The transcript from this week’s, MiB: Brad Gerstner, Altimeter Capital & Invest America, is below.
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This is Masters in business with Barry Ritholtz on Bloomberg Radio
00:00:07 [BARRY RITHOLTZ] This week on the podcast. What can I say? Once again? I have an extra special guest. Brad Gerstner is a founder and investor in technology startups. His firm, altimeter Capital, runs over $10 billion. That’s after returning a big chunk of capital and profits to their investors. He’s been in doing this for about 20 years. They invest primarily in private and public companies. They’re no longer very much of a seed investor, although Brad, himself was a very successful entrepreneur. He either started or co-founded or came in to various startups, four of which have had substantial exits to say nothing of the companies that he’s invested in, either late stage private or early IPO and has done exceedingly well with, he’s been involved in more than a hundred IPOs. This is really a fascinating conversation, not just because of his acumen as a venture investor, but one of the things that Brad is passionate about is making every child in America feel like they have a stake in the country. They have some skin in the game, and his idea for starting every newborn in the country with a thousand dollars investment in the s and p 500, or as he calls it, invest America, is gaining traction, not just amongst venture capitalists and corporate America, but on both sides of the aisle in Washington DC And this may actually be, become a real thing. I thought this conversation was absolutely fascinating. I think you will also, with no further ado, my discussion with Altimeters Brad. Gerstner,
Brad Gerstner: 00:02:00 It’s great to be here, Barry. It,
Barry Ritholtz: 00:02:02 [Speaker Changed] It’s great to have you. I, I’m kind of fascinated by your background, and before we get into what you do, we have to talk a little bit about how you got to where you are today. ’cause it’s a pretty wild ride, starting with, you’re working with Peter Legal of Forest River that’s later sold to, to Warren Buffet and, and Berkshire Hathaway’s, but you’re operating as his chief of staff. That what, tell us what you were doing with Forest River.
Brad Gerstner: 00:02:29 [Speaker Changed] Well, thanks for having me. I’m a big fan of the show, and you know, I grew up in rural Indiana. I’m 52 years old, so it was 19, you know, early eighties. My dad was first generation college, became an entrepreneur, started an auto parts manufacturing business. He, he chose a, a challenging time. There were double digit interest rates in America, double digit inflation. The Japanese were attacking our auto industry. Right. And as you remember, that part of the world was known as the Rust Belt. Yep. So it was tough times in America, you know, growing up where I did in Northwest Indiana. But the, you know, when I got to high school, I realized my dad’s business didn’t make it. I had to find my way out of this town. I was gonna have to pay for college. So I had a job. And, you know, Elkhart, Indiana happens to be the RV capital of the world.
Brad Gerstner:: 00:03:23 And there was a, a gentleman I got introduced to named Pete Legal. Pete Legal, had built an RV company called Cobra, sold it or partnered with private equity, had a bad experience, left that, and said, I’m gonna do it over again. And he had a little startup RV company called Forest River. Pete’s an absolute force in nature. And, you know, so when he asked me if I’d come be his right hand guy, I had no idea what that meant. But I knew I’d learned a lot. So I worked there the summers of my junior and senior year, and then I’d worked throughout the year a bit, and I learned so much from Pete, but Pete was one of these guys he didn’t spend a lot of time analyzing. Right. Right. The way, the way an entrepreneur does it is they ab test, they’re prone to action.
Brad Gerstner: 00:04:10 Right. Right. So, Pete would say the, you know, jump in the car with me, and we’d go to a competitor’s lot and he’d be measuring, you know, the dimensions on the new RVs out from the competitors on their lot. He’s like, we don’t need to waste money on expensive architects. Right. We can just, you know, do this ourselves, run a better lower cost operation. He knew about competitive modes. Like I say, Pete knew about Michael Porter’s five forces, all the stuff you learn at Harvard Business School. But he learned it by ab testing it in the real world. And so it was a real, a real pleasure to work for him. And yeah, he went on to that, became the biggest RV company in the world. Wow. Would later sell it to Warren Buffett. And, and Warren writes about him extensively in his letters.
Barry Ritholtz: 00:04:50 [Speaker Changed] So eventually you get your JD from the University of Indiana, you don’t really strike me as a lawyer. Not only that, two years later you become Deputy Secretary of State for Indiana. So, so how does that happen?
Brad Gerstner: 00:05:06 [Speaker Changed] So, you know, you’re, you’re, you’re highlighting a random background, and we’ll come back to this. I do think when I look for analysts today, I look for interesting backgrounds. You know, all of these things. I would say the thing that connects them is just voracious curiosity about the world of politics and, you know, economies and trying to make sense out of it. But because my dad went broke, I have three siblings, so there were four of us, his father, so my grandfather, he came to the grandkids, he sacrificed everything. This was a self-taught man. I remember his bookshelf. He had physics textbooks and biology textbooks, you know, and, and he would just read them. He, he couldn’t afford to go to college. And so he came to the grandkids and he said, you can’t be entrepreneurs. You have to become professionals, law school, medical school, become an architect, but we gotta get the family back on track. Right. And so, really to honor his wish, I went to law school, as it turns out, it’s incredible training in just how to think analytically. I,
Barry Ritholtz: Brad Gerstner:
00:06:05 [Speaker Changed] I love, I love that take. That was my experience as well. But you kept going. You said, Hey, if law school is good, what about business school and off to Harvard Business School, you go, what was the career path? What were you thinking about from politics to law school, to to business school?
00:06:21 [Speaker Changed] Well, the truth of the matter is, I was lucky enough when I came back from studying overseas to work for an incredible statesman, Indiana Senator Dick Luger was 19 90, 91. He and Sam Nunn were denuclearized the world with the Sam Nunn bill. This was post the fall of the wall, the end of the Cold War. Right. It was ex exciting times. And I just hit it off with, with this incredible man. And so when I graduated from law school, he pings me one day and he said, Hey, I would like for you to accept an appointment as Deputy Secretary of State. And it was really a launching pad in Indiana for higher political office. So Evan Ba, who became our governor and a US senator had been Deputy Secretary of State. So I knew what it meant, but I took the job. I got there, I think it paid $60,000 a year. And I realized, you know, how poor I was. Right. And I had grown up poor, and I didn’t wanna spend the rest of my life begging for money. So the truth is, I thought to myself, if I could get into one of these fancy business schools, I’ll go there. I’ll figure out how to make a million bucks, and I’ll come back and I’ll run for governor. And that was 25 years ago.
00:07:28 [Speaker Changed] Well, if you ever get to the million dollars you could run for governor. Right.
00:07:33 [Speaker Changed] So I, Harvard Business School, it was a transformative time. 1999, 2000, the internet was blowing up. And that would change really everything further,
00:07:43 [Speaker Changed] You joined General Catalyst right out of, out of business school and then Park Capital Management. Tell us a little bit about both of those experiences at fairly established venture funds.
00:07:53 [Speaker Changed] Well, at the time, there was no general catalyst. It was 1999. The internet was going wild. There were some established venture capital firms in Boston, matrix, Charles River, Graylock, high Highlands, et cetera, Bain. But there are these two enterprising young guys, David Falco and Joel Cutler, forces of nature. And they wanted to start a venture firm. And so we knew we had to put together a launch deal in order to launch this venture capital firm. I help ’em put together that launch deal. Wait,
00:08:21 [Speaker Changed] So when you joined General Catalyst, it wasn’t already established?
00:08:24 [Speaker Changed] No, in fact, that, in fact, I think they were still investing money off their balance sheet called FC Capital. Fiaco Cutler Capital. Gotcha.
00:08:32 [Speaker Changed] Okay. That, all right. Now that made that, so that chronology makes more
00:08:35 [Speaker Changed] Sense. This was an early online travel company that we started. We would eventually, not only eventually, so that was 1999. I was still in business school helping them incubate it. I became co CEO of the business. And we sold our stake in the business to Barry Diller in 2001. You know, the internet had crashed, but our business was working really well. It was fortuitous. And on that successful launch deal, they were able then to go raise General Catalyst one. I learned a tremendous amount from them. They’re both still dear friends. But one of the things I learned in that first startup, I had two guys on the two investors who were not traditional venture capitalists. One was Seth Klarman, the founder of Balpost. Sure. And the other one was Paul Reeder, the founder of Park Capital. So these guys would be bucketed as hedge fund guys.
00:09:22 [Speaker Changed] Okay. Not traditional VCs. But
00:09:24 [Speaker Changed] The truth of the matter is, if you think about Warren Buffet’s hedge fund, Seth Klarman’s hedge fund, Paul Reed’s hedge fund, they never quarantined themselves to just public investments. Right? They just made great investments. Sometimes they were private, sometimes they were public. And so I was really a believer that this was going to be the future of venture capital. That companies were gonna scale faster, that there was gonna be a lot of information flow that you could extract out of venture into the public markets and vice versa. I had an appetite for both the public markets and the venture markets. So I went to Paul, who was the, the founder of, of Par Capital. And I said, Hey, how about if I build your technology practice, I’ll run a public sleeve and I’ll also run a venture sleeve in technology. Paul was crazy enough to invite me on board.
00:10:12 [Speaker Changed] So, wait, at this time, you really had, didn’t have a whole lot of investing experience. You were both a lawyer and a business school graduate, so you had a lot of academic knowledge. What was that transition like once you’re in the trenches and actually deploying real capital?
00:10:28 [Speaker Changed] Yeah, so it, it, one, I mentioned my grandfather, you know, he sacrificed everything. So it was a surprise when he passed away that we learned that he left a hundred thousand dollars, 25,000 to each of the four grandchildren. And, you know, I vowed on that day that I’m gonna come, I’m gonna multiply this money. Like this guy sacrificed everything. I’m not wasting it. And, you know, so in law school, I went and got my series seven in 63, I started plotting stocks. I started thinking about public market investing. I started doing some of my, you know, own public market investing. And you have to understand what this felt like for a kid on the outside looking in who never had money for the first time to buy a stock, to make some money to sell a stock. And so I would say I had an appetite for the public markets.
00:11:16 When Paul met me, I was modeling companies like Priceline in my spare time and investing out of my, you know, probably Fidelity account at the time. And Paul said, Hey, I think you would be good in this hedge fund business. And I said, Paul, I don’t know anything about managing a public portfolio, but the deal we made with each other. I actually said to him, I’ll come work for free. I said, you just have to agree to have lunch with me every day. If I love the business, I’ll probably start my own. Because by this time, I had started and sold a couple companies, and I knew I was an entrepreneur. And you know, I, I will tell you, I still talk to Paul every week. Wow. He’s an incredible friend, an incredible mentor, and a super
00:11:57 [Speaker Changed] Investor. You have one of the wildest backgrounds. It’s really quite amazing to me, seeing how you were driven and you were running pretty fast and you really didn’t know in what direction you wanted to go. And once that came into focus, lots of pieces fell in quickly. Now you’re, you’re running altimeter capital. You launched it at, at a really fortuitous time, 15 years. Any second thoughts that, was this what you were born to do? I mean, how does it feel having spent so much time not knowing exactly what direction you wanted to go, and then suddenly it’s all falling into place?
00:12:34 [Speaker Changed] You know, you, you, you always have to contextualize those moments in your life. So I had started a third company called Room 77 that we had end up selling to Google. I had just gotten married in the fall of 2007. I had my first child in June of 2008. And I told my, you know, you know, very pregnant wife at the time, you know, we didn’t have a lot of money that I was gonna leave this secure job. Now, the first half of 2008, I was doing pretty well in the fund. I think I was up 20 or 25%, right? And so I was feeling pretty good about things. I said, you know, now I’ve been thinking about starting my own firm. Now’s the time I had soft circled a couple hundred million dollars from some endowments. These are folks who said, we’ll give you money. We think you’re good at this. We want to help you launch your own firm. And explicitly what I was going to do is move to Silicon Valley and start a crossover firm by a founder. So I’d started three companies. This was somebody who was venture first, public market second. And I thought that was a really unique wedge into the venture community in public investing. But of course, I didn’t know the world was gonna meltdown in 2008. So by August, the world started melting down. Remember, I’ve got a three month old child, right?
00:13:51 And September rolls around every morning, taboo every morning I’m on, you know, watching CNBC, it’s gapping down 5%, 6% advisors were calling me saying, don’t leave your firm. The world’s ending. This is a terrible time. But what I had was having started three other companies on the back of a napkin, I knew what it felt like to be in a windowless office on the back of a napkin by yourself. And I just said to ’em, the horses left the barn like, I’m doing this and I’ll have whatever money I’ll have. And I knew that Seth Klarman had started with very little money in 81. Paul Reeder started, I think, with less than $5 million in 1991. The SNL crisis Tiger Chase had started, you know, in the wake of the internet melding down in 2000. So a lot of folks who I knew and respected had distress era firms. So I started with less than 5 million bucks my first trade. I bought Priceline on November 1st, 2008. Last week we celebrated our 15th anniversary. And I would own Price Line. I bought it when I was at par. We bought it, you know, at, I think it was 10 bucks a share. We would own it when it was over $2,000 a share.
00:15:06 [Speaker Changed] Unbelievable. So you start three separate companies. NLG eventually gets sold to dealers. IAC open list, which goes to Marchex, and then Fair Cast gets sold to Microsoft. And my missing anything that,
00:15:22 [Speaker Changed] Well, the third company I start is Room 77 that Google bought, right? Fair Cast was an investment, a series B investment. We, we made in 2005, I believe. In fact, we backed the head of artificial intelligence. Listen to this, Barry. Yeah. 2005. We backed the head of artificial intelligence at that time.
00:15:40 [Speaker Changed] People don’t realize AI has been here for time. That
00:15:42 [Speaker Changed] Was first AI investment, 2005. Wow. We back it. He was, he was at the University of Washington. He had an idea for being able to build predictive analytics into the future movement of airline ticket pricing using early AI techniques. And we would go on to sell that business to Microsoft in 2008. Now, here’s the interesting part of the story. The person who bought Fair Cast in 2008 for Microsoft was Satya Nadella. Oh, really? He, he, he was running Bing at the time, right? And he was buying this as a, as a search business into the search platform. And I said, I had dinner with him the other night, and I said, do you remember the conversation we had when you bought Fair Cast? And he said, yes. What I said was, we’ll never beat Google with 10 blue links. We have to get to answers. Okay? Think about that. 15 years before chat, GPT started producing answers. Satya knew that that’s where they had to get to if they were gonna leapfrog Google. Such a, such a fascinating one.
00:16:41 [Speaker Changed] And, and here we are. And they really put the fear of God into Google with chat GPT. It was incredibly disruptive.
00:16:48 [Speaker Changed] I think, you know, I’ve had the, the, the true luxury of investing what into what we call four super cycles. You know, I think scha calls them platform disruptions, right? Internet, mobile, cloud, and now ai. And I’ve said in several places, I think that the platform disruption around augmented intelligence is gonna be bigger than the internet itself. Now, follow me on this. If you think about what AI is already doing for the enterprise, we’re seeing 30 to 50% productivity improvements in engineers. There’s never been a technology in the history of technology. There’s never been a tool that increases productivity almost instantaneously by 30 to 50%. Call centers are now 50% more productive. So you’re seeing margins explode as people are able to run their call centers more effectively. Sales centers are, are more productive. So you wanna know why Meta doesn’t have to cagr its employee headcount at 40% anymore.
00:17:50 You wanna know why Dara reported for Uber that again, their number of employees was down quarter of over quarter. I wrote this letter a year ago, time to get fit. It was an open letter I published to, to meta, you know, mark would go on to write his letter. A year of efficiency. This is what we’re seeing. The power of AI is unleashing incredible potential within the enterprise. And then look at consumers. I I was speaking at the Javits Center, 2000 people in the audience. I asked, how many of you have used chat GPT in the last two days as a replacement to Google? Half the hands in the room went up. That is the first time in 20 years, there’s been a challenge to Google search Monopoly. And Google Search Monopoly represents over a hundred percent of the profits of the business. So this is one of the most fascinating times I’ve seen in my 25 year career, and we’re just getting started. The,
00:18:41 [Speaker Changed] The irony of, of what’s going on with Google is, and I, I’ll use a dirty word. A lot of the big tech companies having been going through a process that Cory Ro calls and fication and Google’s search results have become worse and worse. It’s vesto with ads. Pick a company, Amazon, apple, Microsoft, any large tech company, at a certain point, they kinda lose touch with what made them so successful in the first place. So I don’t use Google half as much as I used to. And before I start the research process, I use a little app called Perplexity. Yep. Which is a pretty decent ai and who is Brad Gerstner? And up comes like pages and pages of information organized in such a useful way. It’s not different than what I would’ve found from Google, but it saves me 10 steps in between. It’s
00:19:34 [Speaker Changed] Well, at the end, at the end of the day, you know, a lot of the information on Google, you could have also found in a card catalog in a library. But you would have to drive there. You would have to open the card catalog. Exactly. You would have to go find the periodicals, you would have to find the books, you would have to read ’em yourself. So really, when you think about, I, I describe Google, it’s the largest card catalog in the history of the world, right? Right. It’s 10 blue links, but it’s an infinite number of blue links. But you have to open the blue link. You have to read the information yourself. And you know, so I, I did this experiment the other day. I, I was lucky enough to be having dinner in Omaha with Paul Reeder, you know, and Paul and I were flying back to New York and I needed to know the answer to the question, what is, and we’ll talk about Invest America in a bit.
00:20:16 So it was related to that. I wanted to know what was the aggregate amount of corporate matching dollars for 4 0 1 Ks on an annual basis. I said to Paul, you use Google and I’ll use, I’ll use chat. GPTI got the answer instantaneously. It took him three or four minutes of hunting and pecking around. It was full of ads, about 4 0 1 K providers and everything else. And the reality is this is a be, was a better tool simply because it made us more productive in the moment. Google’s an extraordinary business. A healthy Google is good for Silicon Valley. The challenge is they are facing a massive innovator’s dilemma. The organizing philosophy principle for the internet for 20 plus years has been internet search. And it’s changing. So I said to somebody the other day, they said, yeah, but Google’s got ai, you know, they’ve got Barr, they’ve got this and that.
00:21:13 I said, I, I will stipulate, I will stipulate they’ll be successful in ai. But do you think they can cross the chasm? And on the other side of this chasm, knowing they have to compete with meta ai, with chat GPT, with copilot, with Claude at Anthropic, with, you know, whatever the post AI to series going to be at Apple. Do you think they’re going to be able to replicate the same dominant monopoly in this new world that they were over here? Now I know your answer. As an investor, you would say, well, Brad, it’s possible, but I’d apply a high discount rate to that. Right? And that’s the truth. And yet if you look at it today, it shouldn’t be like, when I say this, it’s not attacking Google. It seems to me to be a statement of the obvious that, you know, we are, you, you know, 10 years from now, we’re not gonna be using a card catalog called 10 Blue Links to find information.
00:22:06 My son came in the other day, 15 years old, his name’s Lincoln. He said, dad, you know, it’s funny, all my friends at school, they think chat GPT is just good for writing essays. He goes, I now use it for everything. When people say stuff like that, when I go to the Javit Center, they all raise their hands when I’m speaking to groups of founders and they all tell me they’re using as a replacement. When I watched the Open AI Dev day yesterday, right? And I realized the pace of innovation is faster than any innovation I ever saw with the internet. Faster than any innovation I ever saw with mobile. Faster than any innovation I ever saw with the cloud. Okay? So whatever it is today, which it already is, eye-popping the good, whatever it is today, you have no idea how good this is gonna be in three to five years. And
00:22:54 [Speaker Changed] The amazing thing is, markets are mostly kind of sort efficient. And even if this is obvious now, it’s still gonna take a while to work its way into the prices. ’cause people just aren’t gonna be believe that a company like Google can be dethroned. I have a vivid recollection of the news coming out about Enron being a fraud. The first big article, I think it was Fortune Magazine, Bethany McLean took a year for the stock to collapse a full year. No one wanted to believe it. People look at, at the Magnificent seven, they look at these big great tech companies. There’s, there’s a, a hesitancy to believe that the winners are eventually gonna tumble. Thank goodness for books like the inv Innovator’s dilemma.
00:23:38 [Speaker Changed] Yeah, I mean, and, and listen, I’ve also said, I think what is different? So if, if you say, well Brad, are you excited about AI and venture capital? You know, given, you know, this new supercycle and you know, these are gonna be the disruptors against the incumbents. You know, and that was true. If you think back to 2000, Amazon was the disruptor to Walmart or to Macy’s. And if you think about it, mobile, the iPhone was the disruptor to your black barrier to Nakia or to, you know, the, the palm pilots of the world, or in cloud Snowflake was the disruptor to Teradata and to Oracle, et cetera. But when you think about ai, what are the primitives to ai? The first primitive is massive amounts of data, right? The second primitive is massive amounts of compute. Those things take scale and they take money, massive amounts of money, tens of billions of dollars, you know, in order to build the infrastructure to do what chat GPT is doing.
00:24:33 So this is not your typical venture domain where you put 5 million bucks in and you wake up in 10 years and they’ve disrupted, you know, Google or Microsoft, the incumbents are not asleep at the switch. Satya knew 15 years ago, answers not 10 blue links. He is in front of this. He was prescient with OpenAI. Co-pilot in the enterprise is the fastest adopted product in the history of Microsoft. So I think 80% of the benefits of AI over the course of the next three to four years are going to innu to the benefit of the incumbents to the larger platforms that are already public today. Huh. Whose businesses will get better, their bottom line margins will expand, their top lines will re-accelerate. And so it’s not just gonna be the, you know, the gold rush for venture, though venture will do just, just fine. I think it will be a great time for venture as well. But I do think that the incumbents here are gonna compete very vigorously.
00:25:31 [Speaker Changed] So let’s stick with the, the topic of ai. What sort of companies are you looking at in that space? Are you only focusing on the incumbents that you think I’m gonna do really well and find a way to integrate this in this business? Or are you looking at startups or private companies that have been for around for a while that are potential disruptors? So,
00:25:52 [Speaker Changed] You know, as you know, 2022 was a tech recession. It was a challenging year for all of us who were investing in tech. And yet we bounced back in 2023 with one of our best years in the history of the firm, right? And what we recognized in the fall of 22, in fact, we had our investor day for all of our LPs. And our investor day was in October on the age of AI before chat. GPT entered the public consciousness. And what we were already hearing throughout 2022 was the voracious appetite people had for Nvidia GPUs. We were hearing about the moves that Microsoft was making. So we repositioned our portfolio at the end of 22, recognizing that there had been too many dollars that went into safety trades. Too many dollars that went into bonds, right before Bonds collapsed too many dollars that went into cyclicals that were trading at 25 times earnings, despite the fact that they had five or 7% growth and everybody had vacated the scene on technology.
00:26:58 Remember in December of last year, NVIDIA’s trading at $125 a share. And the consensus sell side expectation for data center growth this year was negative 6%. So don’t give me this craziness about efficient markets, right? In the short run, markets are voting machines, they’re not weighing machines, right? That’s exactly right. The consensus estimates were radically wrong at the end of last year. We loaded the boat, we shrugged off the Mike Wilson hard landing consensus bet that everybody had on at the start of the year. We were 93% net long at the start of the year. We’re 60% today. Okay? Wow. And if you look at what we owned, excuse me, we owned Nvidia, we owned Meta, we owned Uber. Those are three of the top four performing Nasdaq 100 companies. I think this year. We also owned companies like Snowflake. So remember data and data infrastructure, that is the number one primitive to ai.
00:28:02 There is no AI without data. And 10,000 or so cus customers, the biggest companies in the world like Apple, JP Morgan, et cetera, have entrusted their mission critical data with Snowflake. Okay? Now, a lot of people, in fact, I heard Kramer say on CNBC yesterday, well, Snowflake’s not really an AI company. You know, I love public commentary like that because that allows me to generate Alpha. The truth of the matter is that Snowflake has seen record increases in their data science and AI workloads because no enterprise wants to port all their data out of one system and into open AI and worry about whether open AI is using this data to train models or anything else. You can’t do that. You have privacy and governance requirements, HIPAA requirements, whatever they are. If you’re these big enterprises. So instead the data has gravity, it stays put, and you bring the compute to the data, you bring the AI workloads to the data, you bring the predictive modeling workloads to the data, the data science workloads to ’em. And that’s what Snowflake’s doing in space. So,
00:29:07 [Speaker Changed] So what I’m hearing from you is there’s a lot of chatter out there about the market is too top heavy. It’s just the big legacy companies, but you’re big into meta Microsoft, Uber, go, go down the list of the companies. You don’t think this market apparently is too top heavy in the tech space? You think these companies are big for a reason? Am I putting words in your mouth or is that No,
00:29:31 [Speaker Changed] I, I I think that’s right. I mean, there’s a reason they’ve gone up, Barry, right? Remember I said Nvidia, the expectation was they were gonna have have negative 6% data center growth and that we’re gonna have anemic growth in their earnings for the year. Instead, it’s exploded higher. The multiple today for Nvidia, or at least at 400 bucks where the stock was last week, right? The multiple was somewhere around 25 times next year’s consensus earnings. We started the year at 40 times. The multiple is compressed, right? Meta is still trading below 20 times earnings. That’s below Levi’s, that’s below Coca-Cola, right? Companies that are growing at a fraction of the rate with nowhere close to the incremental EBITDA margins produced by a company like Meta. No, you know, meta has is is gonna have a big role to play in ai. So it has all of these growth vectors these other companies don’t have. So yes, I do think those big companies are a place to play, but we also, in our hedge fund at the start of the year, we’re shorting some of the companies that we thought were covid beneficiaries that wouldn’t be sustainable. And we’ve seen those companies go down. Give
00:30:35 [Speaker Changed] Us a few examples.
00:30:36 [Speaker Changed] If you look at the s and p this year, the s and p’s up 15, 16% through, through today. If you take technology companies outta the s and p, the s and p’s down on
00:30:45 [Speaker Changed] The year down, yeah. Down from the year. No 00:30:46 [Speaker Changed] Doubt. The Russell 2000 is down on the year, just
00:30:48 [Speaker Changed] Down period without even taking out tech companies. Correct.
00:30:51 [Speaker Changed] So we were shorting the components of those indexes that we thought had gotten too bold up as safety trades in 2022. You had a reversion to the mean this year. And so I, no, I, I think in this business, I’ve been doing this for a long time, probably, you know, 20 years now in the public markets, technology by its very essence is about disruption. If you ever think you can go to sleep on a technology company, you know, it’s a sure way to get carried out on a stretcher. It requires agility. It requires intensity. That’s why I think being in Silicon Valley investing, in talking every day with venture capital companies, founders, et cetera, is a huge competitive advantage to us because we see the disruption coming years in advance.
00:31:38 [Speaker Changed] So, so let’s stick with that concept of disruption. You invest in startups, you invest in public companies, you invest in privates. Where is your sweet spot on the private side, early stage, later stage? How do you think about that?
00:31:51 [Speaker Changed] Yeah, great question. You know, so when I started these companies, I started literally on the back of a napkin. So that would, you know, we would call that seed stage in the parlance, you know, that’s where you’re asking your friends and your family for money. You’re trying to establish product market fit. Altimeter generally doesn’t invest in seed stage companies or early series A companies, because those companies are what we call in, in, in the business pre-product market fit. You have an idea, you’re trying to build a product. There are world class partners of ours in Silicon Valley. You know, I think of like a Mike Spies or at Sutter Hill, you know, a Martine Cado and Andreessen, you know, Gurley when he was at Benchmark. But now Chahin or, or Eric Ria or, you know, my friends at, you know, Sequoia, that’s what they do.
00:32:37 The firms are built Purpose Built Founders Fund to do those early stage gestations where we’ve really carved out our, you know, our brand and our niche is we, we still, you know, we wear the black T-shirts. We’re in Silicon Valley. We have the sensibilities of venture capitalists, right? I’ve started the companies, I’ve stood in their shoes, I’ve hired, I’ve fired, I’ve done all the challenging stuff, but I also, you know, am very familiar with New York, with CNBC, with IPOs, with scaling to the public markets. So we usually take the handoff, right when they discover product market fit. Okay? So that’s usually a couple years into a business C round,
00:33:17 [Speaker Changed] Something
00:33:17 [Speaker Changed] Like that. You know, a series B, you know, a company may be somewhere between 50 and $200 million. In that first round of Funny Snowflake, which was one of our, you know, you know, hall of Fame, you know, moments we invested in that first round, it was pre-revenue. They had about 10 beta customers of the product. It was about $170 million valuation. And we would invest in every subsequent round, and I think owned 17% of the company when they went public.
00:33:48 [Speaker Changed] 17%. That’s a big, that’s a big chunk of, of a company are, are you still long Snowflake, or have you paired back a little bit
00:33:55 [Speaker Changed] How you manage that? Yeah, so remember we have different funds. So we’re investing out of our sixth venture capital fund. We just had our first close on our seventh venture capital fund. So in those funds where we invest in those very early rounds in Snowflake, yes. You know, I mean, our journey with Snowflake started a decade ago. So for those investors, we’ve returned capital and, you know, altimeters Fund one will probably be in the top five all time returns, you know, for Silicon Valley because of the likes of Snowflake and Mongo and other great names that we had in that portfolio in our hedge fund, right? Where we’re focused on annual returns, just like you, we start every year and we say, okay, what’s gonna power a 20%, you know, risk adjusted return in this portfolio? And so, yes, we still own Snowflake because we see it compounding on the top line, you know, in this 30 plus percent range. And it’s still expanding margins. So this is one of those unique and rare software businesses that’s gonna have over 30% free cash flow margins has a massive market. All this AI stuff that we’re talking about, the entire database market. Do you know, in the year 2000, the database market was worth a trillion dollars, right? It’s the single largest market in all of software. And it should be, think what is the primitive to every, you know, everything we do in our lives, it’s data. Data isn’t oil, data is oxygen,
00:35:19 [Speaker Changed] Huh. That’s really interesting. You mentioned meta. I know you’re a fan of Twitter, at least the way Twitter used to be. What’s going on over there? Is this doing the full Friendster MySpace circling the drain? Is there any hope for Twitter becoming what it once was? Or is it mutating into something unrecognizable?
00:35:38 [Speaker Changed] Oh, well, call me outside of consensus on this. Yeah, you know, I know it’s not popular today, but I’m in Camp Elon. I think Twitter was pretty broken before. I think, you know, what we’ve, what we’ve learned about Twitter was they may have had a lot of advertisers, but I’m not sure how well it was actually working for users. You know, I’m on Twitter, I find it probably my most, most valuable source of information. Bloomberg’s right up there, Barry. But, but I would say that my newsfeed and Twitter is extraordinary. And Elon came in there, think about this. He let go, 80% of the people at Twitter, and I know everybody on the East coast flipped their lids. How can he do this, you know, mean-spirited, you know, et cetera. But, you know, the cultures at a lot of these places in Silicon Valley were broken. They were bloated, and they were entitled. What I’ve seen outta Twitter is a 10 x increase in product velocity. Okay? I’m talking,
00:36:38 [Speaker Changed] How do you, how do you define product vol velocity for Twitter?
00:36:40 [Speaker Changed] Think about the things that they’re now doing on Twitter. Everything from virtual and fully encrypted private messaging calls, fully hosted videos, short form videos, long form videos, subscription business that empowers content creators to share in the upside of those subscriptions. There’s payments coming. I mean, like, this is, and, and now we have X do AI where, you know, he launched Grok last week. It’s rumored that, you know, 20 people working for about three months have produced a very credible ai. Remember Elon was also the founder of Open ai. Okay? So to underestimate him, he’s the first to raise his hand. He said, I overpaid for the asset. I did it because I wanted to protect free speech. You can quibble about that one way or the other. It’s a longer debate, but what I would say is
00:37:30 [Speaker Changed] Well free speech that his definition of free speech is kind of off kilter free speech is about not having the government coming in and telling people what they can and can’t say. But if you own a company, you are free to say, Hey, Nazis are bad for my business. So I’m gonna keep Nazis out of my, out out of my public business because I like Procter and Gamble. I like these big advertisers, but they don’t wanna be associated with that. So his definition of free speech kind of perplexes those of us who have been to law school or who like to open our feed and not see a stream of anti-Semitic vitriol. And, and that’s the perplexing part. And I don’t think that’s an east coast or a west coast thing. Well, I think it’s a, dude, it, it was toxic social media in general has this toxicity problem, but opening the floodgates. So, so I, so, so
00:38:28 [Speaker Changed] I would,
00:38:28 [Speaker Changed] I really wanna hear your, your thoughts on this. Well,
00:38:31 [Speaker Changed] I mean, I, I wanna, I wanna take two angles on that. I wanna talk about, respond to that and then give you the business angle. You know, the truth of the matter is, the public square has been a pretty brutal place for 250 years of American history. Sure. Whether you’re standing in the halls of Congress or you are in the public square, people always said things that people disagreed with. And that’s the beauty of this country, right? So if you do work on Twitter, you can tailor your feed in a way that will be more productive for you, right? I imagine with ai, they’ll tailor the feed in a way that it can be more productive to you. They don’t want to alienate users. In fact, the user volume or the user and engagement studies that I’m seeing are higher, not lower over the course of the past four or five months.
00:39:17 But I agree with you and stipulate that a lot of the advertisers that were there have left. I think that Elon is trying to get them back. But more importantly, Elon wants this platform to be something totally different. He thinks there’s an opportunity for this to really live at the intersection, you know, to, to harness the power of our collective brain and provide a great AI build on the back of Twitter to open up the public square to discussion. So when you think about it as a business, I, you know, like when I look at Elon building reusable rockets, electric cars changing the world, you might, you might say this was not the highest and best use of his time or energy. That’s, but having had that conversation with him, he’s deeply passionate about it. He believes in it. I would never bet against the guy. Yeah,
00:40:06 [Speaker Changed] No, he’s a tough guy to bet against. I will say, if anybody thinks the public square, as we’ve traditionally known it, is what people go to social media for. Well, they completely don’t understand what that technology is about. It’s not where you’re gonna have long form intelligent discussions. It’s where people throw tomatoes at each other. Yeah. Yeah. And it’s fun, and it’s amusing. And we, listen, I love Twitter.
00:40:29 [Speaker Changed] Twitter space. Twitter spaces, I think is some of the most interesting dialogue that’s happening anywhere in media today. Okay. And so, again, I think there’s a spot moment in time where there’s some fair criticisms. And I think Elon himself has said, we’ve made some mistakes. Right? But I’m just saying the consensus view that, you know, and I’ve heard it every time this guy starts a business, I,
00:40:53 [Speaker Changed] I love the full throat of
00:40:54 [Speaker Changed] Defense. I, I, right? The, the, the, the consensus view that a guy who’s created trillions of dollars in value, okay? Dating back 25 years across, I don’t know, 10 companies. He’s probably never done a down round of financing in the last 10 years. And yet we have all these people who’ve never started a single business who, who like to, you know, lecture him and, and, and say, you know, that he has no idea what he’s doing. He’s running the business into the ground. All I would say is, wait, watch and see, I don’t know, business is hard, right? That changing the culture at Twitter is hard. Rebuilding the business is hard. But if anybody can do it, if anybody’s gonna work 20 hour days to pull it off, it’s Elon Musk.
00:41:33 [Speaker Changed] So, Brad, tell us about Invest America.
00:41:36 [Speaker Changed] Well, it, you know, Barry, we talked at the start of the pod about my childhood. I was on the outside looking in, didn’t have any money, like a lot of rural kids in America. And y you know, it seems to me, over the course of the last 20 years, we’ve experienced perhaps the greatest explosion in the history of modern capitalism. Massive amounts of wealth have been created. We’ve seen extraordinary leaps forward in human progress. But the problem with it is, 70% of the people in this country will never have a savings or investment account. They feel left out of the system. And it’s part of the reason that under the age of 40, less than half of the people believe in capitalism. Ray Dalio tells us that it’s a threat to democracy and the raw rise and fall of nations. He says, this is where it starts wealth inequality.
00:42:28 People lose confidence in the organizing principles of society. And it leads to strife. We see this in some of the populous movements we have, right? That, that, you know, whether it’s Occupy Wall Street or whether it’s charging the White House. And so to me, we have agency and there’s a fix. This idea is a bipartisan piece of legislation where the federal government will seed a private investment account for every child born in America. So think about this, 3.7 million children born a year. When you’re born, you’re issued a social security number, and you’re gonna be issued an Invest America account. The Invest America account will have a thousand dollars in it, invested in the s and p 500. You own it, you’ll be able to open it up on your mobile device at 18. You’ll be able to take out up to 20% for a qualified purchase college, first time home. Otherwise, it’s gotta compound until you’re 50. Now here’s where it gets interesting.
00:43:27 [Speaker Changed] Hold on, lemme just stop right there. 50 years of compounding. People are very bad at recognizing what that looks like. The rule of 72 isn’t very intuitive. If on average markets gain, let’s use a conservative number 8%. That means that pile of money is doubling every nine years. So by the time you are 54, that’s doubled quite a few times already.
00:43:54 [Speaker Changed] Yeah. So what we envision is, think of a four oh one K from birth. So the federal government seeds, it, it’s a tiny investment by the federal government, 3.7 billion a year. That’s less than one 100th of 1% of the annual budget.
00:44:08 [Speaker Changed] A rounding
00:44:08 [Speaker Changed] Era. Okay? So they seed it and then get out of the way. Now private industry comes in and like 4 0 1 k matches, Dara at Uber will say, Hey, I’ll give this to the kids of my, of my employees. Rich Barton at Zillow says, I’ll give this to the kids of my employees, United Airlines, Microsoft, go down the list. You’ve
00:44:28 [Speaker Changed] Gotten commitments from various, various companies, 00:44:29 [Speaker Changed] Right? I’ve gotten commitments already from various
00:44:31 [Speaker Changed] Companies. So if you see this account, we’ll match our employees children on a certain, on a,
00:44:36 [Speaker Changed] Yeah, we’ll give ’em a thousand bucks in the account. So here’s the math, Barry. If you start with a thousand and you only have an addition of $750 a year, okay, families can contribute to that, your
00:44:48 [Speaker Changed] Corporate tax free.
00:44:49 [Speaker Changed] Correct? Completely. Your corporation can contribute to it. If you have seven $50 incremental year, then every 10 year old in America, when they enter into the fifth or sixth grade and the teacher says, Hey, today we’re gonna talk about math or compounding or stocks or capitalism, they’ll say, open up. You all have phones. Get out your phone and open up your Invest America account. Those kids are gonna have over $10,000, their ownership in America, their slice of America. They’ll see their, the amount at the top $12,500, and they’ll see their top five holdings, their slice of Apple, their slice of Microsoft, their slice of UnitedHealth, okay? By the age of 30, they’ll have over $150,000 in that account. And if you take a thousand dollars add 750 bucks a year, and it compounds at the exact same rate as the s and p 500 for the last 50 years, they’ll have a million dollars in their account. This is a way we get people to believe in capitalism. Again, this is a way we teach financial literacy. This is a way we give people hope. The people who feel like they’re left out of the system. You give everybody skin in the game. And if we can afford to, to send $5 billion a year in foreign aid to our top 15 countries that we send foreign aid to, then we can spend $3.7 billion a year to seed every American child with upside in American enterprise and capitalism.
00:46:12 [Speaker Changed] What’s the appetite on the hill on amongst the Democrats and Republicans for a a, a program like this?
00:46:19 [Speaker Changed] Well, I can tell you, you know, I, I, I mentioned I’ve been a four- time founder, and the number one thing you gotta do when you’re starting a company is called product market fit. Do the dogs want to eat the dog food? Right? Right. And so for two years now, I’ve been funding this and bootstrapping and going out and talking to everybody from the Clinton’s to the Cokes, a giant tent, okay? And I’m happy to say that now we have bipartisan authors and co-sponsors lining up in the house and the Senate. We hope to introduce it in the spring. I think there’s gonna be massive support for this. This is one thing that all both political parties in a highly divisive country can agree on that every kid not to, this is not a big entitlement program to guarantee anybody anything. What this is, is a seed program by the federal government that partners with the power of the private sector to give everybody a shot, to give everybody hope, to teach everybody what it means to participate in, in American capitalism.
00:47:18 [Speaker Changed] So we’ve heard a couple of variations of this over the years. Baby bonds, Senator Booker had had a couple of programs, correct? How does this compare to various, you know, opportunity accounts type things that are out there?
00:47:32 [Speaker Changed] So you, you know, and, and by the way, I think a lot of ’em have great motivations. And so there’s no pride of authorship here. The more people who wanna work on this issue together, and I have some of the greats, the investing greats who are excited to participate, who’ve offered to write the financial literacy. Give us some
00:47:51 [Speaker Changed] Names. Who else is else Are you working
00:47:53 [Speaker Changed] With components like this? You know, I’m not gonna drop all those names right now because I want to have a big splash when we do. Barry, I’ll, I’ll come to you, I promise. Okay. But I, all the people who are my friends who I talk to who run these big firms, they believe in this, right? They b because they,
00:48:08 [Speaker Changed] It makes a lot of intuitive
00:48:09 [Speaker Changed] Sense. It’s, it’s their life experience. So think about this versus a baby bond. You know, bonds don’t appreciate very much, right? They don’t compound very much. It’s not very exciting for a kid. They don’t own part of a company, you know? And, and, and so you, you don’t achieve the same things. On top of that, this program needs to be universal. If you’re a poor white kid in Indiana, right? Or you’re a black kid in Trenton, or you are, you know, if, if you are a Latino kid living in East Palo Alto, this is an opportunity to unite America. We are all on Team America, okay? And so that’s the other thing. We’re not gonna pick and choose, right? And we’re not gonna pick and choose companies. All goes into the s and p 500, 500 of the best companies in America. If it’s good enough for everybody else to index off of, it’s good enough for, for these kids. And so I would say in addition to that, there have been other attempts previously. I think a lot of those attempts were also tied to Social security. And I think it’s a big mistake. You,
00:49:09 [Speaker Changed] You anticipated my next question. ’cause does this eventually set up a method for people to say, all right, now everybody has an Invest America account, we could stop funding social security.
00:49:20 [Speaker Changed] No. In fact, we need to fully fund Social security, right? We made a commitment to seniors. We need to keep our commitment, we need to do the things we need to do around financial discipline in this country. We have a $2 trillion deficit. We spend a trillion dollars more today than we did in 2019. Covid v’s. Over the, you know, the extenuating circumstances of Covid are over. So the extenuated circumstances of our spending increase should also come back to normal. So we gotta deal with our debt, we gotta deal with our deficit, and we can solve social security in the context of that. But we all know Barry sacrifices are gonna have to be made. But that is a separate and a distinct problem. This is much more fundamental. I wanna give every child hope for their entire life about my opportunity to participate in the game, in the system, to know what it feels like to own something.
00:50:15 Most of these families and kids will never know what it feels like to own something. And we did, we talked a lot today about ai. My prediction is that artificial intelligence will lead to some of the biggest labor dislocations in the history of capitalism. Okay? So if we already have people who disbelieve in capitalism, they feel like the system’s rigged against them. Now imagine you’re one of those people, right? In a sales center or a call center, right? You’ve done everything that was asked of you, right? You worked really hard and now you lose your job. It’s gonna take a while to integrate, integrate those folks back into other parts of the economy. And so we need people to understand that human progress is not always distributed equally. But one of the dividends, one of the birthrights of being part of this great system is you ought to have a little skin in the game. And it’s, you know, Warren Buffett said it best. Compounding is the eighth wonder of the world. He said, give me a really small snowball and a really long hill buried. There’s no longer hill than starting at birth.
00:51:20 [Speaker Changed] All right? So, so I have a couple of questions around what you’ve described. I just wanna make sure I understand. This money’s locked up for 50 years. You can either borrow against it or withdraw against it to pay for college or the first purchase of a house. But other than that, it’s there. It can’t be attached by creditors. You can’t be forced to sign it away. It, it’s locked up and nothing can happen. Correct?
00:51:45 [Speaker Changed] And you own personal title to it. Now of course we know that savers save, what do I expect’s going to happen, right? They’re gonna open adjacent accounts, they’re gonna open you, you know, they’re gonna learn the power of compounding. Who,
00:51:57 [Speaker Changed] Who can contribute to oh oh oh one baby’s first, first
00:52:03 [Speaker Changed] Up after $2,000 is the proposal can be contributed to those accounts
00:52:07 [Speaker Changed] Annually. Like an annual
00:52:09 [Speaker Changed] I a like, like an ira. And that can come from anyone can come from family, come
00:52:13 [Speaker Changed] Friends free, goes in and and appreciates. Correct. You take it out tax free as well. That’s correct. The thinking and why the s and p 500, why not a broader index? Off the top of my head, the Vanguard total market is 2000 stocks. It’s a little less volatile and it has the SS and P 500 in it. So,
00:52:34 [Speaker Changed] You know, I’m sure there’ll be plenty of debate about this. You know, when, when you know the rubber meets the road, 500 of the biggest, best, safest companies constantly rebalanced that represent the best of America. It’s
00:52:47 [Speaker Changed] A tough benchmark to beat. I’ll give you that much.
00:52:49 [Speaker Changed] And you just look at the 5,000 year history of that index. We’ve got so much data over that period of time. It’s compounded at 10.2%. Right? And so to me, let’s not let perfection be the enemy of the good. Let’s get
00:53:02 [Speaker Changed] Started. I love it. I love it. Alright, so put on your AI hat a second. You’ve been working on this for two years. In the beginning, even though it was a great idea, not a lot of traction from my sense of, of doing a little homework on this, it seems to be getting a little bit of traction. There’s a little more lift to how broadly both sides of the aisle looking at it. What are the odds that this gets done next year?
00:53:28 [Speaker Changed] You know, I’ve, I’ve recruited a great guy, Matt Lira, to run this day-to-Day in Washington. He helped push through opportunity zones. Another big one, another great bipartisan, you know, piece of legislation. Washington is tricky. It’s a long putt to get anything done right? But I will tell you, we’re gonna spend the money we got to, nobody’s gonna work harder to make this happen. And the goodwill of people on both sides, it’s, this has made me so optimistic on America because, you know, I, if, if you read Twitter, like you were saying, you may think that people on the left or people on the right, you, you know, you, you radically disagree with them. They must be bad people. You know, this has given me the opportunity to canvas everybody right across the political spectrum. And I’ll tell you, they all believe in America. They all believe it can be improved.
00:54:23 And, you know, people are climbing on board. So I think this can be one of those big tent movements. I hope that, you know, it enters the fray of presidential politics. I would love to see both presidential candidates endorse it. You know, it’s tough to get anything done in a presidential year, Barry. Sure. But I’m not stop, you know, I’m not stopping next year. Well, I think we’re gonna put it on the agenda next year. Hopefully, magically we can get it through, but if we don’t, we’re coming back the next year and we’re gonna come back the year after that. Well,
00:54:50 [Speaker Changed] Brad, really good on you for this. This is so fascinating and, and just such an obvious in hindsight way to, to bring everybody in. It’s always nice to see somebody do more than just write a check, come up with a great idea that’s disruptive and innovative and just make so much sense. Congrats to you to getting it this far. I hope you get all over the, the goal line, but even taking it as far as you have is you should really be proud of what you’ve accomplished
00:55:21 [Speaker Changed] So far. Well, look, can, can I tell you one quick story
00:55:23 [Speaker Changed] And before I forget, at Invest America, 24 is the Twitter handle, right? Yes.
00:55:27 [Speaker Changed] At Invest America, 24. Follow it. We need followers. We need you to build the movement. We need you to tell your friends, talk to your Congress people about it. Right? Really let, let, let me tell you a quick story about it. Go ahead. You know, I’m a four-time founder. I live in Silicon Valley, right? Human progress is people who take risk to push the whole system forward. That’s not just starting a company. Right? My son and I were on Capitol Hill this summer. My son Lincoln’s 15 years old. I’ve taken him into all these meetings with me to meet these, to meet Congress people and to have this conversation. And we’re walking outta McCarthy’s office and we had been in there for 60 minutes. It was a great meeting, and we’re walking down the hallway, the capitol, you know, just has the power of the capitol. And I look at him and he just said, wow, that was amazing. I said, dude, for 250 years, there’s not a single thing that got done in this country without it. Starting with a conversation between two people like that. Every piece of legislation, every idea is the back of a napkin and somebody who’s tenacious enough not to give up. Really
00:56:36 [Speaker Changed] Fascinating stuff. Let’s talk a little bit about the state of the IPO environment currently. For a while it looked like the IPO window reopened a bit, then it seemed to, to have closed. What, what does the IPO market look like to you?
00:56:52 [Speaker Changed] Well, I, I tweeted something the other day and I said the ip, I saw that the IPO market is always open, right? It’s just a question of whether or not the sellers wanna sell at the, at the price the buyers are willing to buy. And it, it, it’s really true. What I mean by this is, so we had three IPOs, right? We had Arm, Klaviyo and Instacart. We participated in each of those IPOs. Okay? You know, and if you think about the opening that we had, that was in June of this year. The 10 year was closer to four, right? The, the, the NASDAQ was doing well, what happened between July and October of this year, the 10 year bond moved 25%, right? Okay. So it went down 25% and you had the NASDAQ off 12%. So of course, when you have that level of volatility in the market, right, it’s gonna put a little chill into people’s plans. But let, yeah,
00:57:41 [Speaker Changed] But that, that was last month. Now, now with killing,
00:57:43 [Speaker Changed] Right? Lemme tell you this, lemme tell you this. We have a thousand unicorns just in technology that need to get public. These are companies that are valued in the private market, last valued at over a billion dollars. And what I said in that tweet is, if you were valued at over two to 3 billion bucks, if you have a decent amount of revenue, it’s time to get public. You cannot anchor yourself to some delusional price you got in 2020 or 2021. Anybody who, who’s in the stock market will tell you gross stocks are down 50 to 70% during that period of time. So it’s reasonable to assume that these late stage venture capital companies also lost that value. We see it with great company. Think about Stripe. You know, Patrick and John Collison have built one of the, the, the premier companies in, in Silicon Valley at its peak, I think it, they did a round at 120 billion.
00:58:36 Its most recent round was at 60 billion, right? You see aian and some of these companies getting, you know, really getting crushed in the public markets. The, the clearing price will be the clearing price if you’re a great business, okay? Think back to the day when you and I watched the Salesforce IPO, the Google IPO, the Apple ipo. Go through the list. You get into the public markets, you can innovate plenty in the public markets. Public markets exact a discipline, which is good for companies. They keep companies fit. And the reality is, your price is your price. It will go up and down depending upon factors in your control and many factors beyond your control. But hiding in the private market, it’s like, you know, bill Gurley uses this. It’s, you know, this is like a college, a great college player who’s too afraid to play in the NFL, right? No, you gotta enter the draft. You’re gonna get picked, you may get picked lower than you think you deserve. Then you step on the field and you prove it. You show that’s the power of the public markets.
00:59:32 [Speaker Changed] So, so in late 21, 20 22, valuations had gotten a touch frothy in, in both the public and the private markets. When you see that sort of reset that takes place in the public markets, how long does it take for the private markets to similarly adjust? What’s the lag from when the NASDAQ is down 30%? How long does it take for private stocks to get that big
00:59:58 [Speaker Changed] Of a whack? You know, we’ve been doing some study on this. It’s pretty fascinating. So I would say over most of my venture career, which is now over two decades, I would say that was like nine to 12 months, right? And the reason that they adjusted that timeframe is most companies needed to raise money in nine to 12 months. So, you know, when you discover what you’re worth, when you have to go raise more money, right? Okay. But what happened in 20 and 21 was so unique. We were so awash in money because of the Zer environment that startups were raising gobs of money way more and putting it on their balance sheet than they normally raise. So they have not needed to go raise money in that nine to 12 month window. Instead, they need to raise money more like in a 24 or a 30 month window.
01:00:43 Well, now we’re starting to come up on that period. So 2024, particularly the back half of 24, that’s when real price discovery is going to occur. I will tell you though, we’ve been talking about late stage venture in the IPO market. Early stage market has already reset pricing. Okay? We have a little bit of an AI bubble in some things, and we can chat about that. But normal venture, these are companies that raised a series A now have to go raise a series B, or they’re coming to market for the first time. Prices are already back to what I would call like 2013 levels.
01:01:15 [Speaker Changed] All right, so you mentioned the AI bubble. Is it a bubble? Is there just a lot of interest because everybody’s figured out, Hey, this is a game changer. This is another one of those platform, or, or Super cycles, or, or is it just too much money chasing too few ideas and it’s a bubble?
01:01:32 [Speaker Changed] Yeah, no, I think, I think there’s a moment that you have to hold two simultaneous truths intention. It, it is true, or I believe it to be true, that this is gonna be bigger than the internet itself. It’s having massive impact already on every enterprise and cons, you know, most consumers, right? And so, I don’t think in, in fact, if anything, I think we’re likely overestimating it a little bit in the short term, right? And underestimating it in the two to five year range.
01:02:01 [Speaker Changed] That’s the famous Bill Gates quote, right? 01:02:02 [Speaker Changed] But with, with, with that said, remember 1998 01:02:06 [Speaker Changed] Vividly,
01:02:07 [Speaker Changed] We all knew, we all knew the internet was gonna change the world forever. And a lot of us knew that internet search was going to be one of the biggest businesses to come out of it, because it was the toll keeper. It was organizing all the world’s information. In 1998, there’s Mad Scramble was on among venture capitalists, they gotta get a search logo. So they went out and they invested in Alta Vista, in Infoseek Dog pile, in Lycos, in dog Pile, and you know, go through the list, ask Geeves, ask Geeves, et cetera. All of those companies, right? A few years later would basically be worth zero, right? You could have waited to invest in Google in 2004 in their IPO, and you would’ve captured 90 plus percent of all the profits ever generated in internet search. Okay? So my point there is sometimes in venture capital, right, you gotta be in the trenches, you gotta be studying, you gotta be researching, you gotta be preparing your mind, developing conviction.
01:03:01 But as Warren Buffett has said, the hardest thing investing is to do all the work and then do nothing. Right? Right. And right now, I think this has been one of those times where we’ve passed on over 50 AI companies. We’ve made some select investments, but it’s been easier to invest in AI in the public markets because we already see the fruits of Microsoft’s, labors of snowflake’s, labors of NVIDIA’s, labors, et cetera, the private markets. It’s hard to know which assets are going to have durable value. I mean, think about it, OpenAI just dropped its prices 90% again, okay? So if you’re trying to build a model, Barry, like you and I do for one of these, you know, for Misra or Anthropic or Cohere or any one of these companies that are in the model space, it’s very, very difficult. So I think, you know, study a lot, but tread lightly.
01:03:51 [Speaker Changed] Huh. Really interesting. Before I ask you all of our favorite questions, we ask all of our guests, I have to throw a little curve ball at you. You have what has to be the best job title I’ve ever seen from anyone in tech, founder and Chief boat Washer. Tell us a little bit about your first entrepreneurial gig. Where, where you were washing boats.
01:04:14 [Speaker Changed] Well, you know, my, my dad moved us to a, a small town in northwest Indiana because he thought it would provide, he didn’t have a lot of money, but he thought it, it was a nice town, provide a better life for his kids. What this town had was a really beautiful big lake in it. It’s called Lake Waac Sea. And, you know, about 12 miles long, couple miles wide, everybody had a dock out front and a boat. All the boats had to be cleaned, and I had to make money. And so I partnered with my friend Jimmy Kosnik, and we co-founded Wawasee Boat Care, and we ran the table on boat cleaning on the lake. We had a lot of fun. We probably spent all the money before the summer was over. But
01:04:53 [Speaker Changed] How, how much did that affect that experience affect how you approach being an entrepreneur? How, how seminal was that for you?
01:05:00 [Speaker Changed] You know, I, I think those moments working for guys like Pete Legal, Omer Krupp at sup, Supreme Industries, I was always working, I was always a student of the game. I was always studying, I was always curious, like, how does businesses get built? And you know, the reason Barry, I, I think if you really boil it all down, my dad went, my dad was kind of my hero, you know? And I saw him give everything and his business go under, right? And it affected his health, his marriage lost the house. And so I think if you’re the son, your youngest son of, of a guy who’s like your hero, you see him go through that trauma, you kind of spend the rest of your life trying to figure it out. Like, why didn’t it work out? And, and, and really, you know, doing it for him, avenging what the dream, you know, that he didn’t have. And so from an early age, I knew I had to put it on my own back and get it done. And here we are.
01:05:51 [Speaker Changed] Here we are. So we have you for four and a half minutes. Let’s, let’s turn this into a speed round. And I’m gonna ask you the questions that we ask all of our guests,
starting with, are you streaming anything? Listening to anything? What’s keeping you entertained these days?
01:06:05 [Speaker Changed] The diplomat I was watching, 01:06:07 [Speaker Changed] So good. Yeah, so
01:06:08 [Speaker Changed] Good. So terrific. You know, watch a lot of docs. Listen to a lot of pods and listen to a lot of books on tape. By the
01:06:17 [Speaker Changed] Way, I enjoy you on the All in pod with Chamath and, and Company that, that’s a hell of a podcast.
01:06:23 [Speaker Changed] You know what I’ll tell you about that group is Authentic Friends, right?
01:06:29 [Speaker Changed] Right. We’ve all, you could tell they,
01:06:30 [Speaker Changed] We’ve all known each other in some capacity for, 01:06:32 [Speaker Changed] You could tell it’s real. No one’s put him on this
01:06:34 [Speaker Changed] For a really long time. We do play poker, you know, pretty much every week we’re in town on Thursday nights. We like to give it to each other. But importantly, you know, we have a, we have a thread with one another throughout the week. We are all analysts. We’re all, I mean, it’s like a Bloomberg Stream, constantly sharing news analysis, politics, economics, company specific venture capital, because we care. And so to have friends that you get to play a game with, you get to debate with. You don’t always agree on everything. But at the end of the day, you know, you learn a lot with, you know, it’s a real privilege. You,
01:07:09 [Speaker Changed] You’ve already mentioned some of your early mentors who, who else helped shape your career?
01:07:14 [Speaker Changed] You know, I think, you know, Dick Luger clearly as a statesman, I think in life, you know, we talk about compounding, right? And, and, and in compounding, you know, you got your principle P times your rate r you know, for duration T right? And I think you can apply that same formula to life, but your principle is, is your purpose, your passion, right? And I was lucky enough to find that I just like to be a student and study the world, be an anthropologist, and try to make sense out of it. You know, if I was a college professor, I’d do all the same studying, but then I’d teach a class, right? If I was a host, I would do all the same studying, and then I’d do a TV show. I happen to be Ave an investor. So I do all the studying, and then I get to place Betts.
01:07:57 You know, the RI think of as the rate accelerators. Who are the people in your life? The Paul readers, you know, the, the David Fiaco and Joel Cutlers, the Pete Legals of the world, right? Who Rich Barton, bill Ger. You know, when you find those people, collect them, and you need to make yourself collectible. And the way you make yourself collectible, right? Is you have to invest in them. You have to, you have to be, you know, insightful to them. Right? And I tell my kids all the time, you gotta invest in friendships, right? And, you know, so that’s been really,
the, the byproduct of that has been a lot of fun, a lot of learning, and a few good investments. Huh? A
01:08:37 [Speaker Changed] A really good answer. What about books? What are some of your favorites? What are you reading right now?
01:08:42 [Speaker Changed] Well, I’m gonna tell you one, you know, there’s a lot of stuff I’m listening to on Audible. You know, Chama said something the other day. Somebody was talking about a book in our thread that he needs to read. And, you know, within 15 seconds he sna called it, he put the GPT summary in there. He’s like, I, he’s like, I’m done. Which I thought was, was, was pretty funny, but, but actually quite true. Essentialism by Greg McCune, the art of doing less better. So for me, my design philosophy is minimalism and my life philosophy is essentialism. And that’s also really how we run the business. We don’t have to do everything. We don’t have a lot of fomo. We’re happy being students, but when we develop deep conviction, we put a lot of wood behind the bat. And that leads to enduring relationships, enduring investments, and the ability to compound over a really long period of time,
01:09:39 [Speaker Changed] Really, again, really good answer. Our final two questions. What sort of advice would you give to a recent college grad who is interested in either startups, entrepreneurism, or venture capitalism?
01:09:54 [Speaker Changed] You know, I’ll tell you where I go to look for analysts in my firm, I go to Twitter, really, I wanna, I wanna see what they’re saying, right? And so if you wanna break through, if you want to get noticed, right? Then do research, study something. If you come in and tell me you’re super passionate about something, but then I ask you a couple questions, it’s pretty clear to me. You’ve never really done any work on it, right? It’s not very convincing. But, you know, jamming Ball, one of my partners in the firm, he was a young, a young partner at RedPoint Venture Capital firm in Silicon Valley. He had 75,000 followers on his sub stack called Clouded Judgment. This guy’s 29, 30 years old, right? How did Bill Gurley breakthrough in Silicon Valley? He start, I think he was 28 years old, he started sending out a fax called Above the Crowd every Thursday night at five o’clock telling people what he had learned that week in Silicon Valley. That is the type of hack that shows people your passion, it shows them your insights, your capability to process information. So, I mean, you gotta earn it. Nobody’s handing it to you.
01:10:56 [Speaker Changed] Love that. And finally, what do you know about the world of venture investing today? You wish you knew 20 plus years or so ago when you were first getting started.
01:11:06 [Speaker Changed] Power law, power law, power 01:11:08 [Speaker Changed] Law. It’s all about compounding.
01:11:09 [Speaker Changed] The first 10 years of my, of, of my venture career, I would see something as a, as a founder, I’d say, oh yeah, I can help make that work if we just change this and this and this, and you, you know, I could earn a three x on this, a four x, a five x, right? The truth is, in venture, you have to play for spectacular outcomes. So we don’t invest in a software
company if we think it can be a nice little company with 30 or $40 million in revenue. We wanna go after the biggest market with the most audacious founders. Founders that want to change the world, that want to do things. Iconic. Palmer Lucky what he’s doing at Andel, right? Mark Zuckerberg, what, what, what he want to do in social, you know, Sam, what he wants to do. You know, at OpenAI, Elon in electrification, those are the people, right, who do in fact change, you know, bend the universe and you know, you want to back them.
01:12:02 It’s not gonna, it’s not gonna happen fast. There won’t be a lot of people who agree with you at the start. You know, when we, when we invested in Snowflake, that first round was backing the founders out of Oracle, that were gonna rebuild the Oracle database in the cloud. Separate storage and compute. Most of the smart enterprise software investors in Silicon Valley passed. Okay, really? And so like it, you know, because the cloud in 2012, 2013 was out of favor. It was outta consensus. People were like, it’s not as secure, it’s not as fast, it costs more. So you had to see a future where it was gonna cost less, it was gonna be faster, and it was gonna be more secure, which we did. And so that only comes from study, only comes from study. So study hard, look for the really big outcomes, find people who are undeniable outliers working in those areas and back ’em.
01:12:54 [Speaker Changed] Brad, thank you for being so generous with your time. This was just tremendous. We have been speaking with Brad Gerstner. He is the founder and CEO of Altimeter Capital. If you enjoy this conversation, well be sure and check out any of the previous 500 such discussions we’ve had over the past nine and a half years. You can find those on Apple Podcast, Bloomberg, YouTube, Spotify, or wherever you get your favorite podcasts. Follow my Daily firstname.lastname@example.org. Follow me on Twitter at ritholtz. Follow all of the Bloomberg family of podcasts at podcast. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Sarah Livesey is my audio engineer. Atika Val is my project manager. Anna Luke is my producer. Sean Russo is my researcher. I’m Barry Riol. You’ve been listening to Masters in Business, Bloomberg Radio.