Prof G Markets: Why Netflix Dominates, China’s Economic Strife, and a Year of Reckoning for Startups

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0:43Prices and participation may vary. This week's number, 22. That's the percentage of single American adults who have engaged in consensual non-monogamy. True story, I went to an orgy and Jesus showed up, which is a real bummer because he's always pretending to come again. I like that.

1:10Welcome to Prop G Markets. Today, we're discussing trouble in the startup world, Netflix's earnings, and international markets. Here with the news is Prop G media analyst Ed Elson. How are you, Ed? How are you? I'm pretty well. I'm good. It's pretty freezing in New York, but I'm pretty excited about this show right now. And why are you excited about it? We've got some interesting stuff to talk about. Yeah. Oh, this show in particular, not your career in this show. Okay. Pretty excited about South by Southwest too. That's going to be pretty cool. That's right. You guys, the team is coming with me or I'm coming with the team, right?

1:44Yeah, you're coming with us. Yeah, that should be good. Can we talk about that on this podcast? Can we promote that yet? I'm talking about Jesus coming again. We can talk about anything we wanted. No, it would be inappropriate. Yeah, right. That's what I'm worried about. Stay away from the taboo subject. I'm sorry, you need to show greater maturity and discretion around here. I provide a lot of cloud cover for basically any behavior here. Yeah, anything. Anyways, what were you going to talk about at South by Southwest? Well, just that we're going to do a live audience recording. And it's sponsored by Atlassian, the Microsoft of Australia.

2:21I work for a software company down under. There we go. By the way, true story. I was in Australia. I made that up in real time. I was in Australia. I went there, and I had the best night of my life. I met these two women at the bar at the W Hotel, and they took me out to this party. I'm going to date myself. That NXS, NXS was hosting, or the drummer from NXS was hosting. And I'm like, oh, my God. I don't know what that is. You don't know who NXS is? No. Oh, my God. All right. Stop everything. We need to play a clip of NXS.

3:01Okay, we're back. So back to Australia. That's in excess, Ed. That sounded really good. Anyways, so I think this is the greatest place in the world. I'm moving here. And I think Australia, generally speaking, if it wasn't so far, everyone would move there. And at that time, I was pretty professionally esteemed. I peaked early. I don't know if you know this about me, but I peaked early. And in my early 30s, I was quite famous and accomplished, or not even famous. I was doing well. and uh so i called i forget a friend of mine i said you know any vcs down here and he said oh the kleiner perkins of australia is this firm and he set up a meeting right away and they said they were excited to meet me and i said i'm thinking about moving to australia i had just left san francisco i had gotten divorced i didn't know what i was going to do with my life so i thought okay i'll go to australia and i'll move to sydney and be a vc and everyone will love me and i went through an interview or around and they said come back the next day and then i made the mistake of finding out doing some research on them.

3:57I found that their AUM, this is like the largest VC in Australia, and granted this was 2000, I think, was$230 million. And I'm like, I've raised$80 million for my shitty little companies. And it just struck me that Australia is like Europe, in my opinion, a place where you want to spend your money and the US is where you want to make it. It's just a much bigger market here. Anyway, that's my Australia story. So what did the girls at the W Hotel have to do with this? Well, one slept with me. So they pretty much had everything to do with it. Is that wrong? No, I mean, if it's the truth, I think that's all right.

4:32Let's play that NXS clip again.

4:43That's why I have such an affinity for Australia. Anyways, get to the news, Ed. Get to the news before I cancel both of us. Let's start with our weekly review of Market Vitals.

4:58The S &P 500 hit a record high, the dollar climbed, Bitcoin fell, and the yield on 10-year treasuries was volatile. Shifting to the headlines. For the first time in its history, Microsoft reached a $3 trillion market cap. That's the second company after Apple to reach that milestone. The consumer sentiment index rose 13 % in January to a two-and-a-half-year high. It appears consumers are finally feeling the relief of slowing inflation. The SEC adopted new rules for SPACs that bring investor protections in line with traditional IPOs. SPACs will now need to assume more legal liability for disclosures on information, such as projected earnings.

5:37Following the dissolution of the Adobe Figma deal, which we covered a couple weeks ago, Figma is now offering employees equity packages that price the company at a$10 billion valuation. That's a 50 % reduction to Adobe's bid to acquire the company. And finally, Tesla reported fourth quarter earnings that missed expectations and warned investors that vehicle volume growth for 2024 may be, quote, notably lower than last year. The stock fell more than 9%. Scott, thoughts? Well, so Microsoft, we've talked about this before. It's arguably, I would say, maybe the exception of, well, Netflix, Apple. There's so many companies that are so well run.

6:16We're constantly ship posting CEOs. But Satya Nadella is sort of the first ballot Hall of Fame CEO. And a lot of people will say that he's just drafting off a lot of the investments that Balmer made, but probably the best corporate VC investment in history with OpenAI. We talk a lot about recurring revenue and the power of high margin assets, specifically software. Think about Microsoft. Microsoft, I bet, has 97 % of the Fortune 10 ,000, the 10 ,000 biggest companies in the world, probably spend, I don't know, more than$10 ,000 a year and have a 2 % churn with Microsoft. I mean, what company above a certain number of employees can't have a recurring revenue relationship with Microsoft in the form of Office?

7:05In addition, they've innovated around hardware, they've innovated around the video game space, and now they're kind of the de facto leader in AI. I mean, we say it's open AI, it's really Microsoft AI. And he's also been very deft at shifting the culture from what was seen as the Death Star to a company that's a great company to partner with. And as a result, what they've also done, which is really elegant, is he has stayed out of the crosshairs of the FTC and the DOJ. And fortunately, he has Mark Zuckerberg, who's incredibly unlikable, and a bunch of Silicon Valley jerks who sort of just warrant more attention, right?

7:43And so he's kind of managed to figure out a way to assemble something that feels has monopoly like power and margins, but so far has avoided the same level of scrutiny. What are your thoughts, Ed? Well, I was just recently watching this presentation from Y Combinator that was back in 2013. And in the presentation, there's this comparison between the US and Microsoft, and it's a negative comparison, basically saying that, you know, the US is the Microsoft of all nations. It's outdated, it's slow, it's behind the times, etc. And the whole audience claps and laughs and loves it. the reality is that back then, this was 2013, this was not a sexy company.

8:23And people did not have high growth expectations for this company. And Satya Nadella took over in 2014. So it was a year after that. 10 years later, Microsoft has 10x the market cap. And earlier this month, it was the most valuable company in the world ahead of Apple. So this$3 trillion number, I don't think it means anything fundamentally, but I do think it's a symbolic, there's symbolic value to it. And that is the visionary leadership of Satya Nadella, which has been expressed through so many ways. I mean, you mentioned the strategic acquisitions. We should mention LinkedIn, Activision, the fact that that passed a$69 billion acquisition.

9:04They've expanded Azure and the cloud services unit. And then, yeah, you mentioned AI. I mean, I feel like people forget Microsoft invested in OpenAI in 2019 and barely anyone knew what this thing was. And now here we are, they have, you know, pseudo acquired the most important company in the most important industry in the world. So from basically from 99 to for the next 15 years, the stock was flat. And I remember it even attracted an activist investor. David Einhorn came in and said, this company needs is underperformed. And I think he made a shit ton of money. It was a good call. And as you've said, since, gosh, I guess in the last five years, what are the returns on it?

9:47Oh, it's quadrupled in the last five years. So this company, and it's unusual, I would say other than, I mean, IBM has Apple. Apple and Microsoft are the kind of the turnaround stories. Both companies have had just a renaissance that is just remarkable. The consumer sentiment index rising 13 percent, you know, you can't tell consumers how to feel. I'm glad that we're finally seeing an uptick. You know, I still get upset and angry when I think about how much prosperity we have and what a incredibly how concentrated it is. But if you were just to look at the top line numbers, it's just striking.

10:25And I'm glad this consumer sentiment index. And by the way, it's completely separated by political party. If you look at the consumer sentiment, it's literally like as soon as Biden's elected, Democrats go up, Republicans go down. This question, how do you feel about the economy, isn't really an economic question. It's a political question. But the good thing is with this data that basically for the first time, the Republican sentiment has jumped alongside Democrat sentiment. So I'm going to try and equate this or draw personal learning on it. And that is the metaphor is relationships. And you'll see someday when you have a girlfriend that that was good, that when you're upset or your life isn't going well, especially young people.

11:09And a lot of people never go out of this. They have a tendency to project their anxiety, their depression, their upset on the relationship. And if you're unhappy, it must mean that it's the relationship's fault. And as you get older, you usually find out that it's your own shit or it's something else. and you're projecting it onto the relationship and potentially fucking up something that's actually a really nice part of your life. And I think what happens a lot of times in America is that we project our frustration or upset with the current political party and their policies. So I'll give you an example.

11:40When Trump was elected president in 2016, the next day, I sold most, if not all of my stocks, and went to cash. And by the way, the market's ripped. and any objective analysis of the economy from 2016 to 2020, the economy was strong and the markets did well. But I refused to believe that or acknowledge that. And unemployment among non-whites was really low. And here's the reality. And that is the economy is much less under the control of the administration than people would like to believe. We also have a human bias that we want to think we have control over something. And that if we vote for a certain candidate that shares our value, that everything will work out in terms of the economy.

12:22And there's just so many factors at play in the economy that we disproportionately credit them or blame them for the state of the economy. But the economy right now is incredible. Let's talk about SPACs. I'm hoping that SPACs become a thing of the past. And the reality is there's just been enormous wreckage here, just enormous wreckage. And what it goes to is that the hurdles and the friction around getting public end up actually being what the SEC wants, and that is their investor protections in the sense that there are very few companies that go public via traditional IPO that are off 90 % in 30 days.

13:00And so I hope SPACs in their current form become a trivia question. What are your thoughts? I think it's already, almost already happened. I mean, once again, the SEC is right and also too late. Because the damage has already been done. I mean, 95 % of SPACs are trading below their merger price. So as you said, everyone's lost, basically everyone's lost their money, unless you're an early investor, you know, the rich people got rich off of these things. But it's also too late because the SPAC era is dead. I mean, SPACs raised around more than$150 billion in 2021. Last year, they raised$4 billion.

13:40Because everyone understands now that, you know, without the regulatory arbitrage, these are shitty investments. They're not going to make you money. The only thing is you say it's too late. I think that's a really interesting point. They're right and late. However, however, SPACs have been around a while and investors have short memories. Just give them a couple of years and get one company to SPAC that's kind of hot, get the IPO pipeline backlogged, get Goldman's operating committee saying you're too early. It's a cool company. And you maybe have a famous sponsor who knows the producer at CNBC.

14:13but you're too early, these things could come back. So I like the fact that there's additional regulation here. I think it's a good thing. The Adobe Figma deal falling apart. So you said they offered people after the deal broke up equity at a$10 billion valuation, which is a 50 % reduction to Adobe's bid to acquire the company. Now, there's some nuance here because it's a private company. So they want to give options out at as low evaluation as possible. And probably what's happened here, they needed to do something. Because it is impossible when you read in the newspaper that your company is being acquired for$20 billion.

14:51And you go, okay, I own, you start, you immediately get a calculator out and you pull out the paperwork and say, how many options do I have? What's my strike price? Oh my gosh, I have, I have 800, I'm about to get$800 ,000. It's impossible not to call your husband and say, maybe it's time to get a bigger home. Or maybe it's, you know, this is great. Let's finally take the family on a big vacation. Or let's pay off all our student loans. It's impossible not to start counting your money. And then you read in the Wall Street Journal, deals off. That's a bummer. That's a bummer. So what immediately management sets about doing, and the folks at Figma are smart, they say, folks, it happened once.

15:31It'll happen again. We're either going to go public on our own. And here's the deal. We want you to stick around. So we're going to give you all additional equity at a valuation of$10 billion. And a smart acquirer wanted to acquire us at$20. So look how much money you're going to make the next two, three, five years if you stick around. So they immediately had to say to everybody, okay, this was a head fake. We know you're disappointed, but you're going to make a lot of money here. And my guess is they really got generous with options to keep everybody on board. And then Tesla, you know, couldn't happen to a nicer guy.

16:08That's probably unfair. Anyways, Tesla's margins. Tesla's turning into an automobile company. What do I mean by that? It's a low margin, difficult business. Tons of competitors. We've been talking about this forever. Today, just to give you a sense of how overvalued Tesla is, just on the opening bell today, Tesla shed the value of BMW. And the interesting thing here is that was only 10 % down. Tesla is worth more than the German automobile industry. It's worth more than the U.S. automobile industry. It just doesn't make any fucking sense. And so when this begins to look more like a traditional automobile company, it doesn't have the margins or the growth of a software company.

16:48It looks like a difficult, capital-intensive, low-margin business. See above an automobile company. It's going to start trading in line with its peers. And I've been waiting for this to happen for five or seven years. I've been wrong so far. He's always able to pull a rabbit out of the hat. But my guess is he personally is going to spend a lot less time on this company and go where his opportunities are. And that is around SpaceX specifically, Starlink, which to me is just going to be – I mean, it's just a monster company. What are your thoughts? Yeah, I thought the most important thing was that they said volume growth is going to be notably lower because Tesla's been cutting prices for the past year.

17:27So they're basically saying, we're going to start charging, or we're going to continue to charge less per car, and also we're going to sell fewer cars. And then that's in addition to all of the terrible numbers. I mean, revenue up 3%, but if you account for inflation, it's technically a revenue decline. Gross profit down 23%, margin down 50%. It's crazy. having said all that this is still a 600 billion dollar company the market is basically saying here yes it declined around 10 but the market is continuing to say we actually don't care about how many cars you sell we still believe you're some sort of ai robotic software company that's where you derive value and that's why we believe you're going to grow into this ridiculous valuation You know, I want to side with you, but it's been so long.

18:16It's been so long. I just, I don't know. History's not on my side. I'm wrong a lot, but on Tesla, I'm, you know, all caps, all caps wrong. I don't want to say you're wrong. I'd rather say that you're not right yet. I'm early. Yeah. I'm early. Yeah, that's it. We'll be right back after the break with a look at trouble in the startup world.

19:09We'll be right back. for the next one. Get started today at linkedin.com slash campaign. Terms and conditions apply. Tonight on NBC, Jimmy Fallon and Bozema St. John host the highly anticipated new competition show. I hired 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not Play Play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best I do win! On brand with Jimmy Fallon. Series premiere tonight on NBC.

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20:19We're back with Prof G Markets. One of the hottest fintech startups of the pandemic era, Brex, is struggling. According to the information, the company burned through$17 million in cash per month in the fourth quarter. A Brex spokesperson said the company's cash runway is now four years. with expenses running at twice the level of revenue, Brex needs to cut costs. And in an effort to do that, it said last week that it will lay off 20 % of its workforce. So Scott, I think the stat that is standing out here is this$17 million per month burn number. Let's just start with a general startup question.

20:54As someone who has built and run startups, why do you think spending has gotten so out of control here? You have a bunch of companies here that are way out over their skis. And that is some of them are actually pretty good businesses, but they're not going to be billion-dollar businesses. And they probably raised more capital than they needed. And in the back seat is a driver saying, go big, go hard. Because to a certain extent, a lot of these guys would almost rather get a zero than a meddling outcome. When I was building L2, my backers didn't want to sell when I wanted to sell. Because their attitude is, we didn't invest this company to get$160 million back, which we sold L2 for.

21:33We want this to be a billion dollar enterprise. That's not why we invest. And now they got 3x their money back in 27 months. And they were disappointed in that. They're like, that's not what we do. I think they would rather get zero or have a shot at 10x than have kind of private equity like returns, right? That's just not the business they're in. So there's this zeitgeist of go big, go hard. Maybe it's a good company. It's growing, spend money. But But you have these companies everywhere. You have companies or enterprises that have created cash eating machines, but not cash generating machines.

22:08And the question is, where is the inflection point? So a lot of them, a lot of them are cutting costs. And 2024, I think, is going to be a big year of reckoning because a lot of these companies raise so much capital that they're fine. They were fine through 2023. But 2024, things are going to start to, I think, get ugly. So more than 3 ,000 VC-backed startups shut down last year. One in five funding rounds was a down round. That's up from one in 20 in 2021. The number of VCs that are actively investing in deals declined 40%. More than a quarter of a million tech workers were let go. And then we saw 650 corporate bankruptcies last year, and that's the highest number since 2010.

22:50So 13-year high. um so you mentioned this idea of like this reckoning or this death march it feels like the death march has sort of occurred in 2023 but it sounds like what you're saying is that this will at the very least continue and potentially get even worse is that what you think will happen in 2024 oh yeah the these companies think they were went to the valley of death in 2023 they haven't even gotten to the to the desert floor yet this is a lot of these companies will come out stronger because there's some good companies and the lack of financing gives them cloud cover to cut costs. If I look back on all my companies, the ones that have worked were the ones I started in recessions because I didn't have a lot of money, which meant you got to proof of concept really quickly.

23:37Otherwise, you went out of business. And because I didn't have cheap capital, I imprinted a DNA on the company that was just tighter, lower spend, could find office space and people inexpensively. And then once the market came back, I had wins at my back. I had a company doing 5 million. The company comes back, the economy comes back and boom, we just take off more under the races and we have the right DNA. Almost every company there's been a flaming bag of shit crash into a wall at 300 miles an hour has been a company I started in boom times. Everything's expensive. Good people, mediocre people are expensive because all the good people are sitting and resting, investing at Snowflake or whatever.

24:19And you have the ayahuasca big gulp hallucination that this shit's actually working because you were able to raise$40 million off a PowerPoint presentation. And you can throw so much money at customer acquisition that you get customers. You overbuild the product. You're basically sending people a mattress that cost you$1 ,000 to produce and you're charging them 700. So yeah, they love it. And the question is, do you ever get to a point where the brand and the margins and everything are strong enough that you get to an inflection point? And the majority of these companies or a lot of them never get to that inflection point.

24:50The ones that have good businesses and cut costs and really tighten their belts and get lean and mean, they end up better off. Like 25 will probably be a great year for IPOs for some of these companies that get through this because this gives them, again, cloud cover to get in fighting shape. So you think 2024 is basically the year where, I mean, 2023 was the year of efficiency, tighten the belt, but 24 is like, you now have to be profitable. And if you don't, if you're still running on VC funding, then, I mean, would VCs just let these guys die? Well, they'll try and sell them. If you have a, you know, a company that's raised a hundred million dollars and has built a, you know, five or$10 million software company, there's some value there.