For years, venture capital firms have been pouring money into start-ups, trying to get a piece of the next Amazon or Apple. Valuations for new tech companies soared, and many of them took to crypto to explore new forms of raising money. That included issuing tokens to venture capital funds who sometimes then flipped them to retail investors. Now, Silicon Valley seems to be crashing back down to Earth. And an industry that's all about sourcing more and more money at higher valuations, is having to contend with down rounds. Meanwhile, many of the tokens sold by start-ups have lost value during the crypto crash. On this episode we speak with long-time angel investor and co-host of the 'All-In' podcast Jason Calacanis, who was early into companies like Uber, Calm and Robinhood. He predicts that Silicon Valley is about to learn a very expensive lesson.
Points of interest in the pod:
Jason’s approach to angel investing — 4:39
His experience of previous booms and busts — 7:34
Parallels between journalism and venture capital — 9:30
Power law distribution in VC returns — 12:38
What does he think of VCs pushing crypto tokens? — 15:26
Will there be criminal penalties? — 21:00
His investment in Robinhood — 23:00
What does he think of SPACs? — 25:55
How bad will the pain be for startups? — 34:10
Why some firms tech didn’t make money post-pandemic — 38:38
On salary cuts for startups — 39:54
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:16)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy. We've been talking a lot about tech, startups, VC, but you know, this space is so big and it's so opaque because we don't really know what's going on with VC fund performance. We don't really know what's going on with startup earnings or most likely startup losses that I feel like it can never hurt to get more perspective.
Tracy: (00:37)
Yeah. We've had this conversation before, you know, it's easy enough for a publicly-listed stock. You just look at a line on a screen and you get some sense of how things are going. It’s much, much harder in venture capital world. And then just to add to that, you also have this really interesting culture and dynamic around VC and angel investing, where it seems like everyone is incentivized to pour more money into stuff and to get the valuations up. And then the question is what happens when that dynamic starts to go away or at least becomes a little bit more challenged, which is what has happened over the past few months.
Joe: (01:13)
Right. All kinds of interesting dynamics, publicly listed companies like Amazon or Facebook, they might come on struggling times, but I don't think anyone really doubts the viability of the business. With startups, of course, some of these companies may just not have business models that work. They may be a long way from anything resembling profitability and might have to make tough decisions about growth versus survival, all kinds of sort of tricky questions arise in the private tech world that you just don't see when we're talking about public stocks.
Tracy: (01:44)
Exactly.
Joe: (01:45)
So let's talk about it more. I want to jump right in. We have a big guest today. We are going to be speaking with Jason Calacanis. He is a popular podcaster on the All-In Podcast. He is an author. He's an angel investor who has done over 350 deals over 11 years. Very outspoken…
Tracy: (02:04)
Former journalist too.
Joe: (02:04)
Former journalist. Former blogger, specifically, over many years. And he's going to talk to us about the state of the world. Jason, thank you so much for coming on Odd Lots.
Jason: (02:15)
Oh, big fan of the show. Thanks for having me.
Joe: (02:17)
You know, I DMed you, you know, a while back about having you on. And then I looked in our DM history. We haven't really talked that much, but I saw like in like 2009, you're like, ‘Hey, I'm going to be in New York and meeting some people for dim sum. Do you want to come?’ And I don't think I responded or I definitely didn't go, but I should have, because you've had like a pretty great like 13 years or 10 years since then. So I should have been new.
Tracy: (02:40)
That’s such a humble brag. ‘I was too busy to respond to the big angel investor that DMed me to grab lunch.’
Joe: (02:46)
I blew it because, you know, I'm here, but you've blown up…
Jason: (02:50)
This is this is my credo as an angel investor, actually. And I have 20 or so people in my investment company, Launch and thesyndicate.com, and the first thing I teach new investors is never underestimate anyone because we will see people from, you know, a random assortment of beginnings and weird products and terrible ideas and all of a sudden they change the world. And so, you know, if you look at the first version of like Uber, the app, Travis hated it. You know, it was like really ugly. And you know, he was just beside himself at how janky it was.
Joe: (03:26)
Was Uber worth when you invested in it?
Jason: (03:30)
I think that round was $4.5 million dollars. Yeah. $5 million, something like that. Calm.com was worth $5 million when we invested, Density was around $4 million – Density.io. That's another unicorn we invested in. So in that cohort, when I started angel investing was right after the great financial crisis, 2009/2010. What happened was, I was running a company called Mahalo.com, which is now called Inside.com. It's still running, doing millions of dollars a year in revenue and Sequoia, Roelof Botha, who was the latest partner there. He had just started as a partner there working with Michael Moritz and Doug Leone. And they said, you know, ‘you introduced us to all these really cool companies. Would you be a scout for us?’ And I said, ‘how would that work?’ And they said, ‘well, we'll give you money. And then we'll split the returns 50-50.’ And I said, ‘well, don't you get like 20% and 2% like management fees?’ They said, ‘oh, we get more than that. We get like 30%, we’re Sequoia. You know, we're pretty good at this, but this is going to be small potato. So we we're just going to ask you and Sam Altman and you know, this other person to be scouts for us.’ And Sam famously did Stripe as an investment in the scouts program. And I did Uber and Thumbtack and a couple of others and three of the first seven deals I did became unicorns.
Tracy: (04:39)
So you mentioned a credo at the very beginning. And before we had this conversation, I was looking on your Twitter account and you tweeted something that intrigued me. You referred to a basic technique that you've learned in the dotcom era, trust the founder, but believe the product and customers, what did you mean by that? And how is it relevant now?
Jason: (04:57)
That's a great question. So, you know, when you're a journalist, which is where I started, in the nineties, when I was covering the dotcom era, people were really well media-trained. They were spinning, you know, really crazy yarns. And I was just trying to figure out like, is Scott Kurnit from About.com the real deal and is, you know, this woman from iVillage the real deal, or are they, you know, charlatans and you know, is this DoubleClick thing that Kevin O'Connor’s doing? Is it real? You know, that was kind of the job of a journalist -- ask questions. And then maybe when we actually used the products and when we actually talked to customers or we talked to employees, we actually then got the ground truth. And so it was that skillset I learned as a journalist, doing Silicon Alley Reporter, my second magazine, when I was in my twenties in New York in the 90s, which was awesome. New York in the 90s was just fantastic.
Tracy: (05:49)
We had a very similar conversation on Odd Lots just recently about clubbing in the 90s.
Joe: (05:54)
We had TheGlobe.com CEO on. Did you know him?
Jason: (05:55)
Oh, Stephan Paternot?
Joe: (05:57)
Yeah, we had Paternot on the show recently.
Jason: (05:58)
Yeah. I got some good stories about those guys ... I covered them. I'll tell you that story in a second, but anyway, you have to look at the reality of what a startup is. A startup is a group of people, a founder plus whoever they can recruit, building a product that then has some contact with customers. And when evaluating startups, it's important to meet great founders and hear what they have to say. I would argue it's more important to use the product and talk to the customers. And that has been something that in crypto, as one example, or the dotcom era as another example, or in a boom market, that people forget. And so, you know, ‘trust but verify’ is a really good management philosophy. And this is my philosophy of startups, which is, yeah, sure. Talk to the founder, but don't forget to talk to the customers and don't forget to use the product.
Joe: (06:49)
Can I ask a question about now that you've seen several cycles of booms and busts and participated in them, and if my memory is correct and tell me if I'm wrong, my memory is that your tech magazine in the late 90s, either you held onto it too long, you didn't sell at the top. And so you had a chance to make insane amounts of money, but you held on too long and then it went to zero. And then you did another media thing in the early 2000s, Weblogs Inc., which kind of competed with Gawker. And I kind of felt like, my only thought at the time was that you sold too early or that you overcorrected from the magazine experience, because you're like, ‘well, I just gotta get some.’ Is that correct? And what did you learn about booms and busts from those experiences?
Jason: (07:34)
Yeah. As many folks who have gotten rich said, you know, like ‘how did you get rich?’ Selling too soon is like a really good credo as well. You learn these heuristics over time. And so Alan Meckler had offered me $20 million for Silicon Alley Reporter, you know, before the bust, I didn't take it. I was just a poor kid from Brooklyn, but you know, Silicon Alley Reporter was at $11 million in revenue. I had 75 employees and I built it off my credit cards. So I was kind of on a rush and I had done New York, you know, to the nines, like, you know, was on Charlie Rose, had a 10,000 word, New Yorker profile. I mean, I had checked every box in terms of, you know, filling my oats as a, you know, the next media mogul.
I felt pretty good about things. And then the dotcom bust happened and I wound up selling the assets of Silicon Reporter to Dow Jones and got two years of salary. They fired me a week after I sold it to them and paid out my two year contract, because they didn't want me there, because I was too much trouble. And then I started Weblogs Inc. And when I started Weblogs Inc., the goal was to create a hundred blogs and put ads on them. And the idea of putting ads on blogs was, you know, antithetical to the concept and people like Dave Weiner and other folks were like, ‘Hey, you can't have ads on blogs.’ And I was like, ‘I think we could’ on a web blog have ads. And Nick Denton and I started going at it, competing against each other and AOL offered me $30 million for an 18 month old company. And I was like, well, that's 10 million more than I was going to get for Silicon Alley Reporter so… And I only had one investor, Mark Cuban. And I was like, yeah, I'm going to secure the bag. And you know, that's how I got my first chip. And it was one of the greatest trades I ever did. Now Denton wound up selling for $150 million, but then gave it all to Hulk Hogan and Peter Thiel. I'm going to guess that Nick and I did about the same on exits for that except he spent 10 years of his life on it and two years on a trial and I did it for 18 months. So there's also the value of time.
Tracy: (09:30)
What was the transition like from journalists to angel investor? Because I imagine journalism probably gives you a decent set of skills to do due diligence on a company and do your research and you know, go out and meet and talk to people. But on the other hand, I imagine there's quite a bit of maybe culture clash between really cynical journalists and like, optimistic, changing the world, Silicon Valley types, or at least that's how I imagine it.
Jason: (09:58)
That is actually the perfect summary. And I was just talking to Molly Wood about that today, because she just did this transition. So I would say if you're a good journalist, like, you know, a really good journalist who knows how to answer questions, knows how to understand a story, triangulate the truth by talking to multiple sources ... I think you start on second base. I think you're basically 40%, 50% of the way there. And if you have a network, you might be 60% of the way there. If you have a brand, you might be 60% of the way there. So the only thing you have to learn, you're exactly correct, as journalists we're telling stories and yeah, we want to be cynical. We want to really assume that what's being told to us is some percentage of the truth, but Roshomon style — like the Kurosawa film.
There's usually three versions of the truth, yours mind and the actual truth. Or there could be even more versions in a story that's super complicated, like say Theranos or whatever. So you start triangulating the truth. And that goes back to, you know, the tweet that you quoted earlier, which is, ‘Hey, for me, there's really three things here. There's the team, there's the product, there's the customers.’ Now there could also be competitors in there. So you start triangulating around those things. You do have to switch from — and it happens organically — because when you start working with founders and backing them, you then put yourself in a position of power. You put yourself in a position to be the person who is not telling their story, but enabling their story. And then you move from this sort of cynical approach to this optimistic approach. Now the fact is, half of the founders you'll meet will be some version of incompetent, not ready, you know, delusional or, you know, in some small percentage of cases, frauds, crooks, charlatans. And then the top half will be earnest, qualified and, you know, ready to change the world.
And so your job is to figure out which group you're betting on and making sure that you invest in the right group and you're not going to get it right every time. But you do have to come to it with a radical optimism. And so you are basically making a long list of things that can go wrong in a business, and then a short list of things that can go right. And then if you're really trying to go for an outlier success like a meditation app or you know, a cab company, which were my two biggest hits to date, you are going to have to say, okay, I'm going to rip up the list of what could go wrong and just assume the founder will figure out ways to navigate that with their team, and then look at what could go right. And if you figure out what can go right, then you could hit a 100X, 1000X, a 2000X investment. And that power law is what venture is about.
Tracy: (12:38)
You mentioned power law distribution. And this is something that has come up a number of times when we've been talking about VC lately, this idea that the model basically rests on, you know, you throw money at a bunch of companies and you're really hoping that one of them will hit it out of the park. And I guess my question is given the current dynamics, you know, it seems like some of the froth is going out of the market. Is that sustainable? Like, should you always be aiming for the biggest company or could it make sense in VC Land to maybe aim for not unicorns, but like nice looking horses with medium growth trajectories that do well, but aren't necessarily superstars.
Jason: (13:21)
Yeah. It's just not possible to make the single and double concept work. Singles and doubles is what public market investors do or late stage investors do. And all the froth is out of the market. And we're now pouring out the cappuccino. So it it's really been quite a contraction now, it is unbelievable how hard this has fallen for certain companies and how far it's corrected and that's the best time to invest. So absolutely, I'm not happy about a downturn, obviously, but I am extraordinarily optimistic about the returns we'll see on the companies we invest in over the next three years. This is going to be the best possible time to put money to work. And I'm redoubling my efforts, trying to invest in twice as many companies in the coming years because valuations have come back down to reality. And I'd say two out of three companies I wanted to invest in over the last two or three years, if I didn't invest, the number one reason I didn't invest was because of valuation.
The math didn't make sense to invest in a company that has no product in market at a $50 to a $100 million dollar valuation. Or if it's crypto, it might be $100 [million] to a billion dollar valuation, which just defies logic. And, you know, I grew up with mentors like Michael Moritz, Doug Leone, Bill Gurley, you know, George Zachary — people who had been in the game for a long time. And then my contemporaries and I, Chamath, David Sacks, etc., you know, who grew up investing together over the last decade, we all looked at revenue in customers and tried to build models. And last two years, people threw that out the window and it just didn't make sense to a lot of us. So I spent the last two years raising money for my existing portfolio and selling positions in existing companies largely. I mean, still investing in the earliest stages, but now it's yum yum time.
Joe: (15:26)
All right. I have a thousand questions, but since you mentioned Chamath, I'm going to ask you a question that's kind of about him, but it's actually much more about a lot of investors these days. And I think you've even talked about it on one of the All-In episodes, but we're in a moment where — thanks to crypto and I guess thanks to SPACs as well, in the case of Chamath, a lot of VCs are invested in publicly liquid assets. Cryptocurrencies are the most common, but of course, you know, Chamath for much of 2020 and 2021 brought all these SPACs, would talk about them. They've all done basically terribly. In many cases, VCs, you know, throughout history, VCs were invested in companies that public retail just didn't have access to for several years. Now many of them are invested in cryptocurrencies that the public can trade. Do you think this is a problem that so many investors -- historically VC-type investors — are basically either tacitly or explicitly pumping their bags on social media for retail?
Tracy: (16:28)
Hm. Good question.
Jason: (16:29)
Yeah. It's a great question. It's really two different groups. So I'd say SPACs and crypto are very different. And I'll explain why. So let me start with crypto because that's where the problem is. So crypto has created an entire shadow in my mind, [an] illegal stack, that is skirting securities regulations. I believe the overwhelming majority of tokens are securities, but they're being dumped onto retail investors. And this is being done explicitly by venture firms. I won't mention any names who are buying into companies early, getting into tokens, and then those tokens are being listed on exchanges and the public can buy into them. The public is buying into them, a common enterprise, in order to get a financial gain. They have no interest in using those tokens for any utility. These are not Chuck E. Cheese tokens, right? They're not United miles.
We all know what's going on here. And to then liquidate your position in the second or third year of the crypto company — and I'm not going to mention any specific companies here or firms, but you don't need to be a genius to just look at the activity out there. This is going to blow up in the faces of the venture community. Regulators are very permissive in our country. Our country, generally our legal system is you're innocent until proven guilty. But I think there's a lot of guilty parties that, you know, flipped securities and called them tokens. And I think the SEC, Justice Department is in the first inning of taking action against these companies. And sure it would be better if they had given us clear guidelines, but having been in the room for these discussions over the past five years, people suspended disbelief. They shopped for attorneys who told them what they wanted to believe about tokens and the, what is it, the Howie Test, you know, listen, I'm no lawyer. Don't take advice from me. I'm just a kid from Brooklyn.
Tracy: (18:31)
You know, this was actually the ultimate irony, which was that if you went to a regulator and asked permission, they would often tell you no, but if you just went ahead and launched it after doing your own legal study, they usually wouldn't say anything.
Jason: (18:46)
Yeah. So people knew, Tracy, that what they were doing was fugazi. They knew that this was a grift. I have no sympathy on anybody who gets their wrist slapped or gets a speeding ticket or worse because I would like to see accreditation laws be changed so that people can take a test just like a driver's test, or in the few states that have gun owner tests, gun permit tests. We could just educate people, maybe take a three hour course, you take a 50-question test. It doesn't have to be a Series 7, but ‘hey, this is diversification. Hey, these are risky assets. These are non-liquid assets. This is preferred shares. These are common shares. You know, here's how governance works. Here's how boards work.’ Just so you know, a normal person who's not in the top 6% of the country who are accredited investors could participate in this.
That's what the SEC needs to do. That's what our government needs to do. Have a path for people to be educated, to participate in these things. What the country doesn't need is for sophisticated investors to then create a path for people to circumvent the securities law and then flip tokens. I have spent the last five years being criticized because I've said all along, you know, if you can't use the product, if you can't talk to the customers, you know, calling back to your asking me about that tweet I did and my experience as a journalist, if you can't talk to the customers, you can't use the product, then it's probably either a fraud where it's a pre-launched company. And I think the majority of these tokens that are being sold are either pre-launch companies, which would value them at $3 to $10 million or they’re frauds, or they're run by incompetents or they’re frauds run by incompetents. It's some combination of those three buckets. And I invest in the first bucket — pre-launch companies or you know, about to launch MPPs all the time in my accelerator, but I don't take the shares of those companies and put them on a listing and tell people ‘have fun staying poor if you don't buy these tokens and you don't get it. Okay. Boomer,’ and all this other bullsh*t that these very sophisticated investors did to the public. So I don't have strong feelings on it, Joe, but it's a complete, utter grift.
Joe: (20:57)
Do you think there's going to be a criminal response in some cases?
Jason: (21:00)
Certainly.
Joe: (21:01)
You say you think the regulators are only in the second inning, so that would imply that there is a lot more coming. What does this look like?
Jason: (21:08)
I mean, these ‘it's just a little NFT I was flipping and grifting.’ You know, Department of Justine and the Southern District of New York and Florida's, you know, district attorneys — there's a large group of district attorneys who would like nothing more than to get the pelt of a crypto grifter and put it on their wall for when they run for mayor or governor.
Joe: (21:30)
And now people have lost a lot of money. So there's a lot of people, like a year ago, there wouldn't start wouldn't have been a political appetite for prosecutions because people like when the line goes up, but when the line goes down, I assume people want to see someone pay?
Jason: (21:45)
Well also, you know, that's when somebody who's in your local jurisdiction says, ‘Hey, my aunt took a second mortgage on her home and bought this cryptocurrency and they lost all their money. And three of her friends also did it.’ And so now there's an actual victim as you're pointing out Joe, because the tide's gone out. And those people essentially got a free option because — you know, [this is] the cynical view, but they got to buy the cryptocurrency. If it went up, they could sell it, like these retail investors. And now that it's gone down, since it was illegal, all of them can now go after these companies. And so that's just starting and we're like two pitches into the first inning. We are not even close to the second inning of this ... If what I learned from the dotcom era is any guide, it's going to be years of litigation and pain and suffering. Now do people go to jail? We just had somebody on the FBI's most wanted list who was the Bitcoin [Crypto] Queen. I don't remember a fotcom person being on the FBI's most wanted list. So that might be the canary in the coal mine, when the FBI's most wanted list winds up being three or four crypto people, I think you've got peak grift.
Tracy: (23:00)
Just on this topic you were invested in Robinhood and Robinhood is pretty highly leveraged to crypto, nowadays at least, did they make a mistake?
Jason: (23:09)
You know, I think it's fine for people — not speaking about Robinhood -- I think it's fine for people to participate in crypto if they're accredited investors and if they're educated. I sincerely believe people should be able to do what they want to do with their money. They're allowed to go to Vegas. They should be able to do that. So on the retail side, I do think people should be able to buy tokens or crypto. I just think it should all be regulated. And I think, you know, what Coinbase and Robinhood and all of these platforms really need to think about is, you know, when they put these tokens up, who should be buying them and what knowledge base do they need? And I think I'm a big fan of the freedom for you to do with with your money what you want. But I also think there's a responsibility of the people creating the tokens to do it.
And now what is the liability for platforms? I think that's somewhere in between. So, you know, the people who are creating these things, those are the people who are 99% responsible. And those early investors I'd say the platforms and other folks they're 1% responsible for this. People should be able to buy and sell whatever SPAC, they should be able to gamble. I'm a gambler. You guys know that. So I feel fine about that, but I also think that the silver lining of all this is people are very critical of this, you know, Gen Z, stonks, Robinhood generation, meme stocks, crypto. I actually think what we've done is we've made one of the most sophisticated generations financially that's ever been created, what these 20 somethings have learned in their first couple of years or decade of investing dwarfs what the generations before them knew.
I know young people who are trading puts and calls and shorting stocks and buying crypto and alternative assets. So I think all that's really good. And I think you learn by doing. So even if people did, you know, get burned a little bit by Gamestop, I am super permissive of young people and retail investors being able to do what they want with their money. And I do think they understand the risk they're taking. So even the people who bought crypto, I think they knew what they were doing. They wanted to make an absurd return in a short period of time. And if they got burned, that's on them. It's like going to Vegas and just putting all your money on like one hand of Blackjack. You knew what you were doing. You knew it was a stupid bet, but you have the freedom to do that and you should have the freedom to do it. That's my personal belief.
Joe: (25:26)
All right. So what do you think about your podcast co-host and, say, ‘this is my fintech that I'm taking public in a SPAC’ is to me what GEICO was to Warren Buffett and tweeting and posting about public companies.
Jason: (25:44)
Okay. So let me talk about SPACs generally, so that I don't get reaggregated and say ‘J Cal threw Chamath under the bus.’
Joe: (25:51)
That was going to be my title. That was going to be the title of this episode.
Jason: (25:55)
Nice try. Here's the thing about SPACs. If you want to participate in SPACs, you've decided to do what venture capitals do for a living, right? Which is these companies are highly, highly risky. You're deciding to invest in Amazon, Netflix, iVillage, DoubleClick, you know, pick the company, Facebook, and then all the fail companies before they were traditionally ready to go public. In other words, you know, in, in recent years, people have had billions of dollars in revenue in the public. If you want to invest in a company with tens of millions of dollars or millions of dollars or a hundred million dollars in revenue, you're now playing the VC game. This is a high volatility game. This is like playing Pot Limit Omaha, you know, in Macau, you're not playing your Texas Hold ‘Em game anymore where it's predictable, you're playing a high variance game.
And so we were investors in the private market for a company called Desktop Metal. We love this company. We love the founders. We love everything about it. They decided to do a SPAC. Okay, great. Now we're at $10, company's worth, you know, whatever a billion more than its private market valuation. And now it's trading at $2.48 cents. Still a great company. Bird, Joby, I'm not an investor in those companies. I know people who are investors in them. Those are all getting crushed too. Why? Because the big feature of being private when you are nascent is you get to figure things out, right? And you're not under public scrutiny. These private companies go through pivots. They have revenue, you know, surge and then collapse. And then they have competitors show up and then they have things break. They have regulations, the greatest feature of Uber and Airbnb going public after 10 years being private was that these businesses were very stable relative to the SPAC companies that are coming out.
So again, do your homework. If you want to play VC as a retail investor, you better be in it for 10 years. I invest in companies in decade increments. I still own my Robinhood share, still own a lot of my Uber shares. And I decided to hold both of them for the second decade. Right? That's the problem with SPACs is that people came into them and thought these were very mature companies. And if you looked at any of the data, you knew these were private market companies going public earlier. Now this is how the market worked in the 80s. We just haven't had it during our lifetimes. People who told me, you know, who were VCs in the 80s, you know, the Microsofts and the Lotuses of the world would go public in years, three, four, five, six. We decided to have companies go public in years, eight, nine, ten, eleven.
So, you know, recently in our lifetimes, as adults, you know, in the 90s and 2000s. So I'm glad there's more inventory for people to choose from. I think going into the SPAC, you know, disastrous companies and, you know, they've lost all lost what? Collectively 50%, 60% in some cases more. You know, go into those and look for bargains. I think you'll find some there, but for somebody to take these electric car companies that haven't delivered cars yet, and then value them at a hundred billion. I was on, you know, All-In and my other podcast, This Week In Startups, talking about how ridiculous these Lucid, Rivian, whatever, SPACs were, it was a whole cohort of them. And so buyer beware. If you're going to play VC, the VC game is to get to know the founders, to talk to the early customers. Nobody did that work. You gotta do that work i you want to bet that early.
Tracy: (29:15)
I was about to ask exactly this question, because it feels like to me, with SPACs and the VC space more broadly, to your point, it feels like a lot of it comes down to whether or not the sponsors are acting in good faith or whether or not they just see this as a tool to get a bunch of money. And you know, the money's there, people are throwing it around, why not start a SPAC and just get a piece of it and we can maybe, you know, figure out what to do later — or maybe that's not even part of their plan. How do you actually go about, you know, evaluating founders or sponsors on that basis? How do you figure out whether people are in it for the right reasons?
Jason: (29:48)
Yeah. I would just look at the core business, so let's take Buzzfeed trading at $1.69 at the time we’re recording this. $228 million in market cap. That company has $300 or 400 million in revenue. I think they're going to do $400 million this year and their run rate's about $400 million. So they're trading at less than their run rate. Their price to sales ratio is like 0.6 or something or 0.7. This is crazy. Like this company should never have gone public, media is a terrible business obviously, but you just have to look at the revenue. You have to look at the growth.
Joe (30:21):
Do you own some?
Jason (30:22):
I don't, but I'm looking at it. I know this sounds crazy. I'd have to look at the growth rate and the spend. And I don't know if Jonah's made massive layoffs over there, but if he laid people off and this was a profitable company, well then we'd start looking at it and saying, okay, I don't know if, if it starts growing 20 times earnings, 15 times earnings, 10 times earnings, maybe two or three or four times price to sales ratio.
You could actually see it being a takeout candidate for somebody. So, and I'm not giving financial advice here, but I do look at Peloton. I do look at, you know, Buzzfeed and some of these that have gotten really walloped and say, ‘huh, and how much cash do they have?’ Like, we're going to get to the point, Joe, where like in the dotcom era, the company has more cash, cash on hand, and marketable securities will be greater than their market cap. In which case you could buy the company, sell the asset and then distribute the cash and make a killing. So I think that's why Zendesk is being taken private. I dunno if you saw that, they got over a billion dollars in revenue, over a billion dollars in cash, they're getting sold for $10 billion or something or going private for $10 billion. So that's when you know, we're bouncing on the bottom, but you just have to, again, to your question, Tracy, look at the customers, look at the product.
They will tell you the truth, the promoters, the press, the analysts, the CEOs -- all of that is secondary to the customers. Anybody who talks to customers who own a Tesla or who are an Airbnb host, or who are Uber drivers or who take Uber or take Lyft or use DoorDash or Calm, they'll tell you they love the product, right? Or they love participating in the marketplace. Or if you just look at how long have they been an Uber driver, how many rides have they done? How many DoorDash deliveries have they done? That will tell you a better story than any promoter or any CEO. And these promoters will live and die with their track records.
I think Chamath will have a great track record at the end of the day. Now he's my friend and I am a super-biased source, but I know he's very thoughtful and you know, people should understand if they're going with SPACs and they're playing VC, you're playing a very high volatility game. It should be counterbalanced. That should be the small portion of your portfolio. And the rest of your portfolio should be balanced with, you know, index funds and, you know, blue chip companies and bonds AND real estate, right? That's what's getting lost here is, you know, these really high-risk, high-reward companies and opportunities. What percentage of your portfolio should they be? when people ask me about angel investing, I'm like, if you really love doing this, low single digits is what I would tell my mom or my brother, if they want to do the work and make sure they can afford to lose the money. same thing with SPACs, same thing with crypto.
Joe: (33:19)
So you mentioned, okay, like in this SPAC wreckage, there might very well be some diamonds in the rough that come out. And you also mentioned in the very beginning that you think this is a great time to be investing in early stage companies because valuations have come down so much. So you think this is a great time to get aggressive. But let's talk about like the last few years, one of the things that's come up on our show is like all these people who had substacks and rolling funds on AngelList, suddenly getting into the angel investing game over the last two years, maybe starting in March, 2020 with Covid or a little bit before that. How bad is the pain going to be of all these different startups? What is the survival rate going to be? And how prepared are these founders for an actual downturn rhe likes of which maybe we haven't seen in roughly 20 years.
Jason: (34:08)
Yeah. Well, 80% of startups die, you know, in normal times, that are backed. So that's your starting point, right? And then, you know, your fund tends to be, you know, a typical venture capitalist has 30 names in a fund, 30 companies, and, you know, the top two companies will be 95% of their returns. So that's kind of par for the course, right? That's what you would expect. Now, a lot of founders raised money when the market was hot and a lot of them were in denial and thought every round of financing would get easier. And why shouldn't they think that? They got into an accelerator, they raised an angel round. They did a pre-Series A, they did a Series A, all of that was pretty easy and it got easier each stage. And then Series B, they had people asking them to take their money and then Series C, they had people throwing money at them and not doing diligence.
So just imagine you're a founder, you're 35 years old and that's the market you were born into. Okay, you're going to think about the world a certain way. ‘Okay. Yeah. It's going to get harder, but how hard could it get?’ Like every round of financing you've done to now has been easier than the next round. So everything you've experienced has been a complete head fake and whatever you learned up to this point is not going to service you going forward. It's kind of like being the smartest kid in your school, and then you wind up going to Harvard and it's like, yep, you're a dime a dozen. Or you’re the most beautiful actor and talented person in your, you know, in your high school musical. And then you go to Hollywood and it's like, ‘Yep. You're just like everybody else. There's nothing unique about you. Sorry.’
You know, that's the transition people have to go through now. And many of the people who I watched up close and personal became better at raising money from VCs than getting money from customers. That is the big red flag. You have to be better at servicing your customers than servicing your investors. It's important to be able to get investment, but ultimately that investment is all in service of delighting a customer, retaining a customer and expanding the spend with that customer. And that's, you know, the change people have to make. I've seen a lot of people who thought they were Jedi knights and all of a sudden they get into a serious Jedi battle and they lose two or three limbs. This is like serious Jedi sh*t. You think you are a Jedi, you think you know how to use a light saber, and then you come up against a Sith lord and you lose your hand. Period. End of story. Like that's what's happening here. People were pretending to be Jedis, they're pretending to be entrepreneurs and they are just not cut out for it.
Joe: (36:44)
You know, we've seen obviously the announcements of layoffs, right? We know they're picking up and we've seen them. Are founders, even today in July, 2022, have they sufficiently marked their mind to reality? Or are there still many who are in the state of denial?
Jason: (37:01)
Most are still in denial.
Tracy: (37:04)
Sort of related to this topic. There's been a lot of talk recently about the end of the millennial subsidy, or I guess the urban lifestyle subsidy, the idea that all these conveniences that people took for granted before — like ordering a car through Uber or ordering food via GrubHub and things like that — that the cost of those are all going to have to go up as the companies sort of pivot from spending lots of money to grow their market share to actually making a profit or at least trying to. How is that playing out? Do you see evidence of that in the companies that you are either invested in or very, very familiar with?
Jason: (37:41)
Yeah. I mean, Uber would be the best example of it. You know, they were losing a dollar a ride and then they went down to losing 60 cents a ride and then 20 cents a ride. And so for anybody who was an insider, it was abundantly clear that at any point in time, when the competition with Lyft and other services, or DoorDash on the eats side of the business, when that competition abated and those second- or third-tier players ran out of money and stopped getting free capital, then the network effects would benefit whoever was in the lead, right? And so Uber clearly was in the lead. And we actually see that manifesting itself over the last couple years, which is to say, drivers are getting paid more money. Drivers are drawn to the Uber platform. The prices of Ubers have gone up, Uber's revenue has surged. And now what we'll see this year, I predict and Dara’s been pretty clear about this, is the money printing machine will turn on. Just like Amazon can do that.
Joe: (38:38)
And I want to stop right there real quickly because we recently had Jim Chanos on the show and he said, you know, look yeah, 2020, for many of these so-called sharing economies, whether it's DoorDash or GrubHub or Uber, whatever, like that should have been the most amazing [environment]. Everyone was home ordering stuff online with stimulus checks from the government and they couldn't make money in 2020. And his line is like, ‘if they can't make money in 2020, when?’ When will they? Do you still hold your Uber shares?
Joe: (39:17)
So you think that’s doable? That they can turn the corner…
Jason: (39:16)
There are two things to look at. Number one, stock-based compensation for these companies has been a large portion of their losses. And so if stock-based compensation changes a little bit and that's been a big back channel in Silicon Valley and with the large fund holders of private equity is, ‘Hey, maybe we need to talk about stock-based compensation.’ Now that all these layoffs and hiring freezes have happened at the FAANGs and, you know, certainly layoffs and salary cuts even, I think are going to start next. That's going to be the true sign that we're in something dark, is when people's salaries get cut. Wait for that. That will be the true tide.
Joe: (39:51)
You think that's coming? Cash salaries are coming down?
Jason: (39:54)
Hundred percent. I think the way it works is, and this is like the cynical insider stuff that people don't like to talk about, but what people do is they lay off a bunch of people. Then they reset the salaries and hire people back at lower salaries. And so that's de facto a salary cut, right? So if you lay off a third of your staff and then you put the positions back out, but they're at a lower price and people can work from home and they can work from anywhere. That's the way for like a Facebook or an Apple to reset it without saying to the people who currently work for them, ‘Hey, by the way, we're cutting your salary 20%.’ Apple just says, ‘you have to come back to the office. Oh, you don't come back to the office. Okay. I guess you don't want to work here anymore. You were overpaid. Now we're going to put those salaries at a different number.’
In some companies, if things get really dark, they might just say, ‘Hey, the management team's taking 20% cuts and everybody else is taking 10. And then they just challenge people. ‘If you don't like it, you can leave.’ And if things get really dark, I think it's a 50-50 that we'll see this happen in the second half of the year. You know, I've seen the layoff approach. First, it's a reorganization. Then it's layoffs. Then it's mass layoffs. Then it's pulling the offers that have been done. Remember those were a lot of big headlines. ‘Oh, I had an offer at this company. It got rescinded.’ The next piece is the salary cuts. So that that's the true bottom sign. Look for that. It's not guaranteed, but it could happen.
And so we got to this with, you know, Uber, and if they couldn't make it in 2020, I think a lot of these companies got too big. Facebook, Google, Uber, Airbnb all could operate with 20%, 30%, 40% less people. And in a market where the public markets want to see cash flow, it's just time to shift gears and do that. Airbnb like, oh, a third of people during the pandemic, I think? I think Uber did something similar. And so these companies were getting rewarded in a low interest rate environment where they could just keep raising capital for growth — top line. Now people want to see the bottom line. Uber's perfectly positioned to do that, which you have to do if you're one of these rocket scientists — is just say, are you going to take less Ubers or do less DoorDash, or less Uber Eats, if it costs $1 or $2 more?
The answer for 90% plus of use cases is, I'll absorb the $1 or $2. And the proof of that is that's actually happened. Ubers have become more than $2 or $3 more expensive. Now for Uber Pool, will it make a difference? If somebody was paying six bucks and now they have to pay nine? Yeah. There are some people who might say, ‘I'm going to take the subway.’ But that's not the people who are the profit anyway, the profit is in the whales and the bigger rides and the more luxurious rides, the Lincoln town cars, etc. So, yeah, it's pretty easy to figure this out. If Uber charges $2 per ride or delivery or DoorDash does the same thing, which they're all doing, and they cut their staff and they cut stock-based compensation, these things become money printing machines.
Now I get Jim's point. Jim's point is like, ‘why didn't you do that before?’ Well, we weren't being rewarded for that before. The investment community told us to do the other thing. And so when you saw Dara come back, I think it was last year, and he just said, ‘listen, I met with all of our large shareholders. They said they want free cash flow. They want profits, I'll give you that.’ He's pragmatic. You know, he's a dog, you know, he knows what he is doing. It’s not his first time at the rodeo. And so he he's willing to make the cuts and raise the prices, and that's what everybody's going to do. And they get rewarded for that. And then you know what will happen? Everybody's going to be like, why aren't you growing faster? And so this is just the pendulum of being a CEO and a board. They're going to be like, ‘oh, we want more than 27% year over year growth. Can we get to 34%?’ So you gotta play the game as the rules are saying to play it on the field, you know, and the rules of the game are now show us profits. The companies that showed profits, you know, didn't get the funding previously.
Tracy: (43:37)
Right. What's your base case for how bad things might get? And then secondly, you know, you mentioned that in the current down cycle, you're still taking a bunch of meetings and there's still opportunities out there at an even lower valuation, how much money is actually out there on the sidelines and ready to get deployed in the current cycle, and how much does that help?
Jason: (43:59)
There is a ton of what I call, you know, debt or boring money, money in bonds or boring assets and safer assets. And so, yeah, people are scared right now. I think there's a lot of existential and macro issues. We talk about it on All-In, you know, every week. And so, you know, some people like David Sacks is incredibly obsessed with the Ukraine. It's like become his entire Twitter feed. And it's like, I thought you were a SAAS investor, David, like, you know, but this is a perfect example. Like he is very scared about that escalating. He's a very smart individual. He's one of the smartest people I've ever met in my life. So smart people right now are very concerned. Some of them are concerned about Taiwan. Some of them are concerned about, you know, or they were concerned about Covid. Everybody's got a different thing that makes them scared in the world.
I don't operate that way. Because I get to invest in the early stages, I know great companies are built all the time. And great companies are built when there's wars going on in the world, when there's famines going on in the world, all these terrible things can occur. And Google and Uber and Facebook and Robinhood and other great companies are going to be made independent of those things. Entrepreneurs are going to keep creating. And in fact, when the market is the most troubled, that's when your selection gets easier. Because if you're creating a company in 2008, 2009, 2010, well, you have to be a true maniac. I mean, you have to be a true mission-driven founder, who is going to do this no matter what. And I've just seen it so many times in my career, people who were starting companies in the early 90s were maniacs.
People who were starting them after the dotcom bust and9/11 were complete utter maniacs, myself included, and people who started them after 2008 were completed utter maniacs. And that's when the great companies are formed. And then they grow through the down and up markets consistently. That's really what it's all about. So I don't worry about these things. I do not live in fear, like a lot of my other contemporaries and get obsessed with these things. I just like to focus on the founder and the customer and the product. It's really, you know, it's one of the great things about just being a simple kid from Brooklyn. I don't need to overthink this. I don't got no Ivy league education. I didn't go to Stanford. I didn't get perfect SATs. I just look at what the product does. I look at what the customer thinks of the product and I place my bets. And you know what, that's a better way to do it in my mind. It's simple. You just put the ball in the basket, take a good shot, rebound the basketball. And then on the other side, you know, take a good shot and put the ball in the basket and rebound, and then you get to buy the niche. It's not.
Tracy: (46:30)
And then you get to buy the Knicks.
Jason: (46:34)
Yeah. F*ck yeah, let's go. I mean, what else would I do? No, I mean, I just would like to see New York win a championship. I did a little spreadsheet a year ago during the pandemic. I was kind of trying to figure out what I would do with the last decade or two or three of life I have left, when my friend Tony Hsieh died, the day after my birthday and kind of rocked my world a little bit. And I just thought deeply about what do I want to do and what actually gives me joy and fun. And yeah, I like skiing and I like hanging out with my friends and laughing and doing podcasts and writing books and watching the Knick game.
Joe: (47:07)
You play poker with Phil Helmuth, right?
Jason: (47:09)
Yeah. Every week.
Joe: (47:11)
We had him on the show years ago. Anyway.
Jason: (47:13)
Yeah. Phil's the best. I mean, he's amazing, great human being. I mean, even with all the outburst and craziness, which I thought when I met him was for TV, and now I realize it really is truly who he is. I mean, we've had some epic battles at our private poker game, but when I had my little like existential, 50-year-old, you know, J Cal crisis, I just thought, well, If I keep investing at this rate and I go up 50%, or I double the number of dollars I invest every year, yeah, there's a chance I could be tres commas and I could buy the Knicks or make a run at them. So why not create an outrageous goal? So my two outrageous goals are to, you know, invest over the next 10 years and be one of the top five investors in the history of Silicon Valley, and have a long shot chance of leading a syndicate. That's why I bought the domain name thesyndicate.com. And I invest in a hundred deals a year at the syndicate, with 11,000 accredited investors. It's the largest one in the world. If I keep doing that, I might be able to lead a syndicate to buy the Knicks someday. And that would be a great thing to do in my sixties, either that or run for office. So it's one of those two.
Joe: (48:20)
My daughter's a Knicks fan. So hopefully you can turn them into winners. Jason Calacanis. That was a lot of fun. Thank you so much.
Jason: (48:27)
I hope that was entertaining.
Joe: (48:28)
It was very entertaining. Thank you so much for coming on Odd Lots.
Jason: (48:32)
My pleasure.
Tracy: (48:33)
Thanks Jason.
Jason: (48:33)
Hey, don't forget to rate and subscribe everybody.
Joe: (48:36)
Oh yeah, we gotta do that.
Jason: (48:38)
You gotta ask them to rate and subscribe. Tell a friend about the pod.
Joe: (48:57)
That was fun.
Tracy: (48:59)
Yes. I'm thinking, sorry. I'm thinking, do you remember that Simpson's episode where like Homer Simpson goes to work for Hank Scorpio and he wants to buy the Dallas Cowboys? He confesses his dream is to buy the Dallas Cowboys. And at the end of the episode, Hank Scorpio buys him the Denver Broncos.
Joe: (49:16)
No, I don't remember that one. I was thinking, you know what Simpsons episode I thought you were going to reference? Well, you know, Jason was talking about, if I just do this 10 more years, I thought you were going reference to the one where Homer bought Halloween pumpkins before Halloween and just thought they would just keep, just keep holding the pumpkins and draw a straight line up and get rich one day.
Tracy: (49:36)
Actually. That's not, yeah, that's not a bad episode to reference because one thing that keeps coming up in all of our episodes lately is just the cyclicality of human nature. And this idea that for years, investors were comfortable with these companies growing market share, spending money, raising more money in public or private markets, in order to do that. And then suddenly it's like, ‘oh no, no, you really do have to return a profit.’ And then, you know, I think Jason is right. At some point in the cycle, people will come back and be like, ‘no, no. It's time to grow again. Here’s your opportunity.
Joe: (50:11)
The point he made about — to the Chanos point — about like, oh, well, why weren't they making money in 2020? And it's like the market wasn’t telling them to make money. The stocks were going straight up. I hadn't really thought about that, but you know, it's something that comes up. It comes up on our energy episodes. It's like, what are investors rewarding at a given time? And so if that 2020, on paper, yeah, it's a good environment for some of these gig economy companies, but if the market is still in that mode of no, we're not going to reward you for cutting spending. We're not going to reward you for slamming the brakes on growth in the name of profitability. Maybe I could see how that's a counterargument for why weren't they profitable at that time.
Tracy: (50:48)
Absolutely. It just feels like there's a tendency for people to run too far in either direction. And it's really hard to stamp out because to some extent that's human nature, right?
Joe: (50:57)
Yeah. By the way, the issue with all these legacy VCs getting into unregistered securities, arguably, with crypto tokens and then tweeting about them and then retail investors buying them on exchanges. I thought Jason's comments were pretty pointed on that. And it does seem to me like this could be lawsuit season or investigation season. And I do wonder if any of these sort of legacy VCs will regret pivoting towards talking about publicly-traded instruments as much as they did.
Tracy: (51:31)
I'm very curious to see how it shakes out. I still think the regulators should have been there from the beginning. I mean, some of these tokens quite clearly resemble securities offerings, right?
Joe: (51:42)
Well, you vote and dividends can theoretically accrue them. That sounds like a stock to me.
Tracy: (51:47)
Yeah, absolutely. So why not say that that's illegal or it should be a registered security? Where were the regulators? But yeah, I mean it does feel like some sort of shakeout or reckoning is coming, but I guess it's hard to predict. Yeah. All right. Should we leave it there?
Joe: (52:05)
Let’s leave it there.
You can follow Jason Calacanis on Twitter at @Jason.