Bill Gurley and Michael Eisenberg on The First Signs of an Impending Bust

Sure. And by the way, people that have followed my work will definitely call me out and recognize that I compared where we were to the .com bubble five years ago. And I have a little bit of a chicken little reputation issue here, but things are clearly more like ’99 today than they were five years ago. So we can continue with the conversation. The things that I think are the same, kinda rapid speculation. You have this kind of unbridled enthusiasm. And in certain sectors, you have valuations that are super tough to support using traditional analytical valuation models.

And, you know, that was true then. I think that’s true today. The things that I think are different is the speculation’s much broader. Even though it’s pretty broad then, you have a lot of speculation now where entrepreneurs with lots of cash are attacking incumbents in very traditional industries. The scale is way larger, both in terms of the amount of money being raised by each company and the burn rate. And I would say that is by 10 to 20 x larger than back then, a company would go public early.

They go public with 1,000,000 in revenue, but it wouldn’t be burning that much. It’d just be pretty nascent. And so there’s just way more money and scale at at play today. And then lastly, you know, back then, I think you still had this belief in market cycles, like, did everyone knew it would end. I think right now, there’s a group of people that have doubt about that because of some of the Fed’s actions in o nine and and more recently in March 2020. Wonder if we’ll ever have a reset again.

And so that part feels different to me also.

Michael, how do you feel hearing that? Broadly the same as Bill. But, you know, for a little context, I was like you in the first one, which is I was young early in my venture career. I had had my first couple of of exits in one very small public company, and so it surprised me pretty meaningfully when it happened. It felt at the time, candidly, even though I knew it was irrational, like it could go on forever. And I think when you’re young, you kinda feel that.

And then it did. And what I think is, you know, another, call it, feature or bug of these exuberant markets is you see all sorts of investors in this area that you never saw before. And perhaps one of the reasons when Bill felt, I think, analytically and perhaps correctly, four or five years ago that we were high up and today is he didn’t see the flood of of new investors, what we used call at the time tourists, who’ve kinda come into venture capital investing. And there’s everybody’s investing in venture capital today.

I think the other big difference, though, is it’s gone international. So venture capital was decidedly a Silicon Valley and Israel, candidly, investment theme in the late nineties. You almost didn’t see it anywhere else at the time. You know, New York wasn’t a thing. London certainly wasn’t a thing, and there wasn’t China yet to the best, know, early innings. And so it was all about Silicon Valley. Now you’re in hundreds of spots around the world with venture capital as an accepted financing model globally. And so it’s hard to know how it pulls back when so many markets are in their early phases, to Bill’s point earlier, these because tech companies are disrupting traditional businesses.

So many, many markets around the world are in early phases. Many industries are in early phases. I mean, it’s just much more diffuse. And, you know, it could go both ways. It could collapse kinda globally at the same time, or, you know, you can get different outcomes in different places.

Maybe I’ll make two different comments about that. One, you know, Bill talked about the quantum of capital that’s just there. You know, until you get public, you got preferences on top of it. And so today, you don’t have kind of senior preferences in the venture business. Everything one kind of goes pari passu, but it’s still a preference. And if there’s a market reset, kind of peeling off all that preference can be expensive to those holding common stock and those who don’t have enough money in reserves because their funds aren’t giant like Tiger or Altimeter, etcetera.

And we haven’t seen that in a very, very, very long time. The other thing I mentioned is, you know, you called this the .com crash and then said that Howard Marks said we only had the Internet back. People forget that there were two phases to the bubble coming undone. It was the .com, which has become famous because of the pets.com commercial. Right? So that’s what y’all think .com.com. But there was a second one in fiber optic communications, which was all the rage, and it happened after.

That was the second crash afterwards. And if we have time later, I’ll read through some data on that that I think people have missed. And so it’s hard to know. You know, there may be more areas of technology and certainly new industries that are real with business models. It doesn’t mean that when it happens, it’s in the first and second and third order effect where many of these businesses kinda come undone. I haven’t seen this before.

Yeah. I don’t think you feel the first part of it. I mean, I’ll give you a data point right now. You know, people were forwarding around some charts on Twitter that showed a lot of the non SaaS, non FAANG, mid cap public companies. They’re already average cut in half right now. In the past six months, no one’s really paying attention to it because the SaaS stocks are still super high and, like, you don’t hear much discussion of it. But we could have already started right now.

I mean, that’s how it would feel. Right? Like Michael said, like, one sector falls out of favor. People dismiss that it’s a correction. They say, oh, well, those companies just weren’t as good, which is exactly what happened when Michael I can remember the all the investors that invested in telecom infrastructure. When the .com burst busted, they said, oh, well, you guys were just stupid doing those stupid Internet companies. Our stuff’s real. And then, wa la la boom, their bust was actually bigger from a financial impact standpoint.

But there’s one thing that we just don’t know how it would ever happen happen again, which is capital scarcity. So in o one and then in o nine, we capital became scarce. People didn’t know how they would raise their next round. Like and people thought about, you know, virtually putting cash under their mattress. They were worried in o nine Morgan Stanley was gonna go out of business, and you had just availability of cash shrink excessively. That time period in March 2020 was about two weeks, and then the Fed came in heavy and brought all this money, and everyone was a contrarian and bought on the dip.

And so it didn’t hap And so the real question that I would have about a near term correction is, you know, would the Fed if things started to fall off the rails, would the Fed try and and just overfund and get across the gap again, or have we run out? Like, have we just exhausted the supply of what’s possible on that front? And I don’t think the greatest mind on the macro side know the answer to this question right now.

You know, Harry, people forget that economies are complex systems. And so you don’t know when you poke on one side, you print money on the other side, it is, you know, how they react. And so, you know, to Bill’s point, it’s it’s really tough to do. I wanna follow what Bill said, by the way, about the market correction that no one’s talking about. You know, Gavin Baker tweeted about it. Morgan Stanley Nomura wrote something about it. You know, it follows right on Fred Wilson’s blog post about kind of the average outcomes for the businesses started ten, eleven years ago.

You know, the math is the math at the end of the day, sizes are bigger. But the absolute quantum of companies to get to these high stratospheric valuations is just not that high. And there’s a lot of capital. There’s no capital scarcity, by the way, but there could be, and this will take longer to play out, a scarcity of returns because of all that capital that’s come in. It’s not clear. Again, to the other point, which is because there’s such large parts of the economy being disrupted, financial services in particular, that’s a whole area that wasn’t really available other than PayPal, you know, to these people.

So you’ve kind of countervailing forces here. Just one side point, but I think relevant. Bill used to talk about way back, the price of rent in San Francisco is a good leading indicator of when this market’s overheated, office rent in San Francisco. Francisco. Well, Well, now now with with the the pandemic, we can’t actually track that because everyone’s working from home and rents are down. But I can tell you in Tel Aviv that office rents are up like 50% because everyone’s working from the office in the last twelve months.

It’s nuts. And

Oh, can I read you something? Yeah. Go

I’m looking at the list of Cisco’s acquisitions. This is important to remember. So Cisco prior to 1999, to the best of my knowledge, never bought a company for above, call it $250,000,000 till 04/13/1999, they purchased Geotel for about 2,000,000,000, few more hundreds of millions, but a couple punched through 400, Transmedia and Stratum above 400, then Monterey 500, then Cerent, the big one, I’m sure Bill remembers it well, 6,900,000,000. At the same time, for what it’s worth that, Alcatel, I think, Lucid buys Chromatis, an Israeli company for over 6,000,000,000 and 800,000,000, 400,000,000, 2,150,000,000.

I’m still in 1999, by the way. You get to 800,000,000 at the end of March two thousand where Cisco buys SitePath. We then see 6,000,000,000 on May 5, right, just after the market goes down. 6,000,000,000 buying Arrow Point, and then we never see the billion dollar number again, except for one in 2002 on the Amos systems, 2,500,000,000. That’s the only exception for another five years or so, maybe more till 11/18/2005 when they bought Scientific Atlanta. That should tell you a lot. Ninety nine, two thousand, you see the first punch throughs of 250,000,000 to 400,000,000 and multiple billion dollar acquisitions over one and a half year period and then none more for five years.

And so, again, a bunch of those were after the dot com crash. So much of what you take away from that, but I think it’s interesting history.

There’s one thing, thing that’s been happening with late stage that could get specifically to your question, Harry, about these decacorn rounds and what there appears to be a rather competitive environment going on between the different top players in the late stage private round. Provoked, you know, mostly by Tiger, which everyone’s talked about, who’s taking a very bold some people have called it, you know, SoftBank two point o. You know, having talked to Scott and understand what they’re doing, it’s very meticulous, top down, tons of research.

They have a plan they’re executing on, but that’s provoking other people to lay chase. And there’s a lot of money. Most of that money is in traditional venture firm formats, which is interesting because a lot of these hedge funds used to run, you know, a two and twenty book that marked every year. And they’ve all switched to this venture model where they raise capital, invest it, and then return it. It’s a very different model because you’re not as worried about those marks, you know, the daily marks, and your management fees aren’t tied to the marks.

You’re pushing money through the system. And there’s ample money available, and they’re raising rounds faster and faster. It’s easy to become valuation agnostic to a certain extent because you’ve seen if you hit a winner, if you hit a snowflake, if you hit a Uber or whatever, it ends up being a 100 x more than where you are today. So you become indifferent. So you have ample supply of money. You’re not as worried about the daily mark. And every one of these things is a lottery ticket from your standpoint in the way your economics work.

And so I think that shift where the late stage money move from a traditional kind of evergreen two and twenty model to our one and twenty or whatever it was to a venture structure, I think has implications for what’s happening.

You know, Harry, maybe just to add on to what Bill said one second. Think he’s a 100% right. He’s talked often about the weaponization of capital. What we often don’t pay attention to is if you’ve got the largest war chest at the table, you’ve got a shot to overwhelm the cap table in a down market. Meaning, if I’m Tiger and, you know, I’ve taking a large round from Tiger at a company, then the company needs capital at some point. They are, you know, kind of the winner in the capital sweepstakes in that case because they just have less price sensitivity and ability to overwhelm the cap table.

And I think that’s pretty meaningful. And at the same time, I think interestingly, one of the things that’s different between now and twenty plus years ago in particular is there’s a lot more secondary going on, which means the founders are taking capital off the table in a lot of these rounds. And it’s hard to know how they react, you know, if the going gets tough, if the cap table starts to get compressed from the top, just really hard to know. People made a lot of money in secondary transactions in a way that wasn’t true ten or twelve years ago and certainly not twenty.

I’m having to resist saying okay, boomer, to you, Harry, despite you being half my age. You sound like you’re 50.

Yeah. I mean, there’s been a shift. I think there are some investors that are intentionally executing knowing that capital is a weapon, and they’re taking on opportunities where capital can gain advantage, which are very different types of businesses from what the venture industry has favored historically. And that’s not right versus wrong or anything else. I think a good example, I’d say, is Keith Raboy with things like OpenTable, his current roll up of Amazon stores or Shopify stores. Those types of plays are knowingly capital intensive. Like, they’re very different from a software company.

And so you do have some people that have adjusted. I even think I’m guessing this, but I think some of Tiger’s, when they’re looking at a new opportunity, I think they might be asking, could capital be put to work to advantage the company that we’re backing in this case? In enterprise software, that’s typically done by just blowing up the Salesforce. I mean that by increasing the size of the Salesforce dramatically. Those businesses appear first blush to kinda yield to this capital advantage. If you’re doing a UGC social network play, it’s not clear dumping money on it does anything because you gotta get that product right.

But today, I think a lot of people are looking for those types of opportunities.

know, when I was at Benchmark, they used to say that more companies die of indigestion than die of starvation. I actually think that’s still true. You know, like Bill, I think there’s a dichotomy of companies here. And so where you’ve seen us raise large rounds is where I think there’s a financial services opportunity and balance sheet matters. And it’s not just a typical software business. I’m really concerned about a lot of the software businesses and some of the consumer ones raising tons of money because it’s not clear what you do with it and you get sloppy and it doesn’t cause you to perfect.

You know, Darwin was right in this way, when you stress the system, it gets stronger. I think a lot of the great companies were built out of a stressing of the system, and we’re losing that a little bit and it’s not doesn’t feel right. But there are other people prosecuting them all. You know, Bill’s right about Keith, he’s prosecuting a very different model in some of these cases and doing extraordinarily successfully and well. And, you I think it really depends what you’re after. One thing I will say, by the way, is these big industries, if you’re trying to disrupt them, in order to get the customers on board, they want to see a large balance sheet.

So for argument’s sake, if you’re tackling freight, banking, payments in some cases, like we’ve had with Melio, people want to see a large balance sheet to make sure you’re gonna be around when you’re handling things like money and payments for them. And that’s, I think, driving people to collect large investment rounds. I

Well, part of why I was smiling so much when I said, okay, boomer Harry, is, like, we can sit here and complain or or be worried about a reset or a bubble, and it has absolutely no impact on what’s happening out there day to day. And the problem is it’s a highly distributed field of players. There are thousands and thousands of VCs and way more of that of entrepreneurs. And we don’t get to decide. The market does that via supply and demand. And so you have to play the game on the field.

I think I told you this on a previous call, but I had this amazing meeting with with Howard Marks where he asked me to explain the venture industry to him. And he afterwards, he told me, well, that sucks. I said, what what do you mean? What’s wrong with it? He goes, you’re gonna have resets all the time. There’s no way to invest across the cycle. And I had seen similar our supporting data out of Cursor Bridge, I believe, who’s one of the largest fund of funds, where if you looked at, like, a twenty year window that included the .com bomb boom, if you took out ’96 to ’99, like, you took out the majority of the return.

And so I think you have to invest as a venture capitalist over the cycle, like, a twenty or thirty year period. And the biggest mistake you could possibly make is trying to call the top. And so, unfortunately, I think, you know, have a little, I call it the Thelma and Louise attitude where you just push the gas pedal and run it to the end. Despite that, I fundamentally believe in conservatism and capital cost and all the things that you’re talking about. I just don’t know as a venture capitalist that you have an alternative.

There were several firms in Silicon Valley that in the ’96 time frame said, this is all crazy. This is too expensive. And they they pulled out, and they missed the best three years in a twenty year window of return.

I think he’s misinterpreting price discipline for stage discipline. So we have notably stayed focused on early stage investing, whereas most people have moved to multistage. I think that makes the impression look like that your price discipline because you’re not doing the billion dollar rounds that are in the series c and d. But when we’re competing for a great series a deal with a great founder, we’re we’re paying market for sure.

Michael, how do you feel? Similar to Bill, but I’ll put a couple other notes on it. You know, innovation is constant. And so that’s why you got to invest across the cycles. And because the outliers matter so much, if you decide that you’re just going to have outsized price discipline or make that kind of core, you’ll miss the special ones. And so you need to kind of look at the people. And if you need to kind of stretch on the in price, you do it. And that doesn’t mean you’re going to have a lot of outcomes.

Mean, you could have a bunch of mediocre stuff. Again, going back to Fred Wilson’s blog posts where you have mediocre returns just because there aren’t that many, you know, that hit escape velocity and you get to become the big ones. And, you know, what might have been three to four Xs end up being one or two Xs because you paid too much going in. But ultimately, it’s that one that you hit or two that really go through the roof, you know, Uber or Snap or whatever it is that matter or Wix.

I want to add two other things. Bill mentioned the early stage point. The thing at Aleph that guides us, which one of things I learned at Benchmark is that ownership still matters a lot. One of the things I hear a lot of people talking about, which is is mixed up with price discipline, is how much you own. And I still think because there are so few wires, the ownership really matters. So what we’re doing is if we have to pay more, we’re optimizing for ownership and we’ll continue to do that.

And then the second way I think about is if I need to be the highest priced bidder on the company, on the founder or CEO, I’m doing something wrong. And I think in the public markets, you invest capital is a commodity, you have insight. But I still believe, and I know there are people who don’t think this, but I still deeply believe that relationships matter more than anything in this business and networks matter more than anything in order to accelerate those entrepreneurs.

And so if I’m forced to pay the highest price, it means I’m not doing my job well, I’m not building a good enough relationship with the founder, I’m not adding enough value prior to him taking my capital, and I’m certainly not accelerating the business into the next round, whether by the way, it’s reputation. So the next round, funders will pay a higher price or or just follow on and make sure there’s capital there or business development partners. And one thing I’ve been saying a lot recently, I feel like a broken record is I prefer to optimize long term on reputation rather than optimizing on dollars now.

One of my lessons, again, take away from my time at Benchmark and working with Bill and Bruce and the team there and Peter. And I think that matters. It goes to a

I personally think it’s very different if you’re running an angel strategy where your ownership positions aren’t as large because the liquidity opportunities are much better. If you own 20% of a company and they’re raising a private round and you try and take half of that off the table, you’re gonna affect the price pretty dramatically. So I don’t think those type situations are realistic liquidity events for large shareholders. You know, you’ve seen a couple of very savvy moves. I remember when USV sold Zynga privately at, like, ’21 or ’26, and I don’t think it ever saw that price again.

Those are hard to do. Those are really, really hard to do. Most of the money in venture, as we all know, is met on the home run plays. You’d have to have really strong conviction that the price was super wacky or that there was some reason you didn’t think the company could go really, really, really far to take a large stake off just because the math and venture is all about the big winners.

I’ll add one more thing to what Bill said, which is founders talk to each other. And unless it’s really obvious, you’re taking money off with the founder, and it’s probably a small amount if you’re a large stakeholder, I think that’s reputation negative over the long term and not consistent with playing the long game alongside founders. And so I agree with everything Bill said, and and you want to be around for the win. And, you know, people look back on it. You know, sometimes it’s bad. By the way, I often think about that Zynga thing also that Bill that, you know, they must have had an unbelievable insight to what Zynga really was to have done that at the time.

It’s amazing.

I think the question is the game you’re describing. I think the game you’re describing is the game for argument’s sake set by Tiger on rapidness of capital deployment. In my view, the venture game is around relationships and networks and being able to help accelerate those portfolio companies and the CEOs and bring management to them, which is I think an underappreciated feature. And I don’t think it’s outsourceable in the ways that many people think. And so in my view, the game on the field is finding an amazing founder, getting large ownership stakes, and then helping those companies accelerate out to the next bunch of rounds and staying alongside until it goes public or got bought.

And those are time limiting factors. And so this is not capital deployment. That’s not the game on the field. And so if you want to optimize for the long term for the relationships for the reputation, take your buddy time, it makes sense. Take the time and be the best partner you can be for those founders that creates longevity in this business.

I agree with what Michael said. I also think there’s massive benefit to time diversity in a portfolio. Having lived through cycles before, you spend a fund in nine months, you’ve got no time diversity on that. And time diversity can affect entry prices. It can affect sector bets. It can affect a whole bunch of things. Just as someone that hopes to raise from LPs for a very long period of time. If you have a real stinker fund, it can impede your next one.

Yeah. So I think that’s a bit of a misnomer. I’ve been very outspoken as a huge proponent of direct listings because I just think it’s the only way you should price it public security by matching supply and demand. And I’ve been very negative on the traditional IPO process, which has devolved into something that’s very, very disingenuous to Silicon Valley founders and start up. The process is broken and the outcomes are broken, but it’s really sad. SPACs came along and I think offered something not nearly as good as a DL, but a little better than an IPO, and that it gave the founder and the CEO more control.

And SPACs would have only had this moment in the sun because of the significant underpricing in the traditional IPO market. You know, everyone says SPACs are expensive, but when your stock pops 50 to 70% in the IPO, that’s way more expensive than a SPAC. And so it created this window. I think there have been some, you know, very significant transactions. We just did one with NextDoor. I think SoFi, you know, has done extremely well. I would expect Grab to do well. So there have been some people that have been able to use it as an IPO alternative.

As has happened historically, a lot of people have also used it as a way to take companies public that are pre revenue, which you would call highly speculative. Being public with no revenue is a crazy wild ride. If everyone’s doing it in your industry, back to the game on the field thing, you may have to play that game, but you should expect massive volatility, and that’s what we’ve seen.

I’ll add one thing what Bill said. Part of the question on SPACs is from whose perspective. You know, you contrast it to an IPO or direct listing. That part of that talks about from the bank perspective. But some of these companies would either have taken longer to get public through an IPO or direct listing or wouldn’t get public at all. Some of the lack of revenue companies that Bill’s talking about, and they may be carrying giant liquidation preferences like Ginkgo or or others like that. And so if you’re the entrepreneurs or the common shareholders under that, and you’re going public in a SPAC, boy, you know, removed a monkey up from your back or an anvil on top of you, which is a liquidation preference.

And the counterfactual, by the way, which is hard to say to the SPAC is what would happen to those shareholders had they not been public at all in common stock at that point? And the answer is maybe nothing that good. And so you have to ask from whose perspective.

I’ll jump in. This is question I think you wanted to ask later, but maybe I’ll throw it in now, which is, you know, some of the biggest lessons from way back when. One of them is who you invest with around your table matters a lot. And one of the things I learned in ninety nine, two thousand and sitting with Bill around the board right after that when we merged two companies, shopping.com and opinions, was who’s around your board table and who your co investors are matters a huge amount when times get rocky.

And you need steady hands around the table that, you know, help the founders, you know, raise the valleys and lower the hills because things get rocky. And unfortunately, I think people’s fears and sometimes their true colors come out in harder times. And so what concerns me sometimes, you know, when I look around our our broader portfolio and and other things going on out there is you’ve got a lot of people around these tables who may or not be steady hands when you need them most. People haven’t seen through downturns or stock market cuts of 50%, you know, in the mid caps.

And what are they telling entrepreneurs in that time? Entrepreneurs have a tendency to listen to the people around their board table. They really do. If you’re a aggressive venture capital investor who’s not a steady hand and is afraid to go back to his partner meeting on a Monday and give some bad news or, you know, you can get spun up at a partner meeting. Not you, Harry, because you’re all alone. You’re like a solo capitalist. But the rest of us, we’re mere mortals, so go back to partner meetings.

You know, you come back and then your partner say, well, how’d you let that happen? Or what’s really going on over there? And you come back and you drive the entrepreneur nuts and the rest of the board, and board management becomes a big issue. We don’t have fully steady hands around the table. And that’s something I’m thinking about a lot. Sorry.

One thing I’ll say is I think I’ve been very lucky in that the last couple places I’ve been, three places I’ve been, have been equal partnerships. And I think one of the things about the equal partnership is you’re not worried about your economics or even negotiating them subconsciously on the way. And that makes the partnership more of a safe space and more of a collaborative space. I think it’s one of the really powerful things about the benchmark model that we’ve adopted at Aleph as well. And as far as I’m concerned, it’s religion at Aleph.

And I think it works in these times. But look, inevitably, you have information disparity between the person sitting on the board and the people sitting in the partnership room. It’s inevitable. You also have different perspectives. And by the way, sometimes people on the partnership, will have better perspective because they’re at 10 feet rather than in the weeds. But it’s tough because you’re also the one who’s the partner on the board seeing the entrepreneur and living the emotional up and down of what’s going on and having to kind of bounce back virtually the partner meeting in the boardroom.

And so my experience is that in many cases, particularly with people who haven’t seen these things, it is not a safe space. And when you have junior people also deploying capital, it becomes even less of a safe space. And it really can affect board dynamics and good decision making and calm decision making when things get rattled. Yeah. Bill, how do you feel about it?

I was gonna go in a different direction. I agree with everything you’re saying. I thought up an answer to Harry’s question about challenge, if you want me to I do. I wanna hit it. What direction are you gonna go in? So it relates to where you started this conversation, which is if you have a traditional investor mindset and you study finance and financial history and you’ve read all the Buffett stuff and you have a conservative analytical approach to the process of venture investing, I think, you know, some of these moves by some of these companies, some of the types of companies that have worked are outside of your mental model.

And so if this continues, like, for ten more years, my mindset is probably not optimized for execution in that world because I would say you might need to modify yours because the world’s playing at a different pace with a different game on the field. And there’s all these great stories over the years in on Wall Street where the value investor, you know, is getting his head handed through a boom cycle and then switches to be a growth investor right as everything goes down, and then they lose in both directions, which is always the risk of that.

But I’m constantly trying you know, that great phrase, strong opinions, loosely held. I’m constantly asking myself, you know, why did you miss this? Why did that happen? You know, what is your mental model that’s preventing you from seeing these types of things? And that, for me, the biggest challenge when you have a a boom that lasts this long is precisely that.

yeah. I think so. You know, and we probably discussed this before, but Bruce Dunlevie, one of the founders of Benchmark, walked into the Partner meeting one day, and he just read The Rational Optimist by Matt Ridley, a fellow Brit there, Harry. And having read both the Rational Optimist and How Innovation Work, you know, I think everybody that studies entrepreneurism should read both of them because I really fundamentally believe that what we do with these startups is what the best way to possibly improve standard of living for every human around the planet.

And I think it does do that. And so he came in and he had just read this book, The Rational Optimist, and he uttered this phrase, what could go right? And in talking discussion about the fact that you have asymmetric risk. If you lose $10,000,000 on a deal, you lost $10,000,000. But my biggest mistake was clear because I brought Larry and Sergei in to present when there were 25 employees, and we didn’t lay chase. I don’t wanna say we passed because I don’t remember ever calling and saying we’re not moving forward.

It was highly competitive, but we didn’t lay chase. And two of the most respected investors of our industry decided to make that call simultaneously with John Doe and Mike Moritz. And when I think back on that or any of the other misses, there’s just this failure to imagine how high is up and to recognize that the risk is really missing it rather than losing $10,000,000. Another one that’s very similar, and it wasn’t me. It was a different partner, but I don’t think I was helpful, was Jack brought Square to us on the end.

And there was a lot going on at the time, a lot of reasons not to be imaginative about what was possible. But you really have to resist the feeling like, calling it as a bad investment is not that valuable of an insight. You know, you do feel great. There’s also all this Schattenfreude and whatever in in venture where you you make the decision not to invest, and then that deal doesn’t work, and you’re like, oh, I was smart. But there’s not that much value in that compared to the other thing, which is being imaginative about what’s possible.

You know, we can all handle more boards that don’t work if the trade off for that is more home run outcome.

Michael, how do you feel? I have a a hard time keeping things straight in my head around so many of these things. And so oftentimes, for example, bunch of you saw enterprise software businesses walk in, and I got to say, feels like what I saw before. They all sound kind of the same. I started to figure out what’s unique about them in many cases. I found myself scratching my head as to what’s unique, and that causes me to miss a bunch along the way. I also don’t find that it excites me as much as some of these newer industries do, and I prefer to kind of be way out on what I call the uncertainty curve.

Perhaps it’s my lack of education, but I like the uncertainty curve, which I think creates a more asymmetric bet. And so things that I think are I wouldn’t call them they’re not obvious, but they’re more in the center of the fairway, but they’re great businesses that can hit escape velocity quickly. I have a hard time closing in on chasing, and I’m not sure why that is, but that’s why we have partners. I think the one thing

Yeah. I mean, other people have talked about this, but, you know, if you look back at at 2000 time frame, a lot of the money that was that busted went into telecom infrastructure, and people argue that we are better off having that stuff built out even if the companies and the employees and the founders get washed out, that, like, the physical infrastructure and plant is better. And then, you know, it’s going back to some of Ridley’s work with both of his books. You know, more shots on goal.

And so even if you have a washout, like, it’s really about optionality. So if you have more people trying more things in more places, the, end result of that, you know, should be positive.

I mean, there are great investors that use the phrase diversification. So, know, you can probably get an argument for any point of view.

What are your thoughts, Michael, the pulse? You know, I think in Howard, Marc, you have this notion that busts reallocate talent to where it needs to be and money. And I think one of the things we haven’t talked about today is with all the money coming in to this business, the other thing that’s really scarce right now is talent. If office space was scarce maybe in 2000, now as scarce as talent. I think there’s a few things going on there in parallel. Number one, salaries or option grants or RSUs compensation for engineers in general and great engineers and product people is going way up and continues to go way up and battling with the fangs is doing battle in that way.

And so there’s a big scarcity of that talent, a bust in the past and maybe now would reallocate some of that talent around. I actually don’t think it would reduce the cost of it for what it’s worth, given how scarce the talent is. But I think it could reallocate it to better places. I think the second thing around that talent issue is having so much money come into this has made and having salaries or compensation go up has more attractive for more people to try to become engineers and product people.

So it’s bringing people that otherwise have gone to McKinsey or banking or whatever it is into the tech industry. For what it’s worth, I had a meeting with a very senior banker probably three weeks ago. He told me they can’t recruit anyone. They’re in line behind all these tech companies recruiting the people out of the best schools right now, and that never used to be the case. In 2000, that was not the case. And so I continue to think that’ll be a very large issue facing our industry going forward, and the boom helps that and the bust may help reallocate that.

And by the way, that point I was making earlier about the FANG companies, the other thing is really different this time is because of the growth of passive investing and index investing, and Bill’s probably a better place to talk about this than I am, a giant percentage of the S and P and of these buy side assets are in these FANG plus companies, a giant percentage. When you have a, you know, 50% drop in mid cap tech, which is what I think has happened over the last six months, where does that money go if there’s no yield bearing instruments of note out there because the Fed has reduced interest rates?

Well, they go to the FANG stocks, which have held up pretty well. And so the question in my mind becomes if whenever a correction happens, you know, where does it come from in this kind of bizarrely top heavy pyramid that’s got all this money in these big stocks cause of indexing? I don’t really answer that question. I think that Bill’s probably a better place to talk about that than I am.

I think most of the endowments that have radically radically outperformed outperformed have larger venture portfolios. I And I think the asset class in the past eighteen to twenty four months is, as we all know, has done much, much better than anything else they could be in, and it creates a quandary. You know, they’re sitting there looking at an asset allocation table, and the thing that’s worked is now twice as big than their model wants it to be. And there’s plenty of demand for more, I’ll call it Tiger Chase.

And so I’ve seen some signs that would suggest they’re full, actually, partially because of the returns and partially because of, you know, how far do you wanna take the risk on morphing your asset allocation model.

I still think, you know, maybe I’m biased because I’ve been at this for all these years, but I still think the venture business is a lopsided business at the end of the day. And even if there are more funds today than there were back in 2000 that make money, I still think over time, the index will lose money as it did for a while, you know, and kind of the bottom, pull it half or three quarters won’t beat the market return going forward. And at the same time, you know, like the point I was making earlier about talent, I think there are more entrepreneurs in the ecosystem than there ever were before and coming on from all parts of the universe right now.

And so there is again, demand and supply, The demand for capital on the side of entrepreneurs is growing because they’re just simply more of them. And so I think it will continue to be a larger part of these endowments or pension funds portfolios. But by the same token, somehow I still think that when we play this out in twenty years, the top quartile will do significantly better than the rest who are in this business. I do wanna move into

I know we’re out of time, so I wanna make the quickfire happen. I can talk to Bill forever and to you for even longer. Right here? You guys okay for the quickfire? I said I can talk to Bill forever, and you’ve also. But let’s start with Bill. What would you most like to change about the world of venture today?

You know, it’s funny. I have a very quick response to that, which is if it ain’t broke, don’t fix it. I think it’s an incredible model. I’ve loved being a part of it for majority of my career. As I mentioned earlier, you know, referencing the Ridley books, growth, I think it unlocks innovation. I think it’s just fantastic. And so one of my theories is that one of the reasons Silicon Valley’s been so successful is because it’s so far away from Washington DC. And my biggest concern has always for the venture industry been government gets overly involved and tries to regulate things because then I think you will slow the optionality, slow the diversity, slow the shots on goal, all those types of things.

So I wouldn’t touch it, Harry. That’s my

Right. I think that’s great. I mean, in other words, I think there are different strokes for different folks, and everybody can have that doesn’t make the other stuff go away. I think this whole notion that you’re gonna disrupt and fundamentally take over the business has just been proven false over and over again. AngelList is awesome, but it’s not 20% of the industry. You know? Andreessen said, we’re gonna completely, you know, turn the venture industry upside down, and Sequoia and Benchmark have their best ten year run-in a long while.

It’s a silly notion. As I mentioned earlier, when I said you to play the game on the field, you’re not gonna affect the industry by doing something new and disruptive. You’re just gonna add to it.

Well, by the way, it’s think Bill’s last point is really important to dwell on for a second, which is Benchmark hasn’t changed its model. Right? We copied it at Aleph. Right? So they’re still playing the game on the field with their model and delivering unbelievable returns. And so it should beg the question of if everything’s changed, why does that still work? And the answer is because great people want to be a part of that and the brand relationship matters, and the people are just great. Michael, what are the enduring lessons from WeWork?

Be careful of headline valuations. Okay, boomer. I’m gonna name it, okay, boomer. There’s a few. One is big markets actually matter, it turns out in the end of the day, and this one is a big market with a, know, with a big sucking sound on it. And you know, and a business that was changing, you commercial real estate hadn’t been touched and God bless the teams that went after it. At the same time, kind of don’t fall in love with your own momentum. And board oversight remains critical.

And I think that was true at a lot of companies that reached a lot of these valuations and certainly true at WeWork as well. And this is to both of you. Have you learned more

I saw something recently, like within the past week that is super interesting on this topic, which is I think humans tend to overanalyze failure more than success. There’s a great book I’ll recommend called The Storytelling Animal, which suggests that as humans rewrite history every night before we go to bed casting ourselves as the hero. It’s a bit of a Darwinistic tool to keep anxiety low. And as a result, like, you just study the failures. The winners are like, hey. I was right. Like, you don’t study them as much.

I’m not sure it’s the right thing based on what I said, but I do think we tend to really, really focus on the message. I personally, in in our firm, we studied the great breakouts that we missed the most. So that’s not failure in our portfolio. That’s failure of us to chase the deal that ends up outside of our portfolio. That’s the thing we swept the most.

I’d say neither in this regard. I learned most from the people around me. And, you know, getting to sit around the table with Bill and Bruce and Peter and everyone there for all that time was, you know, the best lessons ever. Then in my current partners, you know, Eden, Aaron, and Tomer, and the entrepreneurs. One of the great things about this job is I think you can learn from people every day. And that’s what I keep finding. I learn most by talking to people and sitting around the table, people who’ve been smarter than me, who are smarter than me, and continue to kind of press hard in this business to try to make it better.

And, you know, that’s been the place I learned the most. Now it’s

I could be quick. I’ll be a broken record because I’ve already talked about it multiple times. It relates to this asymmetric risk thing, and I’ve heard other investors say the same thing. I would, you know, urge myself to be more optimistic, more kind of risk seeking as we evaluate each and every deal and not get overly obsessed with downside protection.

Since I’m a hopeless optimist, that one won’t work for me, but I’ll also repeat something I said. It’s just who you invest with actually really matters. I’ve seen so many companies undone by their boards and shareholders over time that I think who you invest with really matters. I didn’t have enough appreciation for that early. You know, Bill and I had this board together at shopping.com. I think, you know, being together on that board informed me a lot. And I think the people, you know, the great coach, Bill Campbell, came around that board and Lorin Orrington went on to great things.

And and Mather went on from shopping.com to be, I think, the head of the audit committee at Google. You know, having great people around mattered, and I think it still does. And I think it’s underappreciated.