you had a 30-minute window. A show started. A show ended. There were blocks of time that were sellable. There was a message that it has to get truncated in a fixed-period of time.

Let’s take a newspaper. You sat down. You opened the paper on page one and it would end on page 10. So my point is there was scarcity in old media. So you have to now actually have an SLA around the quality of the content because it had a direct correlation to engagement, which then had a direct correlation to modernization.

We divorced ourselves from that expectation in new media because the first thing we did was we eliminated scarcity, right? There’s a reason why feeds are infinite scroll, guys. There’s a reason you can’t get to the end of YouTube, right? And the reason is because it’s directly correlated with modernization, right? There is one single economic formula that guides all of social media, which is clicks times ECPC. That’s it.

So I think we just need to be really intellectually honest about what that compact is. We should have never have been expecting truthiness. But if you do want truthiness, now I think is the time to demand it. But then the question is: What are willing to do if you don’t get it? That’s also a very… that’s a really difficult question that I don’t think we also don’t know how to answer right now.

So I think social media in general has been constructed in a model that is purely about the feudalistic modernization in capitalism. This modern form of something or other, that is just a fantastical business model of all times, right? If you add up the entire market capital of all UGC companies, a trillion, $2 trillion, right, globally. How many total employees? Less than 300,000, 400,000. That’s preposterous. Two billion people generating $2 trillion in value shared by 200,000, 300,000 people.

b>Semil: Do you think anything changes in either how any of the companies present content or how users behave or this is all just sort of…?

Chamath: So that’s what I’m saying. So now I think we have to now shift and say let’s have a more first principles conversation about what we now know is actually happening. There is a modernization formula that dominates, and we have to ask ourselves, “Are we willing to compromise usability and quality of the product as it is today in order to get some of these other things?”

So as an example, there’s a person that I think, for me, I follow a lot because he gives me the most truthiness of my network, which is Joe Lonsdale. Joe Lonsdale, to me, is my sort of like keystone of truthiness. That guy finds unbelievably clear, clean, thoughtful content and he shares it both on Facebook and on Twitter.

Does it change the usability of my product because I now don’t look at my feed as much? Instead I can just search for Lonsdale, see what he’s posted, and read that stuff. I do that. Does it mean I miss a bunch of stuff? Yes. Does it make me more detached from the people around me because they’re like, “Hey, did you see my great, awesome cat dressed as Luke Skywalker for Halloween?” I’m like, “No, motherfucker. I could care less about your cat. I was reading about whatever Slate Star Codex had to say because Joe Lonsdale thought it was important and I trust Joe Lonsdale’s filter.”

So I have changed my mental expectation of what these channels should give me. It makes me less superficially connected to the people around me. It makes me more introspective and thoughtful about my worldview. That’s not necessarily a fantastic formula for friendship. So how many people are willing to make that tradeoff? Are you going to make that tradeoff? Do you expect the services you use to make that tradeoff for you? That’s a very slippery slope.

So I have no clear-cut answers, but I do think another solution to this is that there needs to be some of these products or sites – both offline or online – that need to be more operated for public trust. I think the most simple way to get back to a model of scarcity and content value that relies on a SLA is to basically remove this primary driver, which is eCPC times number of impressions, which means if it was funded to not have to make money, now it could theoretically, theoretically at least focus on not generating clicks and views, but theoretically relaying content. There should be sources like that.

ProPublica maybe is one of those things. Slate Star Codex actually is quite good, and there’s a bunch of these things, but they’re hard to find, and they’re really super long-tail, and there’s no efficient way to share it once you do find it.

Semil: So now to get you in a more insular topic, I spent a couple days in New York after the election, and I talked to a lot of old friends and folks in the industry. They’re all reading The New York Times, and they all seemed very, very shocked. So I started to think about well, even in Silicon Valley or media, there is an echo chamber. It might be on Twitter. It might be in the various blogs. Is there something that’s analogous to what happened… on The Coast, for example, in early November, so what may happen in terms of the technology media landscape? Is our information filtered to a point where we don’t see what’s happening?

Chamath: Yeah, of course. Oh, our heads are so far up our own asses it’s unreal. Yeah I mean it’s not good, but it’s the truth. I mean, for example, let’s go back to how I started. There are three kinds of companies, right? Bits to atoms companies, sticky bits companies, and everything else. If you actually go back and if we tried to run a classifier on the last eight years, and last quarter of a trillion dollars of invested capital, what do we think we’d find quite honestly? We’d find very few of those bucket one and bucket two companies, and we’d find a tremendous amount of things in this bucket three company.

Part of what that speaks to is the fact that when things are easy, we pursue them because there’s a fast feedback loop. Part of what… why that’s happened is because we love fast feedback. It’s no longer okay to win in 10 or 15 years. For most people now, in this perverse way, that seems like the end of life as we know it, the idea that one could work for 15 years on something. It’s crazy. How could that be? It has to happen in three years.

Instead, I think to myself, “Doesn’t it seem plausible that if you can build $5 billion in value in two years?” Value, okay. “That could also just get destroyed in the same in the next two years?” Doesn’t that stand to reason? If it was that easy for you, wouldn’t it be that easy for somebody else to come in behind you? Of course.

So the thing is we’ve gotten trapped in this culture, this iterative feedback loop of now, now, now, now, now. So this is a fantastic moment in time where we can actually say, “Man, we have to divorce ourselves from this stuff.” The world needs us to help do things that are hard. But too much of our time gets unfortunately redirected into the things that are easy and obvious. The reason is because there’s an entire infrastructure of people that want to basically congratulate you and reward you for short-term, fake progress. None of it is sustainable ultimately, and especially when there is a capital cycle.

Most entrepreneurs right now, in just the volume, didn’t even go through 2007, ’08, and ’09, let alone 2000, 2001 and ’02. I’ve been through both of those cycles, and I’m telling you I don’t think we really appreciate what it’s going to take to survive when the risk premium adventure doesn’t justify the capital. I’m telling you guys we’re headed in that direction.

Semil: This is a good counterpoint to that. I’ve heard for maybe the last three years, really smart market observers and professors, saying, “The capital is starting to dry up, dry up,” and you do feel it in certain following rounds, but it seems like at the same time there’s more and more money coming in. So if that continues to happen, does that mean that what you’re predicting maybe will take longer to play?

Chamath: No, no. This is… look. I think you’re going to have probably two years of market highs in the U.S. equities. But things are lagging, right? All of… money is always a lagging indicator. With respect to revenue, it’s always a lagging indicator of value, and inflows are always a lagging indicator of risk allocation. The thing is you’re going to look back and in these next 18 months, it may be the case that that $100 billion fund that SoftBank was able to cobble together is the top. You don’t know in the moment. You only know in hindsight.

All I’m saying is this is not meant to depress you. It’s meant to clarify what you’re doing. The problem is two-fold. One is the courage and the instincts to do things that may not necessarily go like this. But, my gosh, I’m telling you. If you can compound 20% a year for 20 years, I’d take that 100 times out of 100 than this little thing. Okay, because this thing, honestly, as fast as it works, it can just die.

The other thing, though, is that then you need to find sources of capital who also understand that. At least what I’m trying to vocalize to you is that there are some places out there of people who realize that working on hard things is better than working on easy things. Working on things that are sticky that are not obvious, that may take years and years may be okay, because once they get going, they’ll get going forever. Oh, by the way, the ability for you to actually feel like you have the social capital to work on something for 15 years and it be okay is absolutely okay. And you to not live… like the filter bubble you need to break is the one in San Francisco, which is like, “Oh, everything happens in three to four years.”

Semil: Do you think that there’s more…

Chamath: By the way… I’m sorry. By the way, if you’re not quick, look at the last group of people you recruited and go and ask them how long they were there in last few jobs they were at. I bet you it’s two to four years max.

Semil: Real quick. If you have questions, just line up here. We’ll ask questions.

Chamath: The reason is because we conditioned people to think about this. It’s like, “Oh, everything has to happen in two to four years. Otherwise, I’m out. I’m going to go to the next company. Then I’m going to go to the next company. Then I’m going to go to the next company.”
This kind of mercenary approach to either being founder or raising capital, or being an employee is a destructive thing, but it also is a path for us to be completely out of touch with what really needs to happen. There’s a reason why SpaceX is going to be a $100 billion company. But, guys, it’s taken them 14 years. I mean because it’s hard.

Semil: Do you think that is a local mindset that gives an opportunity to other locations? Is that specific to this area?

Chamath: It’s a decision. It is a decision. It’s a decision to listen to what Gurley has said a lot, who, I mean he and I are quite aligned on this generally. What I’m maybe saying now, for whatever its of value, is to make hard decisions and then take the time to find the source of capital that it needs. I think that really matters. Then separately, that’s at this high level. But then practically speaking, to use metrics, to use data, to use things like our magic 8-ball to just show you the way. Then to be thoughtful about experimenting.

Here’s an experiment that we’re currently running. As an outcome of this view, what I said to the team is, “Can you please go and figure out how we could maybe abstract all the sales and marketing from all of our big-tier SaaS companies and we will stand up a company and embed it into our growth team?”

Initially I get the same feedback. “It’s not possible. Only I can sell my thing.” I’m like, “Really? I mean it seems to me Salesforce is selling 90 things better today than they did 10 years ago when they were selling one thing.” IBM sells 150 things.

Chamath: Microsoft sells 9,000 things, and they just seem to be getting bigger and bigger and bigger and bigger. “So you are fucking bullshitting.” So what if we could actually just take all of the sales motions and generalize them and abstract them so that now a company can be even more leveraged and focused on their voting market. Now we can have best-in-class people and we can actually staff those people all over the country. They can be in Ohio. They can be in Michigan. They can be in the Central Valley.

You can’t staff a sales organization here, guys. 200,000 fully-loaded OTE for a startup trying to sell a product for a few thousand-dollar ACV. That dog doesn’t hunt, okay? You don’t need to be a magician of Excel to figure that out. So these are basic unit economic-level discussions are not happening in upscale.

So what happens? You get some ARR growth and you raise more money, and then you unprofitably acquire more customers, generate more ARR growth, raise more money. That’s not sustainable.
I think the thing we have to realize is there has to be different, more creative, thoughtful ways of company building. There needs to be more practical, quantitative incentives, and you have to break this relationship with this theoretical, romanticized notion of how success works in terms of time. It doesn’t take four years. It may take eight and it probably takes 12, so buckle in. Capital. Doing more with less is always the better way. Sobriety around all of the things that matter versus the things that don’t. I mean, this is the last time we talked about it. kind bars and exposed brick walls walls don’t matter. It will not be correlated to your success.

Then, working on hard things. Because the fast feedback loop, while it feels good, because there’s a dopamine rush initially, you must internalize that it creates equal and offsetting risk that somebody else can compete with you to do the same thing, but their motivation will be to do it cheaper, faster, and better because that was your motivation to beat the incumbent that first allowed you to get that momentum in the first place, right?

Semil: Great. So we… we’re going to take some questions. If you have a question, just step up to one of the mics, introduce yourself, and a brief question, please.

Audience Member: Hi, Chamath. Victor from You talked a lot about looking at hard problems, Trump as well. I’m just curious what your views are on healthcare given all that’s happening.

Chamath: There’s been a couple of things that have been really negative tailwinds. Sorry, negative… there were some massive tailwinds in healthcare that have now become massive headwinds, and I’ll explain a couple of them. One is at a state level and one is at a federal level.
So at the state level, there were a lot of businesses that theoretically could have existed, but we’ve had California enact two things that are actually constructively quite negative. I’m not here to debate whether you agree with them or not. I’m just temporarily relating some facts.
Number one is around licensure of certain parties and business models that are in the periphery of healthcare. Not the hospitals themselves, but whether it’s a school nursing facility, whether it’s like the at-home care, there’s a whole bunch of downstream things that are involved in the healthcare lifecycle and keeping people well that are now more regulated than they were.

Secondly, there’s been also some very specific rules around compensation, minimum wage increases, and the way they do account for overtime and overtime payment. What that’s done, unfortunately, is a practical matter in California is there’s a bunch of healthcare businesses that frankly now cannot exist. As a result, what’s happened is a bunch of black market activity on Craigslist.

Second is I think the… I think not knowing what the President is going to do around Obamacare and the ACA has slowed down and caused Medicare and CMS, things that are related to it, whether they’re insurance kinds of businesses, whether they’re reimbursement-related businesses, I think are also now in deep, deep trouble.

Now let’s talk about some tailwinds. But there are still some structural tailwinds that exist. Number one, theoretically people are actually going to have more money in their pocket. There’s a direct correlation with chronic disease and people having more money. So whether we… obviously, we don’t like this, but the reality is as we have more money through the tax cuts and everything else, diabetes will go up. Cancer will go up. Asthma will go up. Obesity will go up. So those diseases will still, unfortunately, continue to compound its deleterious effects on society.

Number two, there are just these massive personnel shortages that exist within the healthcare system that are not well serviced today. Nursing being probably the most important one. So that’s my kind of like short-term view is that we’re quite nervous about what the impacts to reversing some of the Obamacare policies are, but the good news is we actually had very little exposure to the Medicare and Medicaid type of businesses, and we still are in businesses that have some reasonably good tailwinds, particularly around chronic disease, that we still think has tremendous value, no matter what.

Audience Member: Love your insights get me super fired up as an entrepreneur, so I appreciate it. So I’m a San Diego company and we raised… we just raised a round of capital, and one of the things that helped us closed is we really communicated to our investors that we want to build a sustainable business. We reached cash positive this summer. We’re now trying to shoot for a series A or shoot for these crazy evaluations. Are you seeing companies here in The Valley just holding chase to valuations versus companies outside in markets that kind of get lots of attention?

Chamath: Yeah, I mean I think that what’s happening is that there has been this culture where people… like look, you know how they say there’s this… one goes this phrase like history is written by winners. But the real thing is there’s a narrative fallacy, which is bullshit version of history, which is history is written by [losers?]. The thing is if you’re going to write a story in hindsight, obviously, you’re going to project yourself as this strapping, muscular winner, good-looking, I can dance, I can dunk, I did everything right, right? You romanticize it. You bullshit. The problem is the end plus, first person that hears that thinks, “Oh, my gosh! They must be telling the truth.”

So the effect of all of this is that you have had people chasing valuation because they think, “Oh, valuation means something.” It means nothing. There’s a fantastic investor who told me, which I love this idea. Haven’t you ever wanted your company value at billions of dollars ever? He’s like, “I want it valued at zero until the last possible moment before we get liquid.”

He’s right. Why? Your employees make more money. You make more money. You take my solution. You’re more sober in your application. All of those things are good things.

So to your point, yes, I do think we’ve kind of been chasing these wrong value metrics. We use to chase registered users. Then we realized it was now. Then we realized it was down now. We’ve been chasing valuation, and we chased the post and we think it means something.

Guys, there’s been less liquidity in the last five years than ever. None of these valuations mean a goddamn thing. They mean nothing, and we take them so seriously, and we pat ourselves on the back and we think something real is happening. It’s the blind leads the blind until these things get out, and the way to get out is to get profitable. There is no way to get out. So, yeah. Get to profitability. That’s just awesome. I wish you the best of luck.

Audience Member: Okay, so it seems that what you’re attacking or being contrarian about is, in fact, all the people in this room and the start an ecosystem that is attempting to scale entrepreneurism. The thing about pursuing things that are hard is that that many less people are going to be able to do that. That most of these ideas about these little schmati, stupid ideas and y-combinator loves that shit.

Chamath: Well, wait a second. Hold on. I think that that’s not fair and I’ll say this. So I saw Sam yesterday. That’s not true. Those guys… for example, like this space printing company was out of YC. The reason we’re involved and the reason why… he actually will tell you. He had to create a separate path for those companies because it is so hard for them to get any attention. It just… all I’m saying is it takes a different capital cycle. What I’m telling you is there are actually more profits in those hard businesses than in these businesses.

So what we need is actually a reframe of how we think about value. If you did that, there isn’t… it doesn’t take a $100 million to print this robotic arm business. The 3-D printing business we’re in was at a $7 million check. It’s no different than any enterprise Series A company.

We just did this fleet of autonomous drones in Alameda. Those drones that are in the water circumnavigating all the oceans, measuring fish stocks, oil spills, climate change, was an $8 million A. My point is their go-to markets are different. The way they construct the business is different and it takes a different kind of investing lens, and I think it is possible to have, and we just have to create incentives that celebrate those people so that, to use your language, it’s not just the shamatzy stuff that we pump up and we say is what… because the person far away that’s not here, when TechCrunch gives 50,000 page views to the schmutz and one page view to the drone company, guess what they’re going to have? More schmutz.

That same person can probably build the next fleet of drones or cure cancer, and there are capital sources that can fund it. I’ve got… we have a lot of money that we can deploy of hardship.

Audience Member: All right. Typically might need expertise and experience, and I don’t have to tell you the people who are over 35 probably can’t even get in the front door. That there’s…

Chamath: Yeah, that’s so true. Totally, dude. I totally agree with you. Look. Listen, my whole thing is for every person that drops out, which is fine and good, there is so much value in working at a company. I worked at AOL. I worked at Facebook before I started my startup, and I felt way more prepared. I was a 36-year-old founder/CEO. I’m glad I waited till I was 36. I had so much more knowledge because I learned from the side gig. I learned from people that were better than me. I also learned from people that were not as good as me about all the things that I shouldn’t be doing.

So to your point, I agree with you. This is what I’m saying. We need to divorce ourselves from this romanticized narrative… like fallacy that we’ve created that is this two dudes, 22 years old, dropped out of school, coded some schmatzy thing. That’s not what success is about necessarily. There are some great examples of that where they’re creating real value, but there’s all of these other things. There’s 40 year olds. There’s 50 year olds. There’s 35 year olds. There’s men and women. There’s people doing all kinds of things that are not easy, and we have to find a way of telling the world that this also exists, and this stuff is worthwhile because I suspect that the long-term solution for us being less tone deaf and for us to actually be a constructive part of the solution is to celebrate with these people.

Audience Member: Right, and so my own life, my own experience has been that software, the purpose of software is to actually change the world, and if you can make some money along the way, great. Unfortunately, in this world, you’re only as good as your last IPO and how much money you made, and a lot more money was made off my company than I made. A lot of people made a lot of money, but in fact, we wouldn’t have multimedia if I hadn’t started that company.

So at the end of the day, software is… it shouldn’t be about waking up in the morning saying, “How much money can I make?” It should be these hard issues that I’m trying to solve, and yeah, I’ll make some money along the way. That’s kind of been my philosophy.

Chamath: Fair point. Absolutely, absolutely.

Semil: Last question here.

Audience Member: Hey, Chamath. Josh Venga Airspace Systems. So you talked about solving our problems, hardware, software, high-speed physics. This drone is in very high speed.

Chamath: Bits to atoms.

Audience Member: Yeah, you got it. So one of our challenges is it’s all about talent, right? My #1 job is to see if the best of the best talent we can get on board. Having a lot of challenges in that because you’re fighting the Teslas of the world, the Facebooks of the world, the Googles of the world, and we’re going to Canada. We had a lot of great talent from Waterloo. You’ve been talking about it.

And so the problem is that we’re worried about the immigration. A lot of these engineers and professors that we’re grabbing from Canada are worried about this new administration, all the talk about yanking green cards, and things like that, and what are you hearing about struggling Visas and…?

Chamath: To be honest, I haven’t really… I haven’t heard anything yet, but I think what’s fair to say is I think that there’s a view of the American exceptionalism, which I think is actually quite constructive, and at the end of the day, it seems… I could be wrong, that Donald Trump is quite pragmatic and wants to winner.

I’ll just use a sports analogy like… if we want to talk about sports for a sec… When sports teams win is when they recruit the best. What’s amazing is I can get these people in. They come from all different backgrounds, and you get them organized. You get them running on the same strategy and they win championships. If they’re really good, they win multiple championships.

At some very basic level, our America has the ability to be unlike any other country in the world. It’s the literally sharing with the best of the best. I think that’ll be a decision that the government will probably make constructively because I think if you take American exceptionalism to be extreme, why wouldn’t we want to be the best? If that includes people who want to legitimately be here, contribute their intellectual capital and monetary capital, we should find a mechanism and a way to do that. So I suspect that he’s going to be pragmatic about that stuff.

Semil: Well, as predicted, that was great. Thank you very much, Chamath. Thanks, everyone, for watching and we’ll do it again some time.

Chamath: Happy Holidays!

Haystack is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2017 Semil Shah.

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