It's been a terrible few months for growth stocks. Small, unprofitable tech companies have crashed. SPACs have gotten crushed. Recent IPOs got crushed. And even the FANGs are way off their old highs. Of course, we don't have very much visibility into what's happening in private markets, so we only have anecdotes and inferences. But what's the big story? And is this the start of a big change? On this episode, we speak to Howard Lindzon, a GP at Social Leverage and the co-founder of Stocktwits, to get a sense of what's really going on. Howard launched a SPAC last year, does public market stock investing, as well as private VC investing, so he really knows the whole space very well. He discusses multiple reasons why tech turned rapidly, and why it might be awhile before it all bounces back. Transcripts have been lightly edited for clarity.
Joe Weisenthal:
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway:
And I'm Tracy Alloway.
Joe:
So Tracy there's obviously a lot going on these days in the world of macro and markets. But one thing that we've seen distinctly, particularly since middle of November, is tech stocks have just been getting absolutely hammered.
Tracy:
Yeah. So I was actually away last week, I guess we should say we're recording this on February 7th and apparently I missed a massive selloff in tech and then a little bit of a rebound. Is that what happened?
Joe:
Yeah, I think that's fair to say. I think it was last Monday, I'm sort of losing track of the days. We've had some really brutal sessions and we had weakness in, I think it was like two Mondays ago or something like that, tech stocks just got killed. Anyway, but we've had some brutal sessions, everything that's sort of like growthy, people like betting on the future big time got hammered. Also had some specific names like Netflix really got wrecked after earnings, Facebook, and a lot of trouble like, and a striking fact that I saw from Bank of America is that in January, so-called value stocks had their best outperformance relative to growth since 2001. So we're talking a two-decade historical reversal here.
Tracy:
Yeah. So the thing I find weird about all of this is this is kind of what everyone predicted would happen. Right? For many, many years, everyone complained about valuation of tech stocks and once interest rates start going up, you know, the air is gonna get kicked out of their tires. And that seems to be exactly what's been happening. But part of me also thinks the explanation can't be that simple.
Joe:
Well, the other thing is like, okay, you can predict it, but it does you no good. You can say like, oh look at all these overvalued tech stocks and look at the multiples, etc. But meanwhile, you're stuck in value for three years and all your clients have deserted you. And then finally, January 2022 comes across, but what good did that do you? And I don't think anyone has some great way of like timing these things. So what good did these predictions?
Tracy:
Absolutely right.
Joe:
So anyway, I'm very interested in what exactly happened, whether this is the end of a sort of era -- for years, anything cloud, anything software as a service, anything growth just absolutely crushed it. So I'm curious whether this is the end of that for the time being or whether it was a blip and what is happening on the private side, because we know that, you know, it's like, would you pay as much for a late stage round or even an early stage round if the IPO window is much worse? And we know that recent IPOs got killed, we got a lot of SPACs that in 2021 got killed. And so also what does it mean for private markets in growth and VC, etc., when we see such ructions in the public market.
Tracy:
Yeah. It might be a situation where, you know, an illiquid asset, like a private share turns out being like a better bet in this environment just because it's harder to get it out of, whereas you can press a button and sell down, you know, Google or Facebook/Meta or whatever, but it's harder to get out of a private company. So yeah. I'm curious to see what's going on with valuations there.
Joe:
I love that and it's totally true. There's the idea of the illiquidity premium because you can't, the psychological impulse to sell doesn’t exist. Anyway, I'm very excited about our guest. He is an active investor in public markets, in private markets. He's an entrepreneur. We've had him on before and he knows everything that's going on in this world. He has all the conversations with all the movers and shakers and can tell us what's up. We are going to be speaking with Howard Lindzon, who is the general partner at Social Leverage, the founder of StockTwits, a crossover investor of public and private markets. He always has a finger on the pulse. Howard, thank you for coming back on Odd Lots.
Howard Lindzon:
Hey kids, how are you?
Joe:
We're doing great. So what happened? Let's start like what happened over the last month? What happened in January in your view?
Howard:
What happened in January is obviously prices went down, but what Tracy was saying was – other than 2008 – this is the most predicted pullback in history, right? I mean, if we really look, it's easy in hindsight and I play an incredible corp-dev person on Twitter, 24/7/365, I do that free corporate dev work for every tech company. I think there's a couple private market let's call 'em big bang. And the first one was obviously the WeWork SoftBank big bang and, you know, it's kind of like the Enron bang, when WeWork and SoftBank, when that imploded, right? I think a lot of us, including myself, if I were gonna make one prediction, it would've been okay. Yeah, that that's the end. You know, people will take stock. You know, it's kind of like a warning of like a warning. Like our Enron. You know what I mean?
It was like, no one was really watching. It was a great idea and they still f*cked it up. What went on? We know SoftBank's been sloppy in the past. And so if you had asked me, if you had told me, there'd be 20 SoftBanks as a result of SoftBank, WeWork, that just wouldn't have been on my bingo card. And so you’ve got from Andreesen to Tiger to Coatue to D1, everybody now is in a race to index the private markets, not at the seed level, but you know, if you could take 2 and 20 and hoard all the money at the late stage market, I mean, that's a pretty good market to corral versus Vanguard charging a quarter basis point, right? So, you know, the macro environment of money printing, the tech mantra of look, if you're not in tech, you're stupid, combined with then Covid which just pushed forward this everything's digital.
Like, oh my God, you know, you're in an accident, you touch yourself, I've been in bike accidents. You touch yourself, you go I can't believe I live. And I think that's the way we were in May and June and July of 2020, everybody called their companies. You know, I was calling all our companies and we were like going remote and people were laying off 20%, 30% of their staff no matter what, because you were allowed to, and things started going upward to the right. If you were a digital first business from healthcare to finance, obviously with the Robinhoods and crypto. And so everybody just as we do, started projecting things in this new ramp, you know, here we are, November of last year, rates start creeping up and valuations are now are coming down. The difference this time is the supply.
And I've been writing about the supply for the last year. You guys covered it with SPACs, you know, and we covered it with IPOs and direct listings. You have all this supply coming at a time, where are you gonna dump it? And we've seen what's happened in the public markets with anything new, there's just no bid. And so if you’re a public company that is not indexed in February of 2022, there's no bid. There's too much supply coming at a time when all the crossover funds went left into private markets. The public markets, if you're not indexed, just there's no natural buyers it seems right now, especially in the rising interest rate environment. So you kind of had a perfect storm. You can't look at one thing. You have this perfect storm that led to the last four months.
Tracy:
We hear that term – ‘perfect storm’ -- quite a lot on the show, I feel like recently. But if I could ask a really basic question because I think it's one of those things we all assume, but we don't necessarily think that much about the mechanics of it, but can you walk us through why exactly are rising interest rates bad for tech stocks and, you know, particularly tech stocks at very, very high valuations?
Howard:
You could probably blame it on Excel. I mean, if everybody was using the pencil still, it would take a few months for people to update their spreadsheets. You know, there's no textbooks for crypto, there's a textbook for stocks. And in the stocks textbook world, you plug in a high interest, right. And you pull back cash flows and they're lower. And that's basically it. I mean, we could argue about everything else, but there's a textbook. Joe, does that make sense to you and Tracy? Like, I don't know another reason.
Joe:
Tracy, what's your answer?
Tracy:
I mean, I guess like, yeah. Cash flows, opportunity cost maybe.
Howard:
Yeah. I just think we have a system of analysts, obviously spreadsheets, it's easy to update spreadsheets, send 'em around people look at the numbers and go slap a, you know, a discount on it and then look at the sector and go, you know, we're taking this from 60 time sales to 30 times sales. Just one person tips, the room slowly tips. I mean, that’s the way markets work. I mean, this is a complete valuation adjustment. And I just don't see the software stocks not growing. They're just... not much has changed other than just how people are feeling about the future and in the public markets, this happens really quick. I used to think it would happen much quicker in the private markets. The private markets are very crowded and I can sit on my hands as a seed investor.
Now we have a large seed fund and we've been doing this a long of time. But if I sit on my hands, the best companies are still gonna get funded. They'll get funded at higher valuations. And the returns won't be as good along the line for all the people writing those checks. But you know, that is what's created this private market that seems to be ignoring — for now — what's happening in the public markets. It used to be that Sequoia would write a letter, or somebody would write a letter saying after the stock market move, and say ‘winter,’ rest in peace private markets. Here we are in 2022 and no one's writing that letter, but the letter's being written by the public market.
Joe:
You know, I want to go back to how you characterized the Andreesen Horowitzes, the Coatues and the Softbanks and the Tiger Globals. I thought that was really fascinating. This characterization of essentially like, how can we become the index fund, so to speak, of private markets? And if you can capture that late stage market at enough breadth, you can more or less kind of have a public portfolio, but with much better fees ... talk a little bit more about that? Because I don't think I appreciated the degree to which that is what they've been aiming to accomplish, but that feels very interesting. Talk a little bit more about what you see as their real goal here?
Howard:
Well, I mean, these are opinions — strong opinions, loosely held. But you can see it happening, right? Like it goes back to WeWork, like the fact that they didn't die and the Tigers looked at themselves and like, those idiots can do this. We can do this and we can do it with better research. You know, SoftBank was made fun of at the time, you know, it was a mess and I wrote about it because everybody had SoftBank in their funds. We were in a company called Wag, the first dog walking app, which is now doing a SPAC. But we invest in the company at a $4 million valuation, which is what seed investors are supposed to do in like 2015. Right? It's a hard idea, the Uber of dog walking. You know, everything the way it works.
But that made sense. You take risk, you know, you've got Google Maps, you've got all the app developers. You can build a dog walking app, no problem. But then SoftBank comes in like a year later and goes, we'll give you $300 million at a whatever valuation. And if you don't take it, we'll give it to Rover down the street. And people already forget that. But that was going on. SoftBank was just trying to take the market. It was genius, evil and flawed. Right? Depends. If you’re Masa, it’s not flawed at all because you know the end game, but it's flawed for guys like us or people like us at the seed stage who now are locked into a cap table that's got a binary outcome. So if a young company takes $300 million very early on in their valuation, the seed investors’ only outcome, if they're not allowed to sell and we weren't at that price because that's what they do, they lock up the cap table — is IPO or zero.
And so for seed investors, I hated it. I wrote about it. I hated the whole idea that we were being held hostage. And I wrote stuff like there should be a Softbank clause in these seed deals that says, if SoftBank comes onto your cap table later, we get to sell, right? Like this stuff doesn't get talked about because the press doesn't wanna cover it. But those are the things we're blogging about and talking about it's like, what did they do to our cap table? Where we were going along nicely building a business, SoftBank comes in and slaps $300 million with like an ultimatum that if you don't take it, it goes to the competitor. And now I'm locked in to this company forever or ride it back down to zero.
And so it's very rare that a company like Wag can then go clean it up. Like they bought out SoftBank, they fired a bunch of management after they p*ssed through a lot of the money. So if you had told me that there'd be 20 of these now invading cap tables, this is what I warned about or other people I'm sure talked about quietly, but just weren't writing about it because you don't want to p*ss off the late stage investors. You don't want your entrepreneurs to hate you because you're telling the truth. But there was no real risk to SoftBank of doing this. So everybody’s copying the same playbook and what's the real risk to Tiger if they’re wrong on 10 of these that they put a hundred or $200 million into? There’s not really much risk. Here's why. If I'm tiger and a company goes sideways for a few years and then needs capital later, they're gonna rewrite the cap table.
So who loses? The early investors. So I think not enough seed investors have really thought through the mechanics of what could happen. Even if you take this late stage money from a Coatue, D1, SoftBank of what could happen in five years, even though your company's doing well, when they need more money. So that's why I've been sitting on my hands, just trying to figure out which founders really can appreciate that. And so there's gonna be a lot of great companies that take money from these index late stage VCs, they're good businesses. It’s a lot like 1999, but they're not good enough. And maybe the public market isn't ready for these not good enough businesses as we're seeing from Allbirds to Nerd Wallet. Are they really meant to be public so young? And so you have this perfect storm of a lot of supply, high valuations and the private markets are liquid, but only at certain levels.
Tracy:
Can you talk to us a little bit about how the dynamic that you just described actually impacts valuations of private companies? Because I imagine, I mean, you have the big players out there, like a Softbank, basically a big whale. They come in, make a big injection at a large valuation and that squeezes prices higher. And I guess they're able to book higher prices as well, but maybe just walk us through like the details of that process and what does it take to actually get a knock back on private valuations when you have these big players squeezing things higher?
Howard:
Yeah, I mean, it's the ultimate question that I have to think about. Because when we write a seed check, when I was a kid seed stage was one on three, you know, and Joe knows this because we were a seed investor in Alley Insider and Henry Blodget at the time got a good valuation, which was like a 6 million pre-money. At the time that was like double what was normal. But that was a great entrepreneur who was like, you know, the world was different. So the biggest thing I can think of, and this is just from my own eyes and ears, Tracy and Joe, it was in 2007, 8, 9, 10 running around the tech stars and Y Combinator. And there were a hundred seed funds, you knew the seed investor, right?
And there were a thousand companies let's say. Flash forward to 2022, there's a thousand seed funds out raising capital right now and a hundred thousand companies a year. So really, you know, the tech booms just, you know, the cloud and software, you know, nd the deflation and starting a company has created this market where you have, and then you have Covid, which distributes all the talent around the world in different, weird ways that we'll be feeling forever. And then you have Substack, everybody thinks they can be a venture capitalist, and then you have market and all these smart people that have been in the industry for so long working the system. And you have this incredible change in the market where these seed investors are the new startups, right?
And I can only tell you what we've done. I can't tell you factually what's going on. What we've done is said, you know, we were good seed ambassadors, and maybe we weren't so good. It was just there wasn't a lot of supply. The network though big, was contained. You read Fred Wilson's blog, or you read TechMeme and you read TechCrunch and you were in the know and everything was Silicon Valley or New York or Berlin and Beijing was still working back then. So you could structure your business in that way. Along comes Covid and all this money and Substack and Twitter and TikTok, and everybody wants to be a venture capitalist. You know, there's thousands of employees that have left Uber, Pinterest, Snap, Twitter, Postmates, you know, DoorDash that have experience. That have 5 million in the bank.
They don't want to go work for another startup because of Covid. They set up a Substack, they use their network, they go raise $3 to $4 million, they set up an Angel list, a syndicate, and they're in business as a fund manager. They've had no mentoring. They have had no idea what cap tables look like, or they know what cap tables look like from their very narrow experience of Uber or wherever they were at. And they think there's infinite growth. And they write checks that make no sense because, you know, seed investors are holding for 10 years. Robinhood did great and it was years to get public. And so when interest rates just tick up a little bit, in the old world, when there was only a hundred of us seed investors, we could call each other and go, not collude, but just say, these prices are silly.
And now who are you gonna call? Everybody's writing checks from every corner of the earth at every angle. Wether you've left Plaid or all these fintech companies, now Square and PayPal. There's just thousands of people that think they can write checks. And by the way, maybe they should. I'm just saying, so the end has not been written here. It's just, we have this new private market that's not digesting the public market information. There's a lot of young people in the private market that have never traded a stock. And so they don't even care what the multiples are in the public markets. They're not thinking about that because they've never had to connect the dots.
Joe:
I find this totally fascinating. There are already so many interesting dynamics that you've teased out for us. So obviously there was the incredible like supply boom on public markets last year, with all the IPOs and SPACs, including yours, which I want to get to and find out what's going on there. There's the dominance of the late stage funds that are essentially trying to create index funds more or less for private markets. And then as you've just described this explosion of people who are ready to write seed checks and you just see them on Twitter. I feel like everyone I follow in the last year and a half became an angel investor….
Howard:
I’m super disappointed that Odd Lots doesn't have a seed fund that I already would've written a check for. So shame on you.
Tracy:
One day.
Joe:
One day. There's so many different angles here that I wanna explore. But one thing I'm very curious about is when Covid hit in March 2020, and then very soon thereafter stocks started going up into the right. But people were talking about like these so-called “Covid winners.” Like these things, okay. The world is gonna change and there are some winners and like Zoom Video, for example, was a Covid winner. And its stock went to the moon and we were all gonna be working from home, all around the world people are gonna use Zoom. Except that Zoom Video is now, it's given up all of it, right? It's not just like giving up a bunch, it's given up all of it. And for whatever reason, despite all the work from home, etc. What happened to like the Covid winner thesis, because it turns out that in retrospect, a lot of these like so-called winners, the stocks actually are now acting like Covid never happened. And some of the big winners are actually like brick and mortar places that we were sort of like gave up for dead. What happened to that trade?
Howard:
Yeah. I call it the great round trip. I’ve been writing about this for a couple months where I’ve just been plotting slowly, all these companies are doing this crazy thing on a chart. You know, the analysts quickly were describing this as a new mobile, you know, digital revolution, everything was pulled forward. That was the famous term. Everything was pulled forward. And so from Shopify to PayPal, to Square to Robinhood, to all the clones, to DocuSign, to Zoom, to Peloton. And now we gotta go back and look at those humps or those accelerating up and the quick give backs, we've gone up and come right back down. And this is how markets work, but there are companies like Zoom. You and I, we're all the three of us are on a Zoom call right now. There are companies that have those margins whose business will not go away and the stock just got ahead of itself.
And there are those businesses like Peloton, who started to believe their own [bleep] or whatever we want to call it. And there were great founders and great teams that saw growth that was just like. There was just this growth that they had to deal with. And you also had this moment of growth, where companies that were built in the physical world had to go remote. And now that's becoming a pain because they piled on all this growth in all these new people by Zoom, but they weren't built for a remote world. They were built for this transition and now that growth may not be there. And what are all these people on these distributed Zoom chains supposed to be doing all day?
And that's the way the markets work. They overshoot to the upside and the downside. And I think from this great give back that I talk about, there will be some winners. Peloton. No, we'll not go back to one $160. Let's not kid ourselves, but could Zoom hit all time highs if they can solve dealing with Microsoft and Google? Yes. So you've gotta find the brands, the margins and the companies and the growth that will, you know, get back on some kind of semblance. And so there will be future winners here, and you're seeing traders lean against certain things because they're new at this or they're having fun and they think everything's going to zero and you see it with Snapchat where not every stock's the same and not every management's the same. And some companies will do fine going forward. So from this volatility comes great opportunity. All these charts that look the same — Square PayPal, DocuSign, Zoom, Robinhood — they all look the same, but they won't look the same going forward because everything's being lumped together. Because by the way, we're doing this at a time where analysts have been cut to bare bones too at the banks. So there's no uncovering these stuff. So that's another part of this perfect storm is Wall Street's thin. And they love having profits. And no one likes the research anyways, so no one's doing research.
Tracy:
So this was gonna be my next question, actually. So you mentioned the idea of a bunch of the tech stocks getting ahead of themselves in 2020 and all kind of moving together as one. But can you dig into that a little bit more? Why did that happen? Did people actually believe these valuations were justified? I've never heard anyone actually say that, but you know, and if they didn't, why was everyone comfortable with the run up last year and they're not comfortable this year? Was it purely getting on board with momentum?
Howard:
Yeah. I think when there's group think and everybody's, you know, watching the same thing or listening to the same people and watching the same stocks, definitely. It’s just herd mentality in a different way, digital herd mentality. And then you had, I don't wanna overthink it because you can just look at the charts in hindsight and go that's what happened. I know that's what happened and you've now gotta go back through the, the Squares and PayPals and Robinhoods in DocuSign and Zooms and all the round trippers from Covid and say, wait a minute, okay, now there's opportunity here. There's some of these that'll be around for 30 years with reasonable growth rates that are being thrown out. The people that do the work here will make some money. But it was kind of like everybody was given money at the same time with the same apps, with the same voice. And it worked. It was a lot of fun and you couldn't have predicted when it would end, but you know, in hindsight they all looked the same.
Joe:
So it's very much sounding like you're talking past tense, like something has changed. So I want to drill into that more and like what actually you're seeing in private markets because okay, we have the public market sell off that it implicitly is going to affect the late stage index funds. And SoftBank is publicly traded. We've seen what happened to their stock. And we know that, I think it was Tiger had a pretty awful last three months, of course, none of it surprising. And then you have all these employees and you mentioned like this new wave of angels or seed check writers who came out of the Shopifies and Squares etc. They've all seen a big wealth hit, especially if they're still employed or still own a lot of stock. So what are you seeing today at the early stage level and what is, or what isn't, filtering through from those public markets to like writing checks right now here in February, 2022?
Howard:
Well, I started seeing this in, I mean, I just look at our data. I can only tell you Social Leverage. So Gary, Tom, and I have been writing a check a month for 10 years, 12 years. And we'd always say, oh, we can't, you know, in the private markets, I can only tell you what we do. We would huddle. And we would talk to smart people. And we have smart LPs from Fred Wilson to Roger Ehrenberg. Like we have smart LPs that we can call on. And, you know, I always used to say, you can't at the seed stage level, if five great founders walk into your office or you get pitched in a row, you can't like time the market, you can't just say, well, we just wrote three checks. Can't write two more. That's not the way investing works.
If you're even on the trend space, this is why all stocks started looking the same. If you were a trend investor, you just got aboard and worried about it later and use your money management to get you out. In the private markets, you can't use money management. You're in for 10 years. So I think that's what we've lost. So we would always have every week and go, man, shouldn't we slow down. But after 10 years, it just always looked the same. We'd write 12 checks a year, they'd come in batches or, you know, equally distributed. And then by like mid-2020, when Covid hit, I was like, I'm not writing a check. Pencils down, Zoom on, pencils down. I don't even know what, how do you invest in the company without having met the founder?
But people started doing it. And as uncomfortable as I was, because I didn't write checks through the first year of Covid, the first six months, my partner Gary was very comfortable doing it. He was younger and more native to the web. And his network was such that he was seeing stuff in the price that he was comfortable with and companies that he was comfortable with. And he wrote a bunch of checks that turned out to be incredible. The early stages of Covid. Along came 2021 when everybody felt comfortable writing on Zoom and the prices were such that every time I got a call from a founder, I was just sitting out. You know, we went from like YC $10 million valuations to like non-YC $20 and $30 million valuations. And just saying no didn't mean a deal wouldn't get done. Deals were getting done.
So I look back at our numbers from 2021 and we wrote two checks. So there's a data point from 12 years of, it's not like I'm scared and it's not like I'm not looking as hard or my network isn't as big. It's just nothing was lining up for us. But that didn't mean deals weren't getting done. It was a record year in venture capital. So I don't think we know yet the long term repercussions. We're just starting to see it. If any Tiger check in fintech that was written last year is down 40%, 50%. They may not say that, but like look at Square. Look at PayPal. Look at Robinhood. Look at anything. So they're sitting on whatever vintage 2021 was this disaster right now, but it it's early. But I think the returns now going forward from all that, even if these companies recover, you have to make back a hundred percent of your money into these valuations.
And this is what I go to earlier. Maybe Tiger doesn't have to make it back because they can put in more money later and change the cap table. Whereas the seed investors can't. So I don't think we've seen the true problem in private markets and that will be LPs finally saying, man, you know what? I've gotten quarterely letters for four years and nothing's working. And so it could take a couple years for LPs to finally say, I'm stuck here and I haven't seen any markups or any returns of capital. So the lag could be huge at the seed stage. And you know, that's what I have to worry about with my partners. And I have to tell my LPs, this is why we're not writing checks. Just to writing checks just because you can is not the business. You write checks into great founders with great teams and good TAM just because TAM’s big is not good enough. And I think we're seeing a lot of investors invest on TAM.
Tracy:
So two things here, you sort of teased it just then, but like one, how do you think venture capital behavior could change in the future given this experience? And two, how patient are LPs, when it comes to sitting out of the market for, you know, a year or possibly a couple years, you know, Joe mentioned in the intro, this idea that, well, everyone knew that publicly-traded tech stocks were overvalued and they would probably get hit when interest rates started to rise. But on the other hand, you're sort of forced into them because if you didn't buy, then you missed out on years of performance. So is it a similar story for venture capital or are people more willing to kind of wait it out?
Howard:
Well, it's coyote and the roadrunner, right? The legs are spinning over the cliff. We don't know if the cliff, how far the cliff is, it took forever to get family offices and people comfortable. And then you have incredible angel list product, like I said, you have Twitter. And all these people networking and thinking their deals are the best, people are the best. So it took an incredible amount of time to onboard all these people. It will take much longer than people think for people to look at their statement and say, wait a minute, this is stupid. I could have just bought the QQQ or the SPY and had liquidity. I don't think what people are factored in, because they weren't public market investors until 2020, is how hard it is to get QQQ type returns that we've had the last 10 years.
Like the QQQs, you know, the triple QS have returned like 20 something percent a year for the last 10 years. I mean, what is wrong with that? Why are people like shunning that at a time when — I'm not saying they should rush into QQQ, but I've always said like, what's wrong with 20% a year, even with the volatility because you get to liquidity. Now people are like chasing 20% a year in the private markets where you're locked up for 10 years. I mean, that just makes no sense to me. And so I think it makes sense for Tiger, who is saying, listen, we can go to our pensions and offer them 18% or 23% a year. You know what I mean? To get late stage. And I get that pitch and that's the pitch. They're just going look at the QQQS. If we could have got you all these QQQS before they went public, all these companies before they went public by two, three years — and you know, you can sell 'em on the unsuspecting public and get liquidity in two years. So you're only gonna be locked up for two, three years instead of 10.
And everybody signed up for that and that'll take a while for it to filter back to because it's not, it's not like, okay, so I'm sitting on my hands cause I've done well enough and I've seen enough markets, but not enough. People are sitting on their hands and saying, guys, you've got to pay me for this 10 years that I'm your partner. I'm not just tweeting about you. I'm helping you hire. I'm helping you recruit. I'm taking huge risk. I'm not gonna invest in your seed stage company unless I have 10% or 15%, you know, in 2006 it was like 30% the VCs were taking. And now here we are in 2022 and seed deals are getting done for 4%, 5%. And that's just too far the other way. So the pendulum's got to swing back somewhere closer to, you know, seed investors getting 15 to 20% of the company and we're not close to that.
Joe:
You know, we've been talking you a lot about valuations and the behavior of markets and investors. We haven't talked much about fundamentals, but I am curious like, you know, all these cloud companies, how much has their growth essentially or in part been essentially their revenue is another startup’s cost. So it's like you have, there's tons of new companies flooding the market all the time, flush with cash from all these seed stage checks and all these companies they launch and then they like have to go out and buy their suite of cloud products to operate the business. I think it's sort of well known that like Y Combinator companies, for example, often other Y Combinator companies are their first set of customers. Are you concerned that a sort of slowdown in market, slowdown in financing, actually does translate into the real world? You know our TAM or our trajectory of revenue is not going to be what we thought it was in this environment of a cooler activity?
Howard:
You know, it's the question, right? You're trying to project if this is a 1999 moment.
Joe:
That's right. That's right.
Howard:
Yeah. And so we all should be thinking like that, but no, I mean, obviously it can have happen again. So I'm not saying, you know, take my advice. I'm just saying I'm super bullish on the cloud. Here's why, because you do have real effects from Covid. You do have distribution out of Silicon Valley and founders moving across the globe and they are not scared by failure. That failure mentality in Silicon Valley is something right. There is less shame in a startup that fails, as there should be like, we need progress. So I'm not buying the 1999 scenario. Even if rates doubled from here, I am buying valuation retracement, because there's more supply. You know, if you go from a hundred angel investors to a thousand angel investors that just put money out there, so you're gonna have startups, I think. You have to ask the question of what's it gonna take for bunch of Howard Lindzon’s and Social Leverages to sit on their hands.
I don't know that yet. Right? Right now I'd like prices to come down, but just because I would like want them to come down doesn't mean they will, you know. Which is why we're investing in other funds and Social Leverage, we launched an emerging manager fund in case we're wrong, right? Like in my religion we call it schmuck insurance and in schmuck insurance language, the hedge is to the upside, meaning I'm trying to hedge in case I'm wrong and too conservative. Right? Whereas in the old days, in a non-cloud world, in a land-based world, hedges made more sense because there wasn't infinite growth, right. To get your customers around the world, took a lot of phone calls, took a lot of travel, took a lot of setup, right? Just to set up an office. Today, you're up and running in 40 countries overnight. If there's demand, if the product market fits. So you have to factor that stuff in as well. So I don't think we're 1999. I think we're in a place where there's just a lot of good businesses. They're just priced wrong.
Tracy:
Beyond clouds. Where do you see opportunities at the moment?
Howard:
Well there's opportunities everywhere if stuff is priced, right? You have to get investors that say, okay, I can make money if you're not a unicorn. Meaning you know, in the old days, you know, we were investors in LifeLock, which sounds like a great company, but in the end it was bought for $2 billion, but it was still a home run for us, or Golf Now or Buddy Media or Alley Insider, which were sold for way less than a billion dollars, but would help people return their funds. You know? And now because of pricing, you need decacorns for some of these seed funds, mathematically. They're not doing the math, but I'm doing in the math because I've seen the math in my own portfolio for people to return their funds. So this is still, like I said, gonna come down to LPs opening their statement and saying, wow, I could’ve just bought the QQQ or the SPY. Just like investment advisors get fired now weekly because there's so many RIAs and there's so many people that can offer indexing and asset allocation that people are moving their accounts all the time. And you can't just move your account if you're in a seed fund, you're stuck with the person. And so that's gonna create a lot of bad will and a lot of tension, that no one's really talking about.
Joe:
Howard. Last time we had you on, I think it was like last summer, summer 2021 or maybe spring, and you were doing a SPAC and we've seen every SPAC, most of them anyway, get obliterated in the sell off. What's happening with yours? Give us an update.
Howard:
I don't think I can tell you. I mean, I'm really glad, we have a great team and we sat on our hands. We were just like, Hey, you know, as I talked about it on your show at the time it was...
Joe:
So did you ever buy a company?
Howard:
We had done a few offers. We've learned the road and I'm very excited about our team and what we're doing. We have not won a deal in the past. We still have a year to go and we feel really good about where the markets are because everybody, like I said is excited to just sell SPACs just because the previous batch have been a disaster. So the short sellers are in control. There's no bids, just like I said, if you're not index and you have a bad reputation and people, you know, the mob has now turned against SPACs, you have a sellers’ market. So I think, just like with our seed funds of Social Leverage, we just sat on our hands last year. And we're very excited that the power is shifted, right? If you're a company that's growing that needs to be public to tell your story and to raise capital in a different way. Now the market switches. So those $3 billion valuations become $1 billion, because you know, as much as we make fun of SPACs, now the SPACs, you know, the good SPACs have some power. So I just think you're gonna see some interest. That is what I would say. And not everybody should have a SPAC, just like not everybody should have a seed fund, just like not everybody should have a venture capital fund.
Tracy:
I mean, it does feel like much in the same way that very high tech valuations have come down as everyone predicted, it does seem like a lot of the criticism about SPACs over the past year or two seems to have been born out — at least looking at, you know, the share price. What do you say to critics of SPACs or people who say that, well, the past year kind of proves that these things are opportunistic market vehicles that are taking advantage of investors?
Howard:
Well, taking advantage of investors is a bit of a comedy, you know, and I'll say this cuz I'm on every side of the table here. I'm watching sports this weekend and we can't trade crypto in New York. Nobody can get a crypto license in New York, but like DraftKings is on all day talking about 30-to-one YOLOs to your college kids. So we can't protect everybody. People at some point have to be adult in this country. And we can't just fire everybody and shame everybody and stop allowing people to invest in, in some cases unfortunately blow the family nest egg. So I'm very pro-SPAC. It's a feature, not a bug. It has become a bug because guess what? Covid, people were bored. Banks needed to make their numbers. It's a thousand reasons. It's not just Chamath’s fault or this person's fault.
There's bad behavior on every different level from investors to syndicates, to bankers, to promoters. And the market just got too much supply, but SPACs will be around for a hundred years, but we're definitely in a world where crypto now exists and the new promoter sits in a Discord room and a person with a great financial network can monetize their network without doing a SPAC, right? It just comes down to the economics and good deals will get done with great teams of great companies. And these are the times they get done. When no one wants to do a deal — like good luck trying to get a pipe done today, but that's when you're supposed to do deals because now prices come down to a point where both sides of the table will sit down and go guys, if we wanna get this deal done and we want it to trade above 10, why are we having this discussion? Unless we are all aligned to do that. So I think that needed to happen. And there's always gonna be a certain percentage of SPACs, a low percentage, that work because not every company can be a winner.
Joe:
I mean, you said you bid for some deals, you didn't win them. You're probably happy, huh? The winners cursed, I'm guessing...
Howard:
You have your price. The bid goes in and you're like so far away. You're like, I don't even know why we’re doing this. And so you sit on your hands and you risk losing, but people don't understand the risk care. Like we risk losing our $8 to $10 million that we put up as a syndicate. Some people rush because they so wanna save their $8 million or turn their $8 million into $50 and to do any deal. Those are the incentives, but there is risk and hundreds of millions of dollars could be lost if deals aren't done. And what investors should do is talk to management, look through the S1s. I mean, how hard is this? You know, what's so funny is everybody's complaining, but there's never been an easier time to do due diligence. So at the same time, as everybody's up in arms and wants someone to pay the price for all their mistakes, let's be honest, like Tracy, you and I can get on the phone or on Twitter, on Zoom and really narrow in on some things and then go do our due diligence and get better due diligence than Goldman Sachs. So there's no reason why someone has to buy it. No one told you to buy a SPAC. And if that person told you to buy a SPAC, I mean, be careful of that person.
Joe:
You were a pre-IPO investor in Robinhood and have talked about it a long time. Another IPO that's done terribly. It's also been, you know, part of the zeitgeist over the last two years in terms of retail investors. And so many retail investors have now actually seen a bear market in a way that many for a while, they hadn't or seen a lot of money. What is the future in your view? a) just real quickly, do you still own Robinhood since we've been talking about it, but more importantly, what is gonna become of this movement, or this meme or this thing of like the retail mania? Like where do you see it going now after the pain of the last year basically?
Howard:
I mean, how much time do you have, do you have two, three hours?
Joe:
You know, you could take a few minutes, like what's gonna happen or do you own Robinhood still?
Howard:
Yeah, of course. So, you know, let me do full disclosure. We’re seed investors huge, huge, this is everything that we wanted to see happen in ‘08. You know, the goal was to disrupt with Twitter. And I always thought that the eTrades and Schwabs were gonna be disrupted with better UI, right? This is a UI thing, right? When the iPhone came along, it took forever for Robinhood — 2014. People didn’t realize fintech is seven years behind. Still crypto was like a joke. And even today you can still call it a joke. Most people do, not me, but it took seven years for Robinhood to exist in an iPhone world. Right? And so we're at the beginning of the beginning of the beginning, I'm not saying Robinhood's gonna win, but I do own shmuck insurance.
Meaning I don't run the company, I'm not on the board. I have no insights that are gonna blow people's minds here. Other than it's still a $12 billion company that was started in 2014. And we can argue whether it's worth $12 billion. I don't, I'm long. So a 12 billion, you know, my shmuck insurance was to the upside, but in full disclosure, when it got to one billion, you know, we invested at a $10 million valuation post money. When it got to $1 billion, it was not hard for me to sell some and think how stupid I'd feel for that. And then it got to $5 billion and we sold some, then it got to $15 billion and we sold some, because we're seed investors right? And the great thing about this bull market is there's liquidity down the food chain. Now it's not being used properly. And people are actually making mistakes with all this opportunity.
But Social Leverage was a seller into those rounds on the way up. So we treated the private markets like the public markets, when you can sell, you should sell some, right. And when the founders sell, you should definitely sell some, you know what I mean? And that's why I get mad at the Softbanks of the world. Not only they pay the founders out some money and the seed investors can't sell. So there's all these like, tricks that the later stage VCs now have that I think screw the seed investor. And we gotta be really careful about that. So as a public company was Robinhood worth $50 billion. I mean, that should have just been the discussion, not like I hate Robinhood and they’re evil. It's not their fault the stock was $50 billion. That's the media's fault. The public's fault. Lack of competition
But you know, we're an investor in a company called Alpaca, which is now powering the next Robinhoods. And I can tell you from their numbers — that I'm not gonna share — that there is going to be a thousand Robinhoods, right? Just like there's a thousand gambling apps. And the next Warren Buffett could be in Eastern Asia, or could be in Brazil because they're going to have access to the same markets that Warren Buffett had access to. So this is not at all over. The question is who's the winner. And for me, it's more a question is that with Robinhood, I always love their attack on gray means stop. Like the SEC, you know, in China, like gray means go like, worry about it later.
Guess what? Now they're worrying about it. In the U.S. Robinhood did what I think is the right thing and got approval by the SEC. Now, the SEC’s showing how awful it is because they can't make decisions and they're holding out the one example, whereas crypto doesn't ask for permission, right, will beg for forgiveness. So if you had told me that it was easier for Coinbase or FTX to become Robinhood than it was for Robinhood to become crypto, I wouldn't have taken that bet three years ago. Today, my only thought is Coinbase and FTX have done a much better job in a world where it's easier for them to become brokerages than it is for Robinhood to become crypto. So that's the only change in my thinking is that, you know, Coinbase and that's why I own some Coinbase and some FTX — is that it's easier for them in a world of APIs to become Robinhood than vice versa. And so that is affecting valuation.
Joe:
Howard it’s always a treat to speak to you. And once again, I feel like because you have your, you know, so many different parts of the market, you have a unique insight. And thank you so much for coming back on Odd Lots.
Howard:
I write about this every day in bits and pieces, including about my prostate on my blog, but hopefully I won't get canceled. I think I said a lot of... I don't think I said anything too crazy.
Joe:
You didn't say anything bad. Thanks Howard.
Tracy:
Thank you, Howard. That was great.
Howard:
Right. Thanks Tracy. Thanks Joe.
Joe:
Tracy, there was a lot there, you know, just to start — one thing is I thought Howard's point about how the trickle down effect from public markets will probably hit, but it might take, maybe be even years as LPs sort of slowly realized they're not getting the returns they expected from a liquid investment. I thought that was like a really interesting point. He sort of like walked through the mechanics of like, you know, how long the late stage investors can sort of keep things afloat, but, you know, there's not that sort of instant feedback that would cause the selling. Kind of an interesting perspective on private markets that I hadn't really thought of before.
Tracy:
Totally. And I mean, it is one of the those times when illiquidity can actually be quite beneficial in some senses. The other thing that struck me was the idea of, or the impact of the big players coming in and kind of squeezing the entire capital structure and valuations. Because again, that can be a source of strength for a while. If you have these big players, like a Softbank or a Tiger, who are able to hold on indefinitely at these really high valuations. But I guess the big question mark is if something happens to one of them, then things can change very, very quickly, it feels like.
Joe:
No, exactly right. And you know, some of the things he pointed out about how like, you know, they can create liquidity for the founder while not creating liquidity for the seed stage investor. Super interesting. Just in general, like also I hadn't thought about that even though it's obvious in retrospect, like just the sheer number of people writing seed stage texts, and you do see them on Twitter, Substack. So many people, they're investors in a way that I hadn't seen, especially like pre-Covid.
Tracy:
Totally. And I guess, well, we know quite a few people, especially in the crypto space who keep getting offers. And almost have to like fight investors off at this point,
Joe:
We should start an adjacent fund somehow.
Tracy:
Odd Lots seed money coming soon.
Joe:
Yeah, no, it’s always great talking to Howard. Great perspective. And I learned a lot,
Tracy:
Shall we leave it there? Let's
Joe:
Leave it there.
You can follow Howard Lindzon on Twitter at @howardlindzon.