E55: Keith Rabois, Logan Bartlett, Kevin Ryan, and Zach Weinberg Dissect the Current Funding Climate

24:57But for true passenger-led stuff, I think this is just a giant Google subsidy, and we should love it while it lasts. I mean, it's great to ride in it, but business model will sell. And that number has to be about$30 an hour. I mean, it's not far off that for the driver. I will say I did a podcast with Dara from Uber a couple weeks ago, and we spent a little while talking about it. At some point, we're going to need to come up with what our tolerance is for deaths from autonomous vehicles. And we have a pretty high tolerance as a society. I think it's like 50 ,000 people in the US a year die from car accidents.

25:33And they're mostly healthy people that otherwise don't have comorbidities or whatever it is. But we're going to need to come up with like, are we comfortable with AV killing 5 ,000 people a year? I mean, that seems pretty reasonable if we take it from 50 down to five. I think that's amazing. But you can only – I mean, when this happens, when one person dies in Arizona, everyone freaks out, right, which is a daily occurrence in every other state in the countries. Yeah. You know, it'll be a three-year-old child and everything will shut down for five years. Yeah. Yep. It's like the best metaphor I've heard for this is like a little quip about if electricity were invented today, it would never be allowed.

26:07Yeah. Well, and it's – I remember going back. There's a book. Oh, gosh. I can't think of it. I'll link it in the show notes. but it basically goes through all the different technological trends. And like when the railroad was being built out, people died all the time. It's just like people, the steam engines would explode and they would kill people. And like that, we just don't have a tolerance for doing those big risky things. And maybe we value life far better. And so maybe it's a good thing, but I don't know. I mean, we need some trade-off to get these things done. Going back to the AI company.

26:38I think, Logan, you're referring to me as the part-time investor because I do mostly work in biotech. But, you know, a little side gig of pretending to be a tech investor. The thing that I think I've been surprised by or at least like uncomfortable with on the AI valuations in particular is just you have so much of the revenue growth when you dig under the hood that looks like people piloting with very unclear margin profile on that revenue. and this like general fear, at least I think, of just pricing coming down as competitors enter the market because the underlying foundational models are going to be somewhat commoditized.

27:18We can define what commoditized means. I just, I wonder how people are paying 50, 100 X top line for these businesses and not really paying attention to like the quality of the revenue, if that makes sense. Now, I don't have time to like dig into these things anymore, unfortunately, but that's been my like, I don't know if I should be paying 300 pre for this company that started nine months ago, because the revenue quality is somewhat unclear. The slope of the line is the thing that I think people are theoretically investing behind. If you look at, we ran some of this data, but it's like 29 times is what a Series B or C non-AI company is going for these days.

28:00And this is high profile. And then it's like 88 times trailing recurring revenue for AI businesses. By the way, you know, Google is trading at 18 times earnings. What are earnings? I'm sorry. Is that? I don't know. It's when you spend a dollar and sometimes you get more than a dollar back. Yeah. It's crazy how that happens. Yeah. That's wild. Yeah. I mean, some of this is circular using even recurring revenue as the guiding metric, but the growth rates are significantly higher. Now, what does that mean from a quality of revenue standpoint. And the people definitely have some speculative AI budgets that are being thrown around on this.

28:37And so who knows how durable this recurring revenue is, quote unquote. But these companies are growing a lot faster when they hit a seam in the market. I know Kevin and Keith, I mean, you guys just did a Series A together in this sort of broader world, right? And I think some of the adoption curve that you're seeing with that, it's unlike more traditional software companies. Well, what I'll say as a global point first is anytime you have a hype cycle or a wave, the first thing that people forget about is quality revenue. This happened collectively, let's say 2018 to 21, like a massive just ignorance of quality revenue.

29:14So think about AI as a species of that. I think the quality of revenue and Kevin, you know, our investment together is quite strong. So very happy. We can't talk about it because the whole day the company's announced the funding yet, but fundamentally that was, it looks, you not like a pilot. It looked like there was very serious customers with real use cases. Yeah. We're seeing cases where in an industry, in white-collar workers, this is literally one-tenth the cost. That is a game changer. Now, to Logan's point, is it possible there'll be other competitors that can do the same thing and it gets commoditized?

29:52Always possible. On the other hand, you need to manipulate data. When you have complex data behind you that's not in ChatGPT and using the proprietary databases in a company that combine with that, I think that's the thesis that we'll see, but can be interesting and can be a true, true game changer. The most interesting thing I think is the shift of actually from service, what otherwise would have been headcount or service revenue now, because we've always sort of had the thesis that, oh, software makes people more productive. But when you're talking about a Kanban board or whatever, how much can you actually demonstrate how much more productive it makes you in doing task management or something?

30:32But now you're actually changing it towards some means of production, some outcome in some ways. And so we're seeing companies start. I know Sierra, the business that Brett Taylor founded, they're actually pricing in an outcome-based way, I think, on the percentage of resolutions that they actually do for customer support ticketing. I think Zendesk now is talking about doing the same thing. And so this outcome-based pricing, clearly seeing a lot of seat-based reduction and price pressure there. And so that'll be an interesting thread to see what people are actually able to realize. So are you shorting Salesforce now?

31:07I don't do shorts or longs in the public market, but I do think there's gonna be a real compression of seat-based pricing. Everyone in my portfolio that prices that way are thinking about how they can capture value in a different means. One thing I am concerned in this industry is that the sales forces of the world have real footprints and are very difficult to dislodge. So will people have add-on products? Maybe. But am I going to retrain 2 ,000 people in the company to move on to your product that has AI? I think Salesforce will get there first, copy everything they see. This is not like the Time Warner that couldn't make the move to the internet and never really got it, never really believed in it, and which I bet more on some of the large tech companies, not all of them, that they will adapt and keep their fun.

31:58Yeah, I agree. Those with existing massive distribution are going to be major beneficiaries of this because the technical part of it, you can theoretically commoditize or buy. I worry not that people, if I'm Salesforce, not that people will swap me for some like AI CRM. Like that's obviously not going to happen at any scale, but just the seat volume comes down. Yeah, you'll go from a thousand seats to 200 or whatever it is. Hey, we'll continue our interview in a moment after a word from our sponsors. I'm curious for you guys that have lived through the internet cycle and saw that firsthand. Like are there, what parallels do you draw?

32:33What parallels are people over extrapolating for this and what's going on now versus what happened then? It reminds me when electricity was introduced and I was younger. Alexander Bell, what was he actually like, Kevin? You can read a great book by Graham Moore that talks about Tesla versus Anderson and the adventure. But actually, are there things that you look at and say these are similar, both in a good way or a bad way? I wouldn't be surprised if we follow the same hype cycle of everything's incredible and worth$10 billion. And then three years later, I was running DoubleClick at the time.

33:18We had 37 competitors, brutal pricing, incredibly shitty business. And then they all got weeded out and you're left with the four big players or three big players who then had amazing distribution, better cost structures. And it was a huge industry. And those companies today, although they're part of the companies, are probably worth$50 or$100 billion. So it did work out, but it's rough getting there. Keith, I remember even when there was a big pullback in 22, when the market really crashed, you were very loud and definitive that the benefits will accrue to the leader in a meaningful way. And so I assume that we might be on the path the early days of that, but ultimately, there'll be retrenchment and the accumulating advantages will go to the leaders.

34:10Well, it's classic, like, is it sustaining technology or disruptive technology? And I think that paradigm is really helpful, certainly as an early stage founder or as an investor. Maybe explain that point for people, what the distinction is. Any time there's new technology, it can either help incumbents or it can be inconsistent with their business model or customer base. If it's inconsistent with their customer base, and you can read like Clayton Christensen's work on this on innovators disruption, actually. If it's inconsistent, it serves like low end customers, it serves unprofitable customers.

34:44They're the last people to want to adopt it because they have to basically blend their pricing, blend the user experience, and it ruins their current business model, which is probably trading at a trillion dollars these days. So that's a great place to invest. It's a great place to found a company. But if you invent technology that's going to help Google make more money or help Apple succeed or help Meta succeed, that is not a great place to invest or start a company. Now, on the application layer, it's a little bit more interesting here. Are there applications with workflow? So let's play the Salesforce thing out a bit.

35:16Could I envision, I agree that nobody really wants to retrain their entire workforce. Sales teams are going to barf and be like, hey, here's a whole new workflow for you. However, could you find sales teams that are ineffective or companies that don't have sales teams and teach them to be as successful as effective sales organizations with a different product. If you can do that, now you've got something that's very disruptive to Salesforce and is a problem, but that's challenging in its own right. But that's the formulation on like sort of the lens I'm using as an investor or if I was counseling an entrepreneur.

35:47I wonder too, if you see just on the Salesforce example, you have a company that's got X dollars and bookings they need to go and get. They need 20 salespeople to do it. Now maybe they need 10 salespeople to do it because their workflows are AI enabled. And Salesforce will come out with its own products to make people more efficient, but it has to cannibalize their seats. And that's going to be a weird, a lot of infighting, a lot of people's compensation tied to those numbers, a lot of salespeople's bonuses tied to those numbers. It's a big, tough, like human shift inside of a company of that size.

36:21And that's not going to be pretty. Zach, what are you seeing on the AI in biotech side? Hype, like way more hype than is reality. And I think for, and I don't want to be one of these people that's like, you know, it's not going to work. It is going to work. Obviously the world doesn't work that way. But I think like one fundamental difference between atoms and bits, if you will, is just the training data. and the volume of training data that we have for like pure digital applications, automated coding, automated email writing, whatever, like any of the use cases where it's like true native digital.

37:00I mean, the training data is like the history of written word of all time and every video ever created. You know what I mean? It's just like an insane scale. And in biotech land where you're dealing with atoms, I mean, you're like one one millionth I don't actually know the exact number, but the training data you have to train your models is extremely limited outside of a very few specific use cases, which already DeepMind is going after. And so we've done an analysis I want to share live here of where do we think AI plays? And I always think, not to go too deep in biotech, but drug discovery is like a 19-step process.

37:40It's almost like a manufacturing process. And there are a few pieces of that process that I think AI will play. but is it going to like de novo design? No, no, no. It's a tool in the toolbox. It will help theoretically improve success rates and maybe drive down costs. But I think the whole like the AI designs the drug is fake. I don't believe it. And it's not just the corpus of data that there is to train on, right? It's also like those, the coding and the email, they're deterministic in nature. So you can validate the feedback loops in a very short manner. Yeah, in biotech, you have to make it.

38:18Yeah, yeah. It's like, the feedback loops are long. It's not a yes or no. I mean, at the end of the day, right, AI, whether it's the new language models or the ML-driven stuff we had before, it's just making a prediction with varying levels of confidence. Now, obviously, the predictions are getting incrementally better, but you have to validate that prediction and feed it back in. And that's really helpful when the prediction is like, which emoji do I want to type to my friends? But, you know, when it's like, hey, you should make this new molecule or this new ligand or whatever, you have to physically go and manufacture it and then you got to test it.

38:50And so that loop is slow and expensive. And so, yeah, I, you know, it's a cool story. I'm glad people are interested in it from, you know, people spend time in biotech at this point, but not a panacea in any way. And there will be exceptions, right? There will be one or two companies that just kind of get lucky and crack it. But yeah, we focus a lot more on like, is the fundamental biology thesis right? Is this drug capable of being made? Do we understand the value creation path? And like if AI can help in pieces of those, that's great. But not a rip and replace kind of model. I'm curious, like the people, I mean, it sounds like we all probably fall on the optimistic but skeptical lens.

39:34I don't know exactly how to phrase that. But there's some people that are just going so hard and indexing so many of these AI businesses. And I'm curious, you guys, I sort of take a cynical perspective on that, that it's being used to justify larger fees and AUM. And you can do it by, oh, well, if you get in the Facebook or the eBay or the PayPal or the Amazon or Yahoo, it all makes up for everything else. But I'm curious how much your guys' perspective, do you sort of take the cynical side of this is just to justify large deployments of dollars? And that was the same thing with blockchain. And now, you know, there's also one.

40:10And I'll let the actual VCs comment, but like in tech. But there's a little bit of plausible deniability when everybody's doing it. Right. Because you can be like, well, we were all doing it. And so, you know, it doesn't affect your next fund. So you're not really out on a limb. And in a way, it's almost like an expression of what maybe LPs want. I like starting a new fund and just being like, this is our AI fund. Because then it's not going to get the Roman numeral of all the other funds you did. You're like, oh, we screwed that up. That was just our clean tech fund or whatever. Yeah, no. Well, I think that specifically would be a terrible idea.

40:44So you get massive adverse selection in AI. Secondarily, I think that would be really bad advice to take away if anybody's like, one of these aspiring fund managers. Don't do that. I think the AI is real. We invest in AI probably more frequently than any other fund on the planet. That said, we also invested in OpenAI when it was raising its first round of financing. And that success and insight will allow us to continue to do this. We think we have an unfair advantage in investing AI. So I'd say 40 % of our investments maybe are AI-based. I would not have actually been able to invest in the company that I'm working with jointly with Kevin had I not had an AI team behind me because I know enough to be dangerous.

41:27I don't know enough about AI to pull the trigger, but they do. And so I could bet the technology, the differentiation, some of the points Kevin made about data advantages, mixing with proprietary data, et cetera, with people who've seen the entire world and the entire planet of AI over the last decade play out. And so I can lead into what I do well, which is founder assessment, market opportunity, et cetera. So there are real opportunities and we're going to continue to double down, but we have this one slide we love from our LP presentation, which is KV investments in a sector overall against general VC investments in a sector or overall.

42:04We want them completely inversely correlated and they have been for basically over a decade. That's for any industry, like you pick a specific industry? Overall, I'll give you the simple one. The simple one is, for example, during 21-ish to let's say 23 when people were leaning back, KV was leaning in to more investments per year. Yeah, and I think it's a bet on the sector. So I think what Keith is doing and what Sequoia is doing, Sequoia is deploying a lot of capital. I think 60, 70 % of their investments are in AI. Assuming that we're all right in the thesis that AI will be important, they will be in many of the most important companies.

42:42If you just invested in the 20 hottest internet companies in 98, hey, if you waited, you killed it because you had to only make one bet, which was that the internet was going to work. Yeah. Yep, that's right. I mean, that can work. It's kind of worked for A16Z and crypto, right? They invested in every possible crypto company. And there are a few really important crypto companies. And so I'm sure the funds returns are awesome. Secondarily, I saw a metaphor from another VCF benchmark that maybe AI is more like the invention of the transistor than like the internet. I think there's some merit to that.

43:16I wasn't old enough to be around in the invention of the transistor, so I'm actually going to go pull some books and read more about it. But that struck me as more likely correct than the mobile metaphor at a minimum. What was the insight there? What's the distinction you're drawing? Well, the world changed. Once there was a transistor, everything we took for granted about what was possible literally changed. Yes, it took decades to play out and change everything, but it may be something like that. there's a kernel and that it literally over time transforms everything and that there's new forces of gravity that are the forces of gravity that we've taken for granted just don't exist whether they're human human scaling costs all those things so i really want to study that you know maybe last minute he probably remembers that that time a friend of mine is a i wouldn't say skeptic of just like the inherent value but more of like the returned profile of investing in ai I think the distinction he made, which I really liked, is, you know, is this a massive capital expenditure line item for you or not?

44:16Because if you're in that like CapEx flow, right, you've got to deploy these like insane clusters and spend billions of dollars. The hurdle for you to return cash is insane. Like the amount of money that you are going to burn to get to that point in time looks more like, you know, you're like the railroad company or the airline back in the day rather than the software layer. And like as tech, you know, we're so, I mean, most of modern venture is software layer, right? Like, and so you don't have that like same underlying capital structure. The open AIs, although catching it early always works, but those that have like a few billion in CapEx, I don't know.

44:56I don't know if you're getting that back over time. I don't love being in that layer of the stack, at least as an investor. I think it'd be great for humanity, but I'm not sure the dollars will be there. Yeah, I agree. Kevin, the next one, I will turn it over to you. Unrealized capital gains. I know this is one of your - Are we having a stupid ideas segment? Is that what's happening now? Kevin actually had something he wanted to share, I think, on this topic. Yeah. Kevin's very in favor of the policy. Oh, God. So I am in complete agreement that it's a stupid policy idea. I think what people are missing so far is that it's not at all going to happen.

45:39And so I'm pretty involved on Democratic Party side, and I don't speak for them at all. But I have a strong forecast, which is that you just won't see this mentioned again. And the proof of that is that the economic policy came out two days ago and did not mention it. So my guess, if I were part of the campaign, is I'd be saying, look, it's not a good idea. We don't want to announce that we've flip-flopped. So we're just going to pretend it never occurred, not mention it. And that's my guess as to what will happen. But I am in agreement, probably with everyone here, that it's just a non-starter idea.

46:12It's realistic. How did it get – the bigger question, Kevin, I agree with you, it's not going to happen. But the bigger question is, doesn't anybody have an antenna that either at the candidate level or the staff level didn't know that this is one of the stupidest ideas proposed in 100 years? I don't think it was part of their official proposals. They stripped it out from the speech, but it was in the briefing materials officially. Yeah. So, yeah, I mean, I do find that perplexing and a terrible idea. Because it sounds – I don't understand. It sounds good to stupid people. Yeah. I mean, I think that's just like as simple as that.

46:47Like it sounds good to people who believe that like economics is a fixed pie. And if you think if everything in your brain is like fixed pie mentality, then like, yeah, of course you want better redistribution because you kind of think like there's five dollars for everybody and I got to go get a bigger chunk of it. Same thing we could talk about on immigration, right? Like if you assume fixed pie number of jobs and your brain changes and how you think about immigration, but that is not how economics works at all. It's not a fixed pie. Yeah. And look, I do think we have a taxation problem in the United States, which is that the wealthy don't pay enough tax and aren't taxed in the right way.

47:23So you can never persuade me that private equity investors should pay 15%, but that lawyers should pay 50 % if they're in a state. So you will not persuade me that basis, like my mother died, had 2 million in stock gains in her name. The next day it goes to my father. If he sells them, they pay zero tax. Yeah, there's stupid policies there too. I totally agree. Although if you look at the actual net revenue to the US government we're talking about and fixing those things, it's like Medicare's bill by lunch. It's just so tiny. It matters negatively. And we spend so much brain power talking about these things that have no impact.

48:04So we need to have just a - Yeah, some incentives that can really matter. So I didn't realize this until last year, I was in Sweden speaking, and my host was a VC, and he said, you should move to Sweden. I was like, this is kind of cool. I like it, but why? And he said, well, we have zero capital gains tax. And I had this misimpression that Sweden was one of these socialist countries that sits around the Nordics and all this stuff. And he's like, nope, we have very high income tax, but we have zero capital gains. and then the light bulb lit off. That's actually a pretty smart policy because you want people taking risks, driving economic gains.

48:35And Sweden has actually a disproportionate share of successful entrepreneurs in Europe. So you can connect the dots and do things that are very different and have outcomes that might be better. I think I'm going to quote a fake statistic I read on the internet, but let's see here. I'm pretty sure Sweden has a larger percentage of per capita billionaires than the United States. It does. That's actually true. So it's like, you know, comes down to - It has a great barriers program. It's got great EDM music. Everything you need except the weather half the year. Yeah, everyone's like, okay, not Sweden.

49:06Let's point to Norway. And you mean the giant oil field in Norway? By the way, my favorite part of Norway, first of all, there's fewer people than in Brooklyn at this point in terms of the whole country, is they basically take the oil money that they get from drilling out of the ground and invest it in U.S. tech companies. It's just like the most capitalist thing in the world. And then people point to the safety net. It's like, where do you think the money comes from? It's a trillion dollar. They tried this policy. Norway actually tried taxing unrealized gains. They actually wound up with negative revenue because obviously the people who have gains.

49:42They moved. 80 of the 400 people that were above the threshold moved out of Norway. Yeah. U.S. has less of that problem because if you keep a U.S. passport, you pay U.S. taxes. That's why we never have flight of people. but still we want to have a tax policy that keeps taxes as low as possible but allows us to collect enough money that we don't have an enormous step the thing we've lost we lost as a country is this idea that growth growth cures everything all of society's problems are better when you're growing faster and we've gotten back to this like how do we distribute the money and what we forget is like the size of the pie is actually what matt you know 60 of a small number is a lot smaller than 60 of a very very big number and so like can we just focus on the really big number here and all of these things are just like this forest from the tree problems like you gotta remember like the u.s government does not have money we don't like people think about like oh the u.s government has money no they don't have money they have tax receipts they borrow money but like they have part of our money and you know if they had if there was more going around the federal government would have more and everything and we just get lost in the like it's unfair it's like oh guys like this is not the problem.

50:53The problem is how do you make it bigger? So we all win and just getting, that's politics, it sucks. Worth pointing out that in the 90s when the economy was growing faster and booming, booming, booming, our taxes were significantly higher than they are today. So there's no correlation we're seeing between marginal tax rates lower in the US and economic growth going up. You can't put that chart together. Can you put the chart on capital gains? So it's combined the two. So I don't think so. I don't think that we saw when we've had tax decreases that tax revenues have gone up because they're so significant, the tax decreases.

51:35It would require 20 % growth to make up that difference. I would study though just on the capital gains, marginal rates and growth and see how much correlation or lack thereof there is. I mean, if you look back - I'm just looking at it now because I Googled it or I should have perplexed it or whatever. You know, the cap gains tax rate for individuals and corporations has reasonably hovered somewhere between like 20 and 30 percent for a very, very long time. So you actually haven't seen like drastic changes in it. So I don't think you'd see anything. But that's the reality, right? Like, you know, you want cap gains taxes that are higher just disincentivize slightly risk taking.

52:16And the risk taking is ultimately what grows. I mean, yeah, but I just don't believe that in that range that people make a decision to start a company or not start a company. I think they do on QSBS, which is effectively a tax cut on capital gains. QSBS was probably a pretty successful policy. I don't know if it's ever rigorously been studied. The macro argument is, okay, maybe people don't make different decisions, but now you have more dollars available to take risk because fewer dollars are going to the US government. And then now you've got the US government doing your capital allocation and not private industry and market-led stuff.

52:55Now, that's a little trickle-down economic-y for people, and so they don't love it. It doesn't sound great. But I am curious. We're sort of taking this as a well-understood thing because this impacts our life when we think about realized versus unrealized and cap gains and all that. I don't know if someone wants to give the quick primer of why this is such a bad idea and the problems associated with it. Kevin, it sounds like you're close to some policy side of things. Sure. The reason you don't want to tax unrealized gains is that you can have an entrepreneur that on paper has a$100 million gain, absolutely no way of selling it, and now has to pay$20 million in taxes.

53:39And so it was just a non-starter. I use this example. Even this policy was, wasn't it, I mean, there was some arbitrary distinction about liquid versus non-liquid and how it was going to get litigated was going to be a pain in the ass. But it was, this seemed to me mostly centered around public executives or founders and then maybe hedge fund folks. It's like, okay, so now all we're doing is incentivizing like illiquid investing because that's where you don't have to pay it. So you know what's going to like boom, the real estate market. You want housing prices to go up even more? Like, fuck yeah, I'm going to park my money in real estate.

54:09It's never liquid. You know, so like the whole - It's just, it just doesn't pass a fairness test. And I hate the fact that we have tax policies that aimed at certain industries, which is really a reflection of good lobbyists who get that stuff done. I mean, you know, there are incentives to sugar and to oil and all kinds of things, and they never leave the tax code. Everyone should have the same tax policy. It needs to be based on when I get cash, I owe some of that to the government. It's not any more complicated than that. I use this example. I was with the US Senator yesterday. I said, why don't you introduce something that says that unrealized gains on everyone's house gets taxed?

54:50Everyone would be like, no, we can't do that. My grandmother bought a house for$300 ,000. It's worth 3 million today, is she going to owe a million in cash? No, that makes no sense. That wouldn't go... So we are the same thing. It actually makes more sense on the housing side because it's less volatile. Like if you think about our company, it's like I'll take, you know, a company I founded has traded everywhere from sub a billion dollars to over$14 billion just in the last three years. We have very volatile assets, you know, certainly in tech. WeWork, We were you taxing WeWork. Yeah. And they're not screwing you up, by the way.

55:27When you pay the taxes one time, they're not coming back and saying, oh, well, you overpaid that last time. So we're going to give you a little bit of a break this time. I think the other thing we don't talk about because nobody wants to address it is like there's really only two things that drive the U.S. federal deficit at this point. It's just Medicare and Social Security and like the military a little bit. But it's kind of nice to have that military around. And so I wouldn't wouldn't chop. It's And both of those are in deep, deep trouble for both structurally because they're, you know, Medicare is designed literally as a pyramid scheme by definition.

56:02And when the bottom of that pyramid is shrinking because we don't have as many kids, like there's no tax policy that's going to fix that at some point. And, you know, Social Security is similar, although not as bad in terms of dollars in versus dollars out. Medicare is way worse. So, like, it's just a pie. I feel like I'm the pie guy here, but, like, that's the only thing that matters. I think all these other things are just tweaks on a – they're not going to help. Yeah. Okay. Here's why I don't agree. One, social security is completely solvable. And you forget the conversations of 20 years ago when everyone said it was going to go bankrupt.

56:33Why did it not go bankrupt? Because we raised the retirement age by two years. Yeah. I agree with you. By the way, you can solve social security by adjusting the benefits. Definitely. Yeah. Politically hard. But I told you, that is a solvable problem. Yes. Medicare. Absolutely. So the second thing, though, is how do we compare to other countries? the bottom line is we collect much less in tax revenue. It's not that we spend more. We're not spending more than those European countries. Spain, I mean, Sweden spends more. They just also collect more. And so we need to collect, as a percentage of GNP, what we did 20 years ago, and we'd be in a better position.

57:10Someone needs to solve the budget deficit problem. So either you're going to cut all of Medicare, which is never going to happen for a variety of reasons, or you need to increase tax revenues. You don't have another solution. And increasing growth by 1 % a year does not get you there. It compounds though. It does, yeah. If you did it for five years, it definitely would. Do the math. We are so far off, so far off, it won't get you there. We just need to collect 2%, 3 % more tax. You have to make an assumption about the interest rate. That's the problem. You have to grow without raising interest rates because obviously you're sacrificing the debt.

57:43The challenge is to have a policy that allows you to accelerate growth without inflation increasing, which can be done. and they're expressing ways to do it, but most people don't understand like in the beginning of that conversation. I mean, like - And I'm still shocked. So go ahead, you guys. No, like they're not incongruous statements, right? Like the idea of like, we want to grow as fast as humanly possible and properly tax at the same time and just make sure that you don't, like one doesn't affect the other. Now, hard to do in practice, but you know, the growth, like that compounding growth, that 1 % additional over 20 years is huge.

58:19It's the difference. that's probably like Medicare solvency on its own right there. I'm still shocked actually that the markets are not concerned about our budget deficit because at some point, it's just math. It is a problem. Well, because my unsophisticated take here is we don't have to pay the piper for a while. Social Security will hit its weird little deadline coming up and maybe we'll raise retirement age maybe we'll cut the benefits but like it does have that natural reset in it so that'll they'll solve it like one day before it goes bankrupt right that's how we that's how we do things there uh because politically difficult to solve and so the donut hole in medicare if you will or the budget gap there we got we got some time like it's coming and so you're just going to see like an increasing percentage of u.s tax receipts going to interest payments and so okay okay, what's going to happen?

59:17The government will like kind of inflate it away a little bit, right? Like we're just going to see probably like persistent, they're going to keep spending, keep borrowing. So you see like inflation, like tick, tick, tick, you know? And so maybe our natural inflation rate won't be 2 % anymore. It'll be three, three and a half, something like that. And actually, what do you want to own in a like slightly higher inflation, low rate environment? Equities. I actually think you see the stock market, like the valuations go up, not down. and the people who actually get screwed by this entire thing are people who have no savings, right?

59:48It harms, you know, for me, I got a shit ton of money sitting in the stock market. It's kind of good for me for this kind of stuff, right? But for somebody who has no savings and can't invest, it's just your entire dollars that you can spend as your income, like, well, now prices are up and it's bad for the bottom. Inflation is better for real estate than it is for the stock market because inflation goes up, interest rates go up. I just kind of think it's like risk assets go up. and so because you got to you know you're you're chasing returns if you will and there's more dollars flowing out there so you know i think you don't want to own cash anymore and like treasuries aren't going to pay you in that environment so you know what do you go and do you buy equities and stuff like that but crypto uh what you don't do is increase incomes for the bottom 30 and that's who gets fucked it's just it's the poorest people get fucked by inflation the most i spend i spend a fair amount of time in France.

1:00:40My wife is French. And in the most recent election, the left is pushing to lower the retirement age from 64 down to 62 or 60. And you're just like, have you not read a single book on economics? It's staggering. It's remarkable. Having said that, France's budget deficit is not bigger than ours, despite all they do. So we used to be much, much better. And now we're - Well, give it time because it's barely growing. And so it will compound and when that boomer generation retires at the french prime age of 61 or whatever the number is that they're going to settle on like you want to talk about pension obligations and health care obligations you're going to see rationing in europe they're already doing it in the health care world right like we have many many drugs available in the united states that the europeans simply do not pay for because it's too expensive and their their pie is small and shrinking-ish, depending on which way.

1:01:35Yeah, although life expectancy is the measure of your healthcare system, and we have the worst. Not really. Because I've seen that stat all the time. It's the worst stat because the United States is a big fucking country, right? We have like 300 million plus people, and we're not all created equal. You can walk around New York and walk around Mississippi. You see very different setups there. if you take out early deaths in that life expectancy one i did a lot of people do this analysis we did three really fucking stupid things here right we drive really big cars and we crash them all the time we have an opioid epidemic so people die of drug overdoses and we shoot each other and if you remove that stuff out from life expectancy the united states is up in the top and actually if you just subselect for like cities mostly depending on the cities we're really far at the top.

1:02:26Like the Northeast life expectancy is massively bigger than anywhere else in the world, maybe save Japan. And so like, it is true, but there's a lot of weirdness in that data because we're amalgamating a bunch of stuff that should not be, you got to look at it like by segment almost. So I, the fourth element you should have added is obesity. I was going to say obesity is a big one. Yeah. For now. Yeah. Pharma is about to solve that one, you know? Yeah, that would be, that would be helpful. Yeah. All right. Next one. If we're talking about unrealized capital gains and the popularity of that, another very popular thing in Silicon Valley is Lena Khan and a lot of the things going on with antitrust and acquisitions.

1:03:07And so we saw another one this week. Covariant was acquihired. There's been a lot of... There's been a slate of these like AI tech licensing deals turned, we'll hire your founders. And then the companies seem to get put on ice a little bit, but then sometimes the investors are made whole, sometimes they're not. And it's an interesting, I think we've had four examples, I might be wrong. There's Microsoft Inflection, Amazon, Adept and Covariant, and then Google Character AI. And it's, I mean, this is nice ingenuity to get around some of the antitrust scrutiny, but it feels like not a sustainable way of operating from a free market standpoint.

1:03:48I'm curious people's perspectives on these acquisitions specifically, as well as the host of other antitrust things that Lena Kahn and the FTC are kind of looking into. Do you consider it? Because I don't think about this stuff day to day. Do you consider it when you're investing these days of like, ooh, the M &A opportunity is kind of unlikely? At the end of the day, we're underwriting all our stuff to public companies for the most part. And so, but 99 % of all companies end up being acquired in the fullness of time, even if they go public, then they get acquired. And certainly this AI stuff, and when you get to a certain big enough threshold, you're limited in the people that could buy you at all.

1:04:32And so it's just taking longer and longer to get out of these positions, even if you built a really good company that can actually go public. So I would say, no, we haven't thought it through in a way of, no, we're not going to make that investment because at the end of the day, we want them to be public businesses anyway. But it's going to flow through to the LP returns and therefore the sector. And therefore, maybe we will have to take it into consideration. So a couple of thoughts on this. One, when those that are investing so early probably don't consider it because the truth is seven years from now, who knows what the landscape looks like.

1:05:07I do have, I can think of one example in my portfolio of a company that is seven, eight years in and now does not have very many buyers because the potential buyers like Amazon are not going to buy anything and know that they cannot buy anything because of the chill on antitrust. And I've been in conversations where a company has said, we just don't think we're going to put an offer in because we don't think it'll clear. And it might, it might not, but they don't want to spend$5 million and find out it doesn't. So there's no question there's a chill. Having said that, we need to step back from our interest because in our interest, we want more acquisitions and it's super helpful for our sector.

1:05:45The US economy, if you compare it to the Europeans, we have much more concentration. And so there are many, many sectors in telecom and banking, all kinds of things where we are so much more concentrated, so much more has been rolled up that it is not very competitive. If I walk into a department store, P &G and a couple of companies, you don't realize that you see a thousand brands, but they control everything and it's hard to break in. And so profit margins here are higher. The consumer gets screwed. It's harder to break in. And look, it is important. So for example, would you start a company to compete with Google Maps?

1:06:19No, because you'll never get revenue because they give it away for free. If I gave away bicycles for free and just subsidize it, you wouldn't - Yeah, but it's a little counter to the argument of consumer harm, right? Because now I get Google Maps for free. That's pretty fucking awesome. I use Google Maps all day. It's amazing. I use Apple Maps, so it's better. But there's the profit margins. They've looked at this. You can research this. Profit margins are higher and many of our industries have more concentration and less competition. And so it wasn't that case 30 years ago. So I do think there is a problem to solve, but it would have a chill on our industry.

1:06:59And I can cite examples where I was surprised that things were blocked. And so it's a judgment call on the exact case. Do you think, Kevin, therefore, we need a new definition around like antitrust? I mean, consumer harm was the definition for one of the considerations for a long time. And now as we're more and more digital, in nature. And it seems that we're able to get a lot of very good things and the consumer is no longer harmed. It's actually advantageous. Maybe the suppliers harm the business or the mom and pop or the DoorDash delivery person or whatever it is. There's something we could come up with, but the consumer certainly isn't in a lot of these cases.

1:07:40Yeah, we have to take a long-term perspective. I guess the question we're going after is, Amazon managed to buy any company that was competing with it for a while. Now, it has such a dominant share. Even that's false. Shopify has dominated Amazon retail over the last decade. Shopify is what powers every DTC brand created in the last decade, despite being right down the middle of the bullseye of what Amazon is supposed to do. Amazon has zero monopoly power. It's crazy. Shopify is kicking their ass in every possible way except AWS. So in retail, which is what people think of, what consumers think of, what regulators think of, Amazon has lost it.

1:08:17And it's not because they couldn't buy Shopify. It's because they were too stupid and too culturally attuned to their own self sort of success that they completely missed that Shopify is better. So if someone can beat Shopify directly head on, OpenAI is beating Google, as we all talked about. Google needs to fire their CEO. head on in the future of technology, a small startup of a bunch of 13 kind of weird people through together is absolutely dominating Google right now. There's no antitrust problem in tech. I agree with you in other industries. I think it's perverse that the concentration is not in tech.

1:08:50It's actually everywhere else, but she's so focused on tech because it's politically popular. Yep. No, no, I mostly agree with that. What changes in tech is that there are tech movements that incumbents don't handle. Whereas in toothpaste and, I don't know, cable TV, there aren't, or there are other examples where there aren't, and then you get real concentration. I think the challenge I would push on is just the uncertainty. Like, if you're going to file an antitrust suit and come after these M &A deals, like, can we just tighten the timeline? You know, like, it's got to be done immediately. You got to get a decision.

1:09:28Because at least then, you know, if I were a buyer, if I knew six months in, I'm going to have an answer, I might take that risk. Now, I know I'm asking for something that's never going to happen, but just the fact that this thing can get dragged out for two, three years is going to prevent people from doing it. Even if they, even by the way, if they win, even if you win eventually, just that fear of like, oh, is it worth it? I got to have this giant breakup fee. Am I going to ruin the culture of this company while it's kind of like in weird, you know, purgatory state? That's the thing she's hurting right now.

1:09:55And I'm not the fear of the potential rather than the actual suits she's filed? What has she actually done besides create fear practically? Well, and actually in that example, it ends up far worse for the acquirer. I was joking with one of my portfolio companies that if they acquired one of their smaller competitors and then said like, oh, this is so great, we're going to have a monopoly here. And it ended up getting broken up because of this text comment that got discovered, put out in Discovery or whatever, it would be such a bleed out for the other business, right? That they were going to be integrated and we do all this planning and merge the two together.

1:10:37And then they would have to unwind and go back to business as usual, whereas the acquirer is in a much better position for it. So I agree. I don't know what the harm that we're ultimately solving for in these cases. And to Keith's point, what is great about technology and is good for all of us is that probably the four of us just, I don't know, four years ago, if I had said, will Google ever have a threat? I would have said, look, I don't, I just don't see it. I just, no, no, it just won't happen. And boom, there's a, I use perplexity. It just works better. And that came out of nowhere. It's so cool.

1:11:13It really actually is like the single best tool I've used in a very long time. It's funny how you talk to people behind the scenes and you're like, what's the best example of AI? It's always perplexity. I just think consistently it's that tool. It's shocking to me. Unbelievable. Well, and I think what's most impressive about perplexity is that they're doing it. I remember when they came in as an investment, I was like, wait, so they're going to out open AI and Google. They're going to out do what they do on top of what their services they offer to them. That just, it sort of blew my mind. How will they do that?

1:11:45How is that even possible? It's actually similar to Snowflake. I remember when Snowflake came in and pitched. I was like, hang on. So this is built on top of Amazon, but they're going to out Amazon, Amazon on top of Amazon. It doesn't make it a good business necessarily, but as a user, it's pretty awesome. I mean, Snowflake, obviously, yes, but I'm just saying more on the perplexity side. I don't know. Have you used it? The thing is incredible. Oh, I use it all the time. I think it's amazing. Yeah. I think it's incredible. And it's one of these things, clearly, we did not lean in on the investment.

1:12:16And I'm not sure in the fullness of time what type of business perplexity is going to be. But I'll tell you, my mental framework was very wrong because I thought that there was a 10 % chance or a 5 % chance they would be able to do damage to Google. And now I think there's like a 50%, 60 % chance. And that pie is just so big. That's what venture investments are, right? It's just some probabilistic distribution of some large outcome. And so my framework was just wrong on this one. And so I still TBD on what the business will ever look like. The service is certainly fantastic, but that's an amazing venture bet for all the people that did it.

1:12:50I give them a ton of credit in seeing around the corner there. Cool. Well, I think the last one I had, I don't know if people want to do this. Do people want to do Telegram? You have been Telegramming me up until this date, so I guess we use it. Are people users of Telegram? It sounds like... Not super actively. I use it. Okay. So for people that don't know, in August 2024, Pavel, the CEO of Telegram, was arrested in France. The charges against him that the French government indicted him with were, they stem from allegations that Telegram was used to facilitate illegal activities, such as child exploitation and drug trafficking.

1:13:30In addition to these accusations, Pavel faces charges related to cryptography laws accusing him of offering encrypted communication services without proper registration with French authorities. Actually, yesterday, he finally spoke on it. And I think he said, we've made mistakes. He acknowledged that they made some mistakes in the very fast growth that Telegram has gone under over the course of the last couple of years. But he still criticized the arrest as misguided, suggesting that the French authorities had much better avenues of communication to him on Telegram. And so there's been this big on Twitter, this very big vocal sentiment of like now we told you this was coming and people want to suppress free speech.

1:14:18And they're sort of coming for our coming for us in this way. And Europe's doing this. And I feel like maybe this is a far more nuanced issue than at least people are in the mainstream sort of talking about. I'm not sure if anyone has any specific thoughts on this, but the problems seem a lot more nuanced to this specific situation than general applicable. Well, both can be true, right? You can have a European suppression of speech and you have political candidates in this country that are, at least in some quotes, in some videos, arguing for more censorship of speech. But that doesn't mean that a specific illustration that there weren't real substantive problems.

1:14:56So both can be true at the same time. I think a lot of what we just don't know, right? We haven't seen like what is it that the French government is concerned about? Were they actively flagging issues and Telegrams ignoring it? You know, what was the actual access Telegram had to the underlying content? Like how encrypted is this real? There's a lot of nuance we don't know. My understanding is it's not encrypted beyond their secret chats. It's not end-to-end encrypted, which is like, therefore, they had access to a lot of stuff going on. And I imagine there's a lot of CSAM and a lot of drug activities that are going on that they actually have access to.

1:15:34And so in that way, I don't have all the details on it, but I think there's credibility in at least some of the potential issues that could be here, I think. I think it's a technological limitation that they probably should have solved if they wanted to operate in this sort of laissez-faire, hands-off manner. Well, three separate points. One is it is ironic that I think Signal and WhatsApp are encrypted end-to-end and Telegram is not. But yet a lot of people have the perception that Telegram is the safest thing out there. um so that the second thing is you know and i have no idea but many suspicious indications that the russian government has access to everything on telegram and so is it really secure and by the way if you haven't read the book dark wire which was a book about how the u.s government actually launched a secure phone aimed at drug dealers and so 10 000 drug dealers started using the FBI's phone.

1:16:37It's by Joseph Cox. It's a pretty good book. It's so unbelievable. So they sat there and had access to 10 ,000 drug dealers and all kinds of other people who wanted a seriously encrypted phone. And they looked at every single message. And so the question is, do the Russians have access to Telegram? And if I were a betting man, the fact that they were upset with him, and then at some point, flipped over and the Russian government said, no, no, we're fine with Telegram. It's no problem whatsoever. So either they got religion on free speech or they have access. Yeah, because otherwise he would have fallen out of a window somewhere between then and now.

1:17:15Absolutely. There was a Wired article that we can link in the show notes. I think it was entitled, The Kremlin Has Entered Your Chat. That sort of talks about the nefarious stuff that's potentially going on with Telegram and the Russian government. I mean, I don't use TikTok because I don't want videos of me using it to be given to the Chinese government. Not that we don't all trust the Chinese government, but still, just as a matter of safety, I don't use it. Do you guys use TikTok? No, hell no. I would get thrown out of the house. Yeah, I was going to say, Jacob will not be. Keith shares a home with a life partner who is very anti-TikTok.

1:17:56I have to admit I do use it. And I sort of assume that there's enough out there on me. And I'm sure I'm being subtly manipulated at this point, one way or the other. But yeah, I... Not surprisingly, at Burning Man, did not use TikTok. Yeah, I can imagine. It is. Or any other time in my life. What do you think actually, I mean, this is sort of a political football topic, but what do you think actually happens to Telegram? Keith, I assume Jacob's been sort of close to some of these things. What do you think ultimately happens? I don't actually know. I don't know if he's been tracking it or not. We certainly haven't discussed it.

1:18:38But maybe because French laws are different. Like drug trafficking stuff, if you don't have active knowledge, you may not have to do much. I don't know the French law. I don't know the layers of that. So it's going to be tricky, but I haven't studied it carefully enough. I don't even know. He may have. Yeah. What about on TikTok? TikTok's gone. I mean, notwithstanding Trump's hedge, he doesn't have discretionary authority under the legislation that was passed. The president cannot overturn that legislation. And there's not willpower in the Congress to sort of amend the statute. So he has a statutory obligation.

1:19:13What I think ultimately happens is they come up with some gimmick transaction. that looks like it's a divestiture. And at the margin, you can argue it either way. It may be a more friendly administration approves that. It may be a less friendly one doesn't. But it'll feel like a divestiture even if it's not clean. When is the actual deadline? It's right after the inaugural. It's like January 21st. It's like within a week or day of the inaugural. It was done intentionally so that Trump can claim credit that he banned TikTok eventually. it'll be i mean i saw kotu he's doing really well on tiktok there he has like 10 million followers i i saw uh philippe lafant from kotu there's been some rumors that they're going to sell their position and he recently stepped off the board there and so it the business implications i mean there's a lot of funds uh that some of us compete with that are very have very large positions tied up in ByteDance.

1:20:08And so it'll be interesting to see how that unwinds. There's a lot of LPs that have very material stakes in that business right now. I mean, I would worry if I had cash in any Chinese company, TikTok, ByteDance, whatever, or anything else, just like, am I going to be able to get this money back? Well, the regulatory scrutiny on tech investing in Chinese companies or money from China investing in tech companies here is just going to increase. And that's independent of who wins the election yeah and just capital controls in china and you know weird issues there are better places to put your money it's kind of the way i would think about it like why would you take that risk and if you have existing exposure i would definitely be trying to get out of it but it's gonna be tough and i assume you guys are all long on on donald trump social media djt gonna make a lot of money there djt act active long position been been adding to it as it's been dropping.

1:21:04Yeah, it's getting cheaper. You're in luck. It's been getting cheaper by the day for you. I know you're joking, but in a funny way, I lump it all in the crypto land too, which is like, there's actually a lot of people in this world with a lot of money and one thing people like to do is gamble. We've been gambling for thousands of years. The Romans would gamble on people killing each other. It's just so ingrained in our DNA in some weird way. And so like, if you just view this stuff as like one giant unregulated or semi-regulated casino. Now, some people call that gambling VC. Well, there's a great book on how you distinguish between luck and skill.

1:21:49And so, fortunately, adventure, I think you could distinguish, but in many other places, speculation is pretty critical. I actually think crypto has been, the core use case of crypto has been speculation. and whether it's Bitcoin directly or NFTs indirectly. And so speculation, people speculate on football games, they speculate on the stock market, individual equities that led to, you know, some of the individual stock trading stuff and the Reddit phenom. Speculation is very natural. So it wouldn't shock me if people are speculating on, you know, Trump's social network too. What book, Keith, were you referencing?

1:22:22Michael Mousbaum's, I forget the title, but it's how to distinguish between skill and luck in sports, business, and something else. Okay. I'll look it up. Bill Gurley tweeted it out about 5-10 years ago with a strong endorsement. And it is actually really good. I'll give you a way to take the key takeaway though, is you want to tell the difference. Can you lose on purpose? So if you can lose on purpose, it's skill. If you can't lose on purpose, then it's mostly luck. So in venture, you could definitely lose on purpose. I have a lot of competitors who do it. Yeah, some people try their best to do that.

1:23:02Yeah, it's called SoftBank.

1:23:06And on that, I think we'll wrap. Thank you guys for doing this. This was fun. Here, we'll see, I guess, people back. Hopefully, people enjoyed it. And we'll see people back here maybe a month or so if we can get this on the calendar. Sounds great. Thanks, Logan. Thanks, Logan.

1:23:51Thank you.