Category: 💬 Opinion | Tech News
Podcast’s Essential Bites:
[15:39] JC: "[There are a lot of] layoffs in tech: Lyft 13%, [...] Stripe 14%, [...] Opendoor [...] 18%, Dapper 22%, and Twitter. [...] It's instructive to look at Facebook and Google, because they have not slowed down by any stretch of the imagination."
[17:03] CP: "If you take a very balanced view of what happened this week, you have to start, I think, with the Federal Reserve. And really what they said is, rates will probably be higher than all of you think. And they'll be higher for longer than all of you want. [...] And basically, what it means is that the dollar that's right in front of you, is now meaningfully more important than the dollar that's far, far away from you."
[17:40] CP: "Let's just assume that the Fed funds rate goes to five [...] percent [...], tech companies have to achieve 500 basis points above that, minimum. So we all have to generate 10 to 11% returns for us to be on a risk adjusted basis better than a government bond. The problem with that is all of a sudden, if you're trying to generate cash, even three or four years from now, it's not worth that much. You need to generate dollars today. And so, they are really reprioritizing the value of short term profits. And that's going to affect how companies get money, the cost of capital, and how much dilution you have to take."
[18:56] DF: "This is that moment where you see that pivot from growth to profit. [...] If Elon is successful in making Twitter a much more profitable enterprise, it could set a new model that catalyzes a lot of other M&A activity, and a lot of other buyout activity of these distressed, small and mid cap companies by other actors."
[21:34] CP: "Right now, there are 15 [...] private [software] companies that are valued greater than $10 billion. And there are 40 public [software companies] that are valued greater than $10 billion. There are 50 companies worth more than $5 billion, but only 60 that are public that are valued more than $5 [billion]. And here's what's crazy: there are 400 companies who have an average valuation of $3 billion. And then there are already 70 companies in the public markets where they have a billion dollars for the next 12 months of revenue. And it just goes to show you [...], if these folks have to generate an 11% hurdle rate, their cost of capital is 11%, the companies [...] will have to go through a lot of very difficult cost cutting, potentially headcount reductions, repricing of the product, all kinds of things. [...] The point is that you didn't have to do this when rates were zero. There was just an abundance of free money and risk seeking and duration that is now out of the market"
[26:43] CP: "If you want to get incremental money to cover your burn, the only way you can do it without really blowing up your cap table and doing a massive recap, will be through convertible debt. But it has a huge overhang, and you risk turning the keys over to the debt holders of the company. So the alternative for that business is to go into the hands of private equity, and get out of the spotlight of these public markets."
[28:13] DS: "It's survival of the quickest. Those who are most willing to adapt the most quickly are going to survive, and the ones that are stubborn and refuse to accept the new [...] market regime are going to die. [...] The most important thing founders can do is forget about the historical terms on which you raised that money. Forget about how much money you were burning in the past. Just think about how much money you have in the bank today. Impute evaluation to it, so you really internalize how much dilution that money represents. And then create a new plan moving forward to preserve that cash as long as possible."
[41:11] DS: "The Bank of England has now warned that the UK is facing its longest recession since records began. Some of this is getting to be fear porn, [...] but look, here's what I think is scary about going into a recession: Number one, you don't really know how long it's going to take to get out. We know the average recession lasts about 18 months. But the truth is, once it starts, you just don't know. And the second thing is, [...] people claim that they can weather the storm. But the truth is that there's no, there's no way to [...] truly simulate a stress test. [...] There's a lot of unknowns."
[42:20] DS: "I think it really makes sense for founders to be conservative. Prioritize your survival above all else. This recession will probably last about two years. You want to make sure you survive it. And [...] if you survive it with lower growth, that's fine. You can keep growing on the other end of this thing. But if you go out of business, because you grew too fast, then you're not gonna get the chance to fix that problem when the recession is over."
[51:30] DS: "I think one thought experiment for founders is to think about what was your plan at the end of 2019? [...] 2020 and 2021 were two of the most distorted years ever in the history of financial markets and the economy, because we had COVID and then we had the reaction to COVID. [...] You had all this money printing, you had zero interest rates, [...] you had SAS companies hitting all time highs at the end of 2021. [...] I think if you were to go back and look at your 2020 plan, [...] you'd probably see that you could get by with half the headcount you have now, because you probably doubled your headcount during the last few years during these heady, heady times."