Jack Smith on How r/WallStreetBets is Beating Wall Street - From the Archive

26:01That was like total users within, and it was, I think, 16 months after we started. So you guys had 4 million? 4 million users. And I think on a monthly basis, we had 400 ,000 active. That's why we knew this not going to work because 10 % of your user base being active every month is too low. And we also knew that the problem with some of these apps is it would be one thing if everyone was using Clubhouse with their friends, right? If we were using Clubhouse to shoot the shit, because, oh, Sam's in Austin and Jack's in somewhere else and Sean's in California, we need the Clubhouse to bring us together.

26:32That will grow like crazy because everybody will invite their friends or their family to the app. The app will grow like crazy and it'll be super sticky. But apps like Clubhouse and what Blab did was the fun was meeting a whole bunch of new people that you were hanging out with. Now, the problem with that is that doesn't scale because you're not bringing your friends to the network. You're coming to the network to make friends. That's why Narendra likes it. He made a bunch of friends. If you go on and see the rooms he hangs out with, I bet you those are people he's never met in real life. They're cool people.

26:56They're people who he has things in common with, but they were not his IRL friends. And so because of that, you don't grow virally because people aren't bringing their own friends. And then it's also not sticky for most people because most people will have the reaction you had, Sam. You go in and you're like, if you don't immediately find a live chat room that's interesting to you, and also you don't have the time and the bandwidth because it's like, there's no editing, right? So it's got to be good right away and get to something that hooks you. Otherwise, you're going to bounce. And you do that three times, you're going to be like, why am I opening this app.

27:28I should just open Instagram. Every time I open Instagram, the top photo on my feed is on point. It's awesome. Even if that photo was taken three days ago, but the algorithm knows this is juicy. You're going to get some dopamine hit of pleasure or laughing or whatever from this photo. And here's the next photo, next photo. So that's the thing that those apps have that apps like Clubhouse and what killed Blab, they don't. So I would still be betting heavily against it. Now, that's not a cool position to take because what's the fun in rooting against a startup like there is no market for me to go short the startup or bet against it because everyone's like yeah duh like it's hard to build the next twitter but like maybe this can be it remind you guys remember meerkat yep yeah that was just as trendy as this right i think part of this valuation is just the market environments for funding at the moment so i mean meerkat would probably have raised a billion dollar funding when it has peaked as well so i think it's just too early to call it i do agree with what you're saying sean that what i don't like about it at the moment and what i think will be a challenge is that all of the content is ephemeral like it just disappears right other places as you said instagram twitter this content is like evergreen like i can see a tweet from like six years ago maybe belagi sent out that thing six years ago and i can like it and resurface and it's evergreen content and they're getting more and more content all of the time this they need to make sure the content is a star at every minute of the day which it won't be right so this is the thing i went to a brunch i think you were there jack actually those James Currier brunches that he used to throw the NFX brunches.

28:56I went to one of them while we were working on Blab and he was one of the lead investors of Meerkat. He was one of the guys who helped Meerkat figure out what it was going to be. And I talked to him. I was like, man, I was like, we're hitting this problem. Meerkat's hitting this problem. Everybody on the outside thinks this space is so hot, but all of us on the inside are fucking panicking because we know how hard this is to get users to stick around when it's live unpredictable content. and he was like, yeah, he's like, he drew this like diagram with his hands. He goes, think about it this way.

29:25Every network, every app that you're going to open has to be interesting. So there's like this interestingness scale. You got to be high on the interesting scale. He's like, and YouTube has this problem. Instagram has a problem. Pinterest, Facebook, everybody's trying to show you something interesting. And they have like millions and billions of photos to pick from, but they're, you know, they're going to show you something interesting. And the algorithm does that. The problem with Meerkat and Blab and all you guys is then you cross-section that with something that's super interesting that's happening right now.

29:51And that right now problem, the evergreen problem you're talking about, it doesn't make the problem 2x harder or 4x harder. It makes it like 2 million times harder. And that's the main problem. That's the one reason that really Twitch is the only live network that has worked, unless you count live TV, which I guess is a different sort of outlier with highly premium produced content. And so Twitch is the only one where it's users creating content live and it actually works. And one of the reasons why is because when you're streaming a game, the person can kind of just come in whenever. There was no beginning, middle, and end of a conversation.

30:24You just hop in, they're playing the game, and you're going to leave whenever you want. And the streamer stays live for like eight hours straight. So the interesting people are online for eight hours a day because playing a game is easy. You can actually do it for eight hours, whereas talking on Clubhouse for eight hours would be impossible to be interesting for eight hours. And so that's the problem with apps like Clubhouse. And that's why the fundamentals to me don't make sense. I think the valuation and all this stuff is for people who don't really understand what's happening, like how hard this type of network is to make.

30:53I don't know. The valuation, I'm not that concerned about. I did see another tweet. Someone, a Googler, asked Eric Schmidt when he was CEO, I don't know if you saw this, at the time they bought YouTube. He's like, did we buy YouTube for the right price? People are saying it's a bit expensive, like 1.5 billion or whatever. He said, no, we definitely didn't buy it for the right price. It was either way too cheap or way too expensive? Ask me in 10 years. So I don't think this 1 billion matters. It's a binary bet. It could get massive. YouTube was already working. YouTube was already massive. It just might have died because of the, you know, all the copyright lawsuits that they were getting hit with.

31:29Instagram was pretty early when it got bought by Facebook and stuff, right? I mean, not as early as this, but... Instagram was also sticky. And again, the fundamentals of Instagram, you could see why that would work. You knew that people viewing photos on a feed that works. Oh, these guys have done it well on mobile, and they're faster than Facebook on mobile. They sort of built Facebook for mobile. And so Facebook buying them made sense. I haven't seen the data, so maybe I'm wrong. Maybe Clubhouse has some amazing retention metrics that have defied the odds of all the others of us who tried something similar.

32:01I doubt it. I think stuff points towards it not working. I'm just saying they're not judging the valuation based on data probably too much at this stage right it's it's like oh wow this seems that this is a big opportunity thing that means if it becomes a 10 billion dollar company you only 10 extra money and i think that the risk reward there is so far off that you know to me this is an example of investors you know just wanting to be the one who gets the hot girl at the dance uh you know like clubhouse is the name everybody knows and you can sort of talk yourself into it like becoming a 10 billion dollar company is no fucking joke you know like i think snapchat when they went public were what 10 or 20 like max um and that was 10 years in not to shit on him because it seems like a great guy and some of his writings about his growth expert but andrew chen has had a couple of big bet failures like he joined andreessen a couple of years ago his big bets are things like atrium which like died like 12 months later like i can't remember his other bets but some of them have like died yeah and i think he was also in Secret, which was like probably the last big social app to do this was Secret, where Secret comes out.

33:08It's in a small number of people's hands. It's super interesting. And the tech guys love it. And, you know, it raised at$100 million valuation, boom, just like Clubhouse did. It didn't get to that next one at the billion. Yik Yak did, but Secret didn't. And then both of those died because of kind of fundamental problems, which were around, you know, like, you know, fully anonymous networks. What was interesting to me is like, I just don't really invest much in consumer apps, because I just don't get it. And I think what highlights that the most to me is that Sequoia and I can't remember the other firm, but they are investors in WhatsApp, like the biggest consumer exit of all time.

33:44They're also investors in things like Secret. So if these guys that have massive teams, they're looking at all the data, they're going to the board meetings of WhatsApp, they have all of these data points. If even them can pick a consumer app that implodes 12 months later, how am I going to be able to pick the winner? We talk a lot about a lot of cool stuff on here, but we never really talk about the social network, like these like poppy fun things. And is that, would you say it's because you, do you just hate that now? Because you see? No, no. So I'm not like, I'm not, I don't hate it. I am probably too scarred by it.

34:23So like I'm scarred by it to remember I would never go try to build another social app. I think it's like just in terms of the risk reward ratio, I guess there's just so many better ways for me to have success than to try to be the genius who catches lightning in a bottle, you know, the lottery ticket winner who really comes up with the next Snapchat, the next Instagram, the next Pinterest, whatever, right? Like, I would love it, but damn, that's hard. And there's just so many other ways where I have a much higher chance of success. So I wouldn't do it again. But I love thinking about it. I love talking about it.

34:51I love using these apps. I try all of them, right? Like I enjoy them and actually enjoy using clubhouse. Sometimes I actually thought that the real value of clubhouse was for anybody who was on it during the first like three to five months, you could meet every single interesting person in tech or even like Hollywood. Like I had conversations with NBA players on there. I had conversations with, you know, Scooter Braun. I had conversations with, uh, you know, from, from kind of like Justin Bieber's manager, all the tech people were on there. The VCs who, again, I tweeted this yesterday. You can't get a meeting with these guys.

35:21If you try to schedule them, their EA will say, you know, they're booked till March. How's the third week of March for you? And then you have to fake also being busy and be like, let me check. Even though, you know, you have, you know, you don't schedule three months out. And then that guy will be on Clubhouse for three hours that night, you know, shooting the shit, doing nothing. So like, it was the best way to build your network and build your kind of friend group. And even one connection that came out of Clubhouse could really change the trajectory of your life because all the people on it early on were heavy hitters.

35:48and then now as it gets kind of like more opened up to more people because they want more users and now you know they send me a message that says you have 30 invites it's like okay they're trying to juice growth they're trying to try to accelerate growth now that value is gone so i don't think it's that interesting anymore so i know jack has to leave probably pretty soon sorry sam i was just going to say like if there was anything else you wanted to talk about with the taboola thing there was one or two points i had in and also kind of felt like you should mention gamestop today. I don't know if you've been following it, but the craziest...

36:17Yeah, go for it. Explain what's going on for people who don't know. Well, with GameStop, I saw a chart saying that trading volumes for stocks are approaching what they were in the dot-com bubble. Basically, for GameStop, BlackBerry, and some of these other junk, what the professional investors would say are junk. The fundamentals, these are dying stocks. GameStop is like a Pokemon card store, basically, at the moment, it's dying. so hedge funds were basically saying hey we think you should short this stock like the numbers are trash people on reddit in this group wall street bets they basically clubbed together and they were like hey let's just screw these hedge fund guys and let's just pump this stock now gamestop the guy this other actor the founder of chewy had become an activist investor like six months ago just saying oh i think i can improve them he invested 75 million it's gone to over a billion in six months.

37:13The stock was up at one point over 100 % today alone. If you look at the stock chart, it just went up, down. It's a straight line. It's a 1 ,200 % gain, 1 ,700 % gain. I mean, 100 plus percent today alone, because everybody is just buying options calls that expire on Friday. Because basically what happens is all these people shorted the stock. But then if the stock goes up, they kind of have to cover their short positions because everyone's pumping this one stock, basically treating the stock market like a game. Kind of funny to see, but like, yeah, is approaching like dot-com bubble levels of stuff because people were posting like really scientific sounding stuff on the Reddit group.

37:54Like, oh yeah, this is called like a quantum short freeze where there's not enough stocks. And in this, like, they basically were chatting shit. People even knew they were chatting shit. In the comments, they were like, you formatted your post very professionally with like bullet points uh sounds legit i'm in right and then they're posting screenshots that he's putting like a hundred thousand dollars buy orders so it's kind of like the dot-com thing where everyone was just buying stock any stock that's was called dot-com now everyone's buying oh someone's shorted a stock let's just pump it like the hedge fund people are saying short this let's just buy that do you think that this is all from robin hood that these people are using like blackberry etc like even they're putting out announcements like we have no material news why our stock is up 40 % today.

38:39Because even though Robinhood users, you'd think like, oh, wait, they maybe don't have as much money as hedge funds. So how can they move the stock so much? It's because they're all buying crazy leveraged options. They're buying options that expire on Friday, which moves that you can essentially move the needle of the stock just by putting in like$1. You can move it massively because you're basically doing a game of roulette you're like hey yeah i know i'll lose all my money but i have a small chance of winning so basically they can increment they can move the stock much more because they're just buying these super risky crazy options because they don't give a shit if they lose all their money so it is robin hood it looks like to me it's so crazy what robin hood has become i actually can't stand it it's funny yeah but i definitely am sorry i'm gonna i feel kind of sad for people because i think it's gonna mess up a lot of people it's funny scary yeah it's funny scary.

39:31I actually had a funny story. So three days ago, I'm in this chat group and I posted, I said, Hey, who's got a hot stock tipped for me? I feel like gambling. And I told her, I said, I got a hundred K I'm going to gamble. You know, give me, give me some, give me your recommend, best recommendation. And so people were just responding. There's like six, seven people in this group. They were like, you know, this, because of this back, because of this reason, you could just speculate on this, you know, just funny things. And Greg Eisenberg, who's been on the pod a couple times he goes oh i think game stop still has a 20x to go and i actually didn't know what was going on with game stop at the time this was i think the first day of the pump like when it was like 50 or something like that and i looked at it i was just like what is he talking game stop i just like he's like you know just referencing some again some obscure old dead thing as whatever and so anyways i picked one i put an rk into it and then fucking game stop has been up like$700 ,000 or something crazy if I had literally just taken his like his joke recommendation to be serious.

40:32It was crazy. Yeah, it's it's messed up. It's funny. I don't have like Elon Musk pumping Dogecoin just because it's like funny meme. Yeah, it's it's wild how and so is there something I actually don't know? Is there something when the shorts cover their position that boost the stock more because they had to cover? Is that why it's like double pumps? Yeah, because when you cover a short, you have to buy the stock at any market price. So these guys, one of the analogies had is like, actually, Warren Buffett said that he doesn't like shorting a stock, because then he's like, you can't sleep at night.

41:05Because here's an analogy, let's say X stock is GameStop is$10. If I buy the stock, I kind of have infinite upside, right? like it could go to 100 ,000 or whatever. But if the stock goes bankrupt, I only lose my$10. I have a capped downside. But if I short the stock, I actually have a capped upside. I can only make a certain amount. If it goes to zero, I only can make$10. But then if it keeps going up, I actually have an unlimited upside. That's why on Robinhood or any of these platforms, you have to have special permissions to short a stock because you actually can lose an infinite amount of money beyond the capital that you assign to that trade.

41:46I was just looking at Tesla's short position. So at one point, Tesla was the most shorted stock in the market. And then Tesla stock obviously has gone insane. And so just in the last, what is this? So this is the last, actually, is the short position up? I think there might be a larger short position. So January of 2020, it was 25 million of short interest. And now, and at the end of the year, it was 60 million. So So even with the massive run-up and people certainly covering their positions, it looks like the short position is still huge against Tesla, which is interesting. It makes sense to me.

42:18I mean, it could be new people buying in, you know, like Tesla at an all-time high. There's new people come in. But the people that shorted it before, if their hedge fund is a billion dollars and they put a lot of money to this, if the stock's gone up 10x, they could have lost 10x their money. So they need to get out of the position at any price. and that's what kind of creates somewhat of a spiral that the price could keep going up as shorts have to cover. One more little thing. I don't know how much time you have, Jack, but are you paying attention? I do need to jump off. Okay, one minute. Okay, maybe we can't do this in one minute.

42:49All right, I'm just gonna give you the short version of it. Actually, let's do this one. I'll do a shorter one. Are you familiar with Grayscale BTC? Yeah. Grayscale. So Jack, explain Grayscale to Sam real quick. I mean, I'm not totally familiar with it, but the stock ticker is GBTC and I believe that it's just like a derivative of Bitcoin. at like a premium. So it's kind of like an ETF for Bitcoin. ETFs of Bitcoin are not legal. So these guys have launched something else so that institutional people can buy it without having to create an account on Kraken or something. So the guys who started Grayscale, I think one of them was the former co-founder of Coinbase, I believe.

43:23This Barry Silbert guy? Yeah, Barry Silbert's involved. Maybe I got it wrong. Maybe he's doing a separate one. But basically, you know, the Winkle Voss and others have been trying to start a Bitcoin ETF to make it easier for a normal investor to go into E-Trade and buy into Bitcoin without having to figure out how to hold it or figure out how to start an account on Coinbase or whatever else. And it just keeps getting rejected. And I think, Jack, last time you were on, you mentioned an idea like this. You were like, why doesn't somebody create a Bitcoin index fund? Just do it in the Middle East.

43:50Do it somewhere else that's just not on the US, on the NASDAQ. Well, I think I was saying that my friend is doing it in the Middle East. Not my friend, a guy I had known. Right. And so Grayscale, I mean, it's been so crazy successful. So basically, this thing has grown like crazy. So they now have$24 billion in assets under management as a pretty new thing. They are buying some sick amount of Bitcoin. I think they hold over 3 % of all Bitcoin now. And the crazy thing is everybody who's buying Bitcoin from there is buying it at a premium because they have not only a management fee of 2%, they literally just trade at a higher price than their underlying Bitcoin holdings.

44:26So you're paying a premium for that convenience. And I just think this is one of the... like these guys are going to make the guys in charge of this you know probably going to make over a billion dollars doing one of the simplest simplest in terms of like they didn't build a product they didn't invent bitcoin they probably had to do a lot of regulatory work though because otherwise someone else would have done it i think they paid some lawyers basically to say hey how could we do this and uh yeah let's go ahead and list this and see what happens on you know on the otc and uh i just think it's it's insane that it's trading i don't know what the premium is i believe I do need to jump now, guys, but this was super fun as always.

45:01All right. Thanks for coming, Jack. Take care, guys. Thank you, Jack. Sean, I want to bring one more thing up to you. Okay. I'm also supposed to jump, but yeah, let's do it. Oh, well, really quick. Andreessen Horowitz. Yeah. So Andreessen Horowitz is regarded as one of the best, maybe the best VC firm out there. By people in the know, it's not the best, but it is definitely tier one. But it has a brand name that is, it's like a, who knows what's better Princeton than Harvard, but it has that name. So they got popular because they had podcasts. My friend just texted me, Maggie, who's the head of content at NerdWallet, a multi-hundred million dollar business.

45:35And she just got recruited and hired there. So I love this idea that they're doing. They're building out their media arm. I don't know if that makes money. I think it does. There might be ads on it. Pretty interesting. What do you think about this? So I don't think they have a media business today. I think they put out content just like most VCs do. They have podcasts and stuff to be thought leaders so they get better deal flow. But now they're like, no, why do we need to go to the Wall Street Journal when we want to write an opinion piece? Let's just make a media company and we will write opinions into that.

46:04And let's actually blow this thing up. I think this is a really smart idea. Kind of a no-lose situation. They have multiple billion-dollar-plus funds. So the media business doesn't need to be a big business for this to add value to them. No, it could easily pay for itself, though. Just what they have now, it would pay for itself. And so I think that it will, I think it will be successful, you know, financially, but at a scale that's for them, probably pretty small. But the impact and the influence and the ability to like dictate their own terms and not be beholden to the media and having to like play nice with journalists and do all this stuff, they're like, no, we'll just be the journalists.

46:40Why not? And this has already been a trend, right? Like Mark Andreessen on Twitter will get millions of impressions. But I think it's smart of them to go straight into the media business and compete. And I love how the media people are all so upset about this. Yeah, it's stupid for anyone to be upset about it. I can't stand that. It's awesome. I can't stand the elitism of people like gatekeeping around who can and cannot share their opinion, who can and cannot have quote news or be a quote journalist. I think it's awesome. I'm on board. I think it's great. By the way, I think this is a general trend for VC, which is that this is not exactly the case for Andreessen, but it's a good example.

47:14VC is going to shift, I think, to businesses that startups need that happen to invest, that have basically, that have a venture arm. So I'll give you an example. Have you ever heard of Tusk Ventures? No. So this guy, I think he's Bradley Tusk. He's like a kind of a big dog in the like, kind of like lobbying world, kind of like the legal political world. So he was an early investor in Uber, Airbnb, and a handful of other really big winners because he was the guy who was helping them go into cities, lobby with the cities and and get their kind of like new product, like Airbnb or Uber was a new idea, get it through with governments.

47:50And so he was a service provider that they would normally pay for for their startup. And he was like, yeah, but I'm a venture investor. So if you want me to work with you on this, let me invest. And so this guy's made a killing on Airbnb and Uber and these other guys. And I think the same thing is gonna happen for lawyers. Like every startup today goes to one group of people for investment and another group of people for legal services. somebody, and maybe it's me, somebody's going to go buy a law firm and be like, hey, here's what we're doing. We're cutting prices down to the bare minimum. We're going to be ultra client friendly and we're going to just invest off.

48:22We're going to raise a fund out of this law firm to invest in all the companies that we work with that we do this for. I think it's a good idea. I think legally, I think you can't do that for a law firm, but I understand your point. I think, but they take equity right now in some startups. Some do. Instead of cash, they take equity. I don't think they have owners, do they? They have partners. Yeah, there's like a partner. The other thing that works there is recruiting. So every startup wants to recruit engineers. So instead of being a recruiting firm that makes all your money, your business model is, give me 20 % of the first year salary.

48:52It's going to be a business model that is basically like, I will do the recruiting for you, but we invest in your company. We invest, and then we are your recruiter firm at cost. I'm on board with this. I think it's great. Although I've never taken money from any of these big guys. I would want to ask them, do you actually use the services they provide? It's different from, oh, I'm Andreessen Hurwitz, and we have some marketing people on staff to being like, no, we're a badass ad agency with a venture arm. We are a badass legal firm with a venture arm. We're a badass recruiting firm with a venture arm.

49:21I think it's a different thing. And I think founders are going to start taking that because they're going to be like, hey, I get two for one here. Yeah, look, it was kind of like that Reed who came on. Reed? What's the YouTuber guy's name? Oh, yeah, yeah, yeah. Mr. Beast Manager. Yeah, that's right. Yeah, that's a good example. Cool, I got to jump. All right. I'll see you. See you.

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