Reddit communities revolt + Brad Gerstner on state of private and public markets in 2023 | E1761

0:00All right, everybody first up on the show before my spectacular fireside chat with the fifth bestie Brad Gerstner. I want to talk about this Reddit situation. As you may have heard, Reddit, the most famous and successful forum or community site ever created in the history of the internet, let that sink in, is currently dealing with a strike. A strike by the members and the community managers of their own website. This Week in Startups is brought to you by LinkedIn Jobs. A business is only as strong as its people and every hire matters. Post your first job for free at linkedin.com slash twist. Vanta.

0:43Compliance and security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a SOC 2 report fast. Twist listeners can get$1 ,000 off for a limited time at vanta.com slash twist. And iConnections is a platform to connect and meet with elite capital allocators through their online platform and bespoke events. The first 25 VC funds to sign up for iConnections Miami 2024 event in January of next year will receive a 20 % discount. Head to iConnections.io slash twist to sign up today. Why are they striking? Well, the Reddit moderators, or for short, mods, are on strike because third-party developers are revolting after Reddit said they were going to charge for its API.

1:34Now, for background, what this means is there are apps in the App Store when you type in Reddit, and you'll see there's a half dozen apps, maybe a dozen. In the early days of the internet, there was a culture of APIs where people could build around other services. So if you had access to Google's API, you could use their search results or Yahoo had one. And it really started at Yahoo, they had something called Search Monkey, and they inspired people to build apps and use their data. reddit did something similar and so did twitter twitter said hey here's the api have at it why did they do that well they were constrained in the 2004 to 2010 era when a lot of these sites were launched there wasn't a lot of money available to startups and those startups had very few developers and developers were a precious resource they said hey if you want to build something like surmise was a search engine for twitter if you want to build tweet deck a desktop client for professional twitter users the developers would make it and the understanding was hey you're giving us free developer resources you own your code you're using our data but you're making our service generally more valuable and then once the services became big like twitter reddit etc they decided we're going to deprecate these services because they became cash rich and they wanted to control the experience with users and doing this means that there's going to be some hard feelings and the feelings have gotten people are a little sensitive so as of monday evening 8 000 subreddits in other words topics have gone dark this means either they went private or they stopped allowing new posts and you say how is that possible well the way reddit works is you can create your own subreddit.

3:25Now there is this illusion that you own that subreddit. We've had people on this podcast who created Wall Street bets and other things who have felt bad about having their subreddits essentially taken away from them, which if you're building your house on somebody else's land, at some point, they can take the land back. And that's essentially what's happening here. The people who are the mods are saying you can't post and you can't even see the content here. So let that sink for a second. Now, they could, it's gonna be very hard for Reddit with this many subreddits going dark for them to fire everybody, it would be essentially like turning off their entire community.

4:02But there is a bit of background here. You remember back in April, we covered that the New York Times did a profile of Reddit's CEO, Steve Huffman, really brilliant entrepreneur, who co founded Reddit with Alexis Ohanian. The title of the article was Reddit wants to get paid for helping to teach big AI systems. And basically, the article is about how Reddit was going to start charging companies that use its API to train their large language models. And we've been talking about LLM's ad nauseum on this program. So you should know what they are by now. You know, in order to guess that third or fourth word in a sentence, or try to essentially come up with good ideas, you have to have a model.

4:38What's one of the best models in the world of human content creation? Well, one of them are newspapers, right? Those serve a certain niche core is one twitter is one reddit's one uh and then of course you have things like open source projects all of those data sets are what modern llms are built on top of but you need permission and people didn't get permission from reddit so reddit said hey this is a way for us to make money and uh it's quite interesting because for my whole career as an angel investor and a venture capitalist now with a fund for the past i think 12 years i've been doing this, people have always told me, hey, we're people, somebody's going to want to buy our data.

5:16And it really never happened until now. But actually, there is a market for data, we think it's possible that these language models will have enough free data that they can use that they won't have to pay Reddit. But if it was a reasonable fee, why wouldn't you to make your large language model that much smarter for somebody like Microsoft, open AI, closed AI, or Google, there's no price that Reddit can charge, that's going to be too expensive, of where that Twitter can charge. But if you made a free version of a mobile app, which these third party developers have done, well, you probably are not making any money or a small amount of money.

5:52So Reddit started in 2005 and didn't launch its own mobile app until 2016. Remember I said before, these startups were typically constrained in terms of their revenue. So they went 11 years before launching their own mobile app. And Reddit users have relied on third party apps. Alien Blue was one Apollo, those apps would not be possible without the API and Reddit, of course, got more users to use the service on their mobile phones, thanks to those folks. But the API, while it's great for people to tinker with the platform and to create these things, when you start looking at how successful these apps have become, well, Reddit wants to charge something around$12 ,500 for every 50 million requests.

6:36And that's going to start July 1. But at that usage point, one Reddit app, Apollo says they would need to pay 1.7 million a month. So let that sink 20 million a year. So now, Apollo, and a bunch of other popular third party apps, they announced they would be shutting down June 30. Before the API costs kick in. Last Friday, CEO Steve Huffman did an AMA and ask me anything on the API issue. And he made 14 replies in the thread is generally really poorly received about the API pricing. The folks on Reddit, I mean, they're largely from anonymous accounts. And the currency of Reddit is being dank, a word for being dark slash funny slash irreverent, let's say.

7:22And so Steve's Reddit username has been spez, S-P-E-Z for since the beginning. And here's one question that came in. How do you address the concerns of users who feel that reddit has become increasingly profit driven and less focused on community engagement valid question all right so he responds quite reasonably will continue to be profit driven until profits arrive reddit is trying to be profit driven especially because they have an ipo coming up unlike some of the 3p apps third-party apps we are not profitable so in another exchange a user named shri mukan said the announcement of the api changes felt very abrupt.

7:58Your New York Times in which suggests this was in response to the rise of ChatGPT and other large language models, LLMs. Were these API changes or in the pipeline prior to ChatGPT? Or is this really a knee jerk response to cut off, get a cut of LLM training data to which Huffman replied, yes and no. Two things happened at the same time, the LLM explosion put all Reddit data use at the forefront and our continuing reference to reigning costs to make Reddit self sustaining put a spotlight on the 10s of millions of dollars it costs us annually to support the 3p apps third-party apps so again that's a super fair response he's being completely honest with the community and when you look at these third-party apps well they are siphoning off the top users why are they siphoning off top users well the reddit app is not as good as these apps these apps have been at it longer these apps only have to do one thing reddit has to do everything.

8:52So they're always going to be slightly better than Reddit's app, or chances are, if you have this, you're going to have two or three apps that are better than Reddit's. What does that mean? The top users then are going to go to these apps. So for Reddit, which wants to make money from advertising, and perhaps some of these apps like the Twitter third party apps, which have been deprecated as well, in a very similar fashion, those apps were taking out ads on in Twitter's case. So not only were they removing ads, they were taking the top users away from the platform who advertisers covet the most.

9:23So a lot of this has to do with the top users. And, you know, having insights into them. Remember, these third party apps are getting all the data of all the usage. As I said, 8 ,000 subreddits with over 28 ,000 moderators have gone dark, some subreddits we shutting down indefinitely, whatever that means. I think that means until they've run out of fish sticks and hot pockets, but you know, they could be back sooner. Three reasons why this is super interesting to me. You know, a lot of Reddit's value is created by these unpaid moderators, and they are doing subreddits, really, because they're passionate, and they found friends.

10:00So it's affiliation, in some cases, it's recognition, you know, being on the leaderboards, some of them could be on the edges, you know, drunk on their power, but they don't get to participate in the profits and some of them probably do. Also, the IPO is coming. And they need to get this revenue going. So it's couldn't be a worse time. I think the Reddit members are doing this because they know they can. And it's interesting because AI is forcing their hands. Now, there are a couple of hot takes I have. Number one, I think it's all going to blow over pretty quickly what they could do. And here's a nice middle ground that I'm sure Steve has thought of and maybe he'll deploy is I would offer to either buy the third party apps and hire those folks who become developers and then maintain them.

10:45So you have maybe different apps that, you know, have different focuses and different themes. So one could be for power users who are using the site all day, one could be for mods, etc. I know it's a lot to handle, but that could be a path forward where they buy these folks out, give them some equity, turn them into, you know, advocates and promoters of reddit as opposed to detractors so if you think about these folks they're the ultimate promoters of reddit who have now been turned into detractors and you you want to flip that so how do you flip it either you buy them and give them equity in the company and say carry on or how about saying this to the different apollos of the world in these apps we'll split subscription with you revenue with you 50 50 so you can be an official third party app we want 50 of your revenue you know we get control of your subscription data or whatever we have co-access to it we get data about the users.

11:37And then we'll give you 30 % of the revenue that people see. And we'll know that because we'll know the number of views you get in your app, everybody wins revenue take and you make it a five year deal or something. So now these folks are going to make more money. And you can feel free promoting them. In other words, you let them eat, you let them get their beaks wet, and that would solve the entire problem. And then if you think about the top mods at reddit i had offered back in the day when i was at aol we had a a clone to dig and reddit or inspired by fark and which is really the and slash dot which are really origins of these news plus community sites where these community news sites and we just hired i think 20 people from reddit and 20 people from dig and we just offered them a thousand dollars a month so i went to aol and i said listen for a half million dollars i can get you 40 of these people who are already doing it to program the homepage and program some topics and it worked.

12:31So I think you could offer the top mods a job in mod support. So you keep the mod structure. And this maybe they're doing this already at Reddit. But the ability of hey, if you get your subreddit to a certain level of critical mass, hey, maybe we'll hire you for 5000 a month, or maybe we'll split ad revenue with you. This could change the entire nature of Reddit, you have to be careful, because again, And a lot of people who are doing this are not doing it for the money. And then if they do it for the money, they're going to compare it to their day job. So if you're a developer making a quarter million dollars, you know, at Uber, you might not want to make, you know, an extra$50 ,000 a year from your subreddit in advertising.

13:09But if you're a journalist and your subreddit makes$50 ,000 a year, you might feel great and you might quit your journalism job to try to double that$50 ,000 and get to$100 ,000. So I would think of a sub stack Patreon like model here where you could enable mods to make some money. i.e. I subscribe to this specific subreddit, I give$1, I give$10 a month, whatever, and that gets split 5050 7030, however, Reddit wants to do it. And that would be very appealing, I think, to the folks on Wall Street. I know if I was going to buy the stock right now as an ad based system with a little bit of a possible data business, it's not super interesting to me.

13:49But if it had a revenue share like YouTube, that would be groundbreaking. And that would be what I would pursue if I was Steve. Interesting take from our guy, Artie Bucco. You know, Artie Bucco from The Sopranos went on to a great career in venture capital doing Bucco Capital. He says, Reddit is walking a tightrope now. Need to choke out third-party apps to serve ads on CoreApp. Have now pissed off all their free labor. Mods who are now revolting. Ben Thompson put a while. The adventure that is the end of free money continues. And that's really referencing zerp zero interest rate policy if reddit is a worth 10 billion dollars or 20 billion dollars at some point the free money uh invested into companies like reddit wordpress whoever they're going to need to basically demonstrate revenue and go public and it has to be consistent revenue and the zerp part of this where there's free money everywhere is truly over you see that with airbnb and uh uber most of all those businesses were in dogged competition with infinitely funded competitors that were taking all the margin out of these businesses same thing with doordash and luckily that zerp phenomenon is now over and we're actually getting the nature of these businesses.

15:14And the nature of Airbnb is it's printing money. The nature of Uber is it just tipped over into free cash flow and is going to, you know, start printing billions of year, billions a year in free cash flow. I believe that and I'm still holding a large percentage of my shares from the seed investment. Reddit is expecting a$15 billion valuation on their IPO. The last known revenue number was 400 million in 2021. But 2022 was a horrible year for advertising. I wouldn't be surprised if they didn't grow much. Maybe they had a flat year, 500 million, 600 million, but I don't think they're tripling revenue or doubling revenue.

15:47It might be like 30%. And that 15 billion number based on the 2021, 10 times 400 million is 4 billion, 20 times, 30 times, 40 times is 16 billion. Is it worth 40 times top line? Probably not, especially if it's growing less than 30%, 40 % year over year, and in which we don't have that number. So maybe it's going to be worth 20 times revenue, 15 times revenue, we're having a little bit of a tech rally, but I think they need something exciting and fun. I really hope they consider my proposal of sharing revenue with the mods, sharing revenue with the app developers. All right, let's get to this awesome fireside chat with my bestie Brad Gerstner from Altimeter.

16:29We talk about macro, macro, macro trends. And it's an awesome fireside chat that happened at our Angel Summit. The Angel Summit is 100 capital allocators, VCs, LPs, angel investors, fund-to-fund, sovereign wealth funds, endowments, et cetera, coming together for three days in Napa. We have it every June. The one that just passed was amazing. And hey, Steve, when you're out of your quiet period or whenever the time is right, please do come back on this week in startups. Okay, here's Brad. creating a job post and finding qualified candidates can be time consuming. We all know that it's insane, right?

17:06Like just the amount of time it takes to find somebody unless of course you use LinkedIn jobs, because LinkedIn is closing in on 1 billion users, as I predicted, well over 900 million members now. And think about how many insanely qualified people are out there right now looking for work. Just go post an open role right now on LinkedIn, and you're going to be 100 % certain that you have access to the most qualified candidates available in the world. And guess what? First one's on me, your boy, J. Kyle. That's right. Go to linkedin.com slash twist to post your first job for free. You got nothing to lose, everything to gain.

17:37And one of the things you're going to gain is that purple ring. You ever see the purple ring around people's profile? That means that you're hiring. And when you see that, everybody in your network is going to know you're hiring and you get some friends of friends. Those are always the best candidates anyway. One of your friends says, hey, I know a great salesperson. They were laid off or they were part of a riff, no fault of their own. and maybe you land that person who is a game changer, a bar raiser for your startup. That's exactly what I did for launch for inside. And I found so many amazing people on LinkedIn jobs.

18:05It's a faster way to find better candidates. All right. I'm doing some programming right now in your brain. I say LinkedIn, you say better candidates, faster on LinkedIn jobs, better candidates, faster. LinkedIn jobs will help you find qualified candidates that you want to talk to faster. Post your job for free. LinkedIn.com slash twist as LinkedIn.com slash twist to post your first job for free. Terms and conditions apply. Next up is Brad Gerstner from Altimeter Capital. Brad, you were in the room for Mars presentation. I'm curious when you hear her framework for picking hits at the early stage, juxtapose that with where you spend a lot of your time, public markets, and frameworks for making decisions about picking future hits there, and working with those founders and supporting those founders in the context of you made a big bet on nvidia recently before the big run-up that seems like a pretty good example snowflake seems like a pretty good example from your portfolio from the private side and then of course maybe supporting founders sometimes with tough love in the example of facebook so a lot of places to go but let's start with just what you thought of her framework just just that just that okay but it's That'll be the only question for the next 30 minutes.

19:22I'm giving you a good roadmap. Well, first, it's great to be here. And wow, I think, you know, Mar's presentation, you know, I'm sitting over there taking pictures. I was live blogging, Mar, your presentation to the besties, right? And she had that slide and it was Mike Moritz and Bill Gurley and there was J.Kell. And of course, they love that. They're having a field day with that. Okay. And Gurley's like He's f***ed Because he didn't put his hand On his chin If you notice Moritz and Gurley Both had their hand on their chin Rodan style And you were like You know So it's like Not gonna happen But I'm gonna try I've been leaning into You know The Steve Jobs Five fingers Pose Okay Yeah That's a really super important one To master I have to workshop it a bit more But yes But that was a That was a great presentation Listen, I totally agree with her.

20:18It comes down to picking. And picking is picking whether you're in the public markets or you're investing in Snowflake when it was pre-revenue. And one of the things she talked about, you know, Clive talked about is that luck befalls the prepared mind. And what links those three people together, what links the besties together is you have people who spend 20 hours a day thinking and preparing the mind and debating and messaging one another with analysis, with rebuttal. sometimes quite sporty and we're deeply passionate about how technology is moving humanity forward and unless you like authentically feel that unless you get up every day studying that trying to learn with a curious and a fresh mind I think then it's very difficult to compete because the byproduct of doing that is that occasionally you have an observation about the world that is orthogonal to the observation that other people have.

21:29And yes, there are patterns that get developed along the way. But, you know, everybody, you know, when I went to Harvard Business School, they taught about the efficient market hypothesis, right? That everything is known or quickly will be known, and so things are priced efficiently. NVIDIA was priced at$125 a share in January of this year. of this year, the consensus sales forecast was that data centers would be down 6%. This is all the world's best sell-side analysts. Goldman Sachs, Morgan Stanley, etc. thought that data center growth in the year of AI would be negative for NVIDIA. Instead, it's up 80%.

22:11That's how wrong they can be. And so, I think people take comfort in crowds. They build models that all look the same with linear deceleration. And they don't want to be too far out of the crowd because it's an uncomfortable place to be. There's career risks there, etc. But when I have entrepreneur after entrepreneur walking into my office saying, the single greatest bottleneck that we have in the world of AI today is our access to H100s. You can't get an H100 for three years. We'll pay any amount of money for it. Right? And you start studying these patterns. It was not hard for us to get our head around that.

22:53And by the way, Gavin Baker is going to be talking later today. He's forgotten more about silicon and about chips than I'll ever know. but sometimes that's a burden not an advantage and I think one of the advantages for us is I try to take a very fresh look at these super cycles just listen to what I'm being told look at it relative to what the consensus thinking is and you know snowflake when it was pre-revenue the consensus thinking was that cloud was too costly was not as performant it was less secure that was 2013 that was the state of the world right but if you went and you talked to every entrepreneur did they like having to set up a data center?

23:34Do they like having to rack servers? And you looked at the trends that were happening, it was pretty clear that those lines were going to cross. And if they did cross, the biggest winners in this thing called cloud were going to be databases that were re-architected cloud native. And so we found the founding team out of Oracle, who had been working on this for two and a half years with some great early investors that were in it, and we took a chance. I think another incredible example is when we watched revenue and the headwinds that the advertising market was facing, Google, Facebook, Snap, and we were looking at how fat these companies had become and just how much money they were spending.

24:18In the Dow market, we started having this conversation at poker and just in group chat about, well, if the earnings are going to go down and they're going to get compressed, Well, if you stop spending money and you cut costs, well, then the earnings can go up. And there was this incredible resistance that nobody would ever do that. It was just nobody had the sheer will of force to say, you know what? Maybe we don't need as many people. Maybe we don't need as many departments. Maybe we don't need to give the free lunch or whatever it is. And you and I were talking about Facebook. And I was like, God, it just seems I heard your whole sort of rationale of how they could turn things around by just changing maybe how they thought about spending.

25:01And that's Sunday night. We were having the conversation. I saw you say, look, they're cutting 10 ,000 people tomorrow. And I said, whoa, if Zuckerberg doesn't like to lose, he's only won his whole life. Well, it. Brad thinks that he can do this. I'll just buy some shares. That was at$91 a share or something. And that one turned out to be except exceptionally correct. Again, a non-consensus this thought. Silicon Valley could do more with less. When we just lived in a culture of just keep spending, it all works out in the end. So maybe you could talk about that call that you made, which is a really great call, obviously.

25:34It's up, I think, two or three X since then. But more important than that call, the sort of operating philosophy and how that's impacted these companies. And maybe we'll use that as a way to segue way into some slides after I answer it briefly. Listen, we've been talking about this for a year, right? Over poker, on the all-in pod, you know, etc. And we actually had a rant about it on the all-in pod the week before I wrote the letter, I think, or maybe two weeks before I wrote the letter. And the world had concluded, you know, that Facebook was dead. That Mark panicked. he threw a Hail Mary, renamed the company Metaverse, this thing that nobody really understood what it was, but it was a bet bigger than the Apollo project.

26:20And things must really be bad. Okay. And then the very next quarter they missed, they were bad. And then it got bad again because we started as 22 and we started heading into like, you know, this recession. And so that was when, you know, I had been an owner of Facebook since 2012, right? So getting back to this contrarian thing, right? My first, I was not in the private market. You know, I had passed on the pre-IPO rounds in Facebook. Why? Because it was trading at$40 or$50 billion and I thought it was ahead of itself. And we were making this transition to the iPhone and I wasn't sure how that was going to play out.

27:02They were building their app in HTML5. There was a lot of questions about that. And if you remember, it was on the cover of Barron's Magazine, the big proverbial red arrow broke the IPO price, went to$17 a share, and it said, Facebook's over. This is about the transition to the iPhone. And as I was looking at the iPhone and looking what was going on in China, infinite scroll seemed to me to be way better experienced than being tethered to the desk and looking at Facebook. So it didn't jive with me, Clive Davis style. I was like, I actually think mobile is better. But they just kind of screwed up.

27:43They didn't build a native app. So they built a native app. They started sandboxing it and experimenting with marketers. And I happened to be out in Phoenix at Google's Zeitgeist conference where they have all the major CMOs in the world and we were on a hike. And so I just started asking these CMOs, is anybody here playing with Facebook in the mobile sandbox? And they're all like, oh yeah, it's the day literally that it's bottoming at like 17 bucks a share. And I was like, how is it working? They're like, incredible. It's working great. And I was like, oh, this is easy. Go buy some Facebook, right?

28:19And it wasn't like this was inside information. Anybody could have done the research, but it was way easier to jump on the Barron's bandwagon and say it's all over for Facebook rather than do first principle research, you know, and study it and ask the questions. Right. And so we became such a key point there though, like actually doing first principle thinking and doing a bit of like on the ground research. If you're in the audience and you see Janice Joplin and you see the audience's reaction, you know everything you need to know. If you talk to marketers and you talk to customers, you know everything you need to know.

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