The Shocking Truth About VC-Backed Companies | Josh Wolfe | Zer0es TV

I'm Carson Block of Xeros, and welcome to another episode of A Short Story. I'm here with Josh Wolfe. Josh is the co-founder and managing partner of Lux Capital, which is, I think, one of the most interesting and now becoming one of the most successful venture capital firms. So Josh, awesome to have you here. Thank you very much for joining us.

Great to be with you, man. Great to see you.

Sort of, sort of seeing each other. Hopefully for real in the not too distant future.

Soon enough.

Yeah. Well, listen, you know, we— people might be a little bit puzzled since we usually focus on short selling as to why we're sitting down with a venture capitalist. And I think it's really important to point out, A, that you're not typical for venture capitalists by any means. And B, you actually have opinions that are subversive, if anything, in the venture capital world. And just to illustrate this, when you and I first met, I think it was probably early 2014. And I remember just asking you, what do you do? And you say, oh, I've got a venture capital firm.

And I hopefully didn't do it externally, but I think internally I had like a major eye roll.

Right, because I'm just expecting like, oh, you know, social media, this and that and whatever. But then when I asked you, you know, it felt kind of the obligatory question, oh, what do you guys invest in? You shocked me by saying nuclear waste disposal and tattoo removal. So that was interesting. And we then talked about how really you, you take this approach in technology investing where you know, you're trying to look where others aren't. And I think just that perspective and that strategy is really why I want to talk to you and understand a lot more about technology investing. And the reason why I think this is valuable for me, valuable for our viewers, is obviously there's a lot of froth out there. A lot of it is connected to technology. And I interviewed Andrew Left this past December, and he made a really good point about where a lot of short sellers make mistakes. You know, they might short, and I think this is particularly the case with technology companies. He said, you need to make sure that you're short a company for the same reason that others are long. And so he said that it's common for short sellers to, you know, become convinced, hey, this company's about to blow their quarter, I'm gonna short it. But you don't get that the long side has a 3 to 5 year time horizon. And that, and that's often, you know, much more that growth type investor, technology type investor. So to really understand how to become better short sellers, but also to understand how to better identify on the long side technologies that just aren't going to get there ever. That's why I really want to talk to you and get your perspective on these. On the myriad questions associated with this.

You know, somebody had said recently that, um, and I don't know to who the quote is attributed, but that, you know, if you think about the distinction between like value investing and venture investing, value investing is premised on things remaining the same. And that, you know, effectively there's a price deviation or aberration, then, you know, intrinsic value will reach expectations, uh, and that the market has, you know, thrown the baby out with the bathwater. And somebody's identified something that was undervalued. And the distinction that they were making was that venture is making a bet on things are going to change. And I don't really agree with that because at the end of the day, maybe the vast majority of venture people are more speculators than they are investors. But I was sort of raised or groomed and took very early to classic Buffett, Munger, Klarman, just rational people that were sort of truth-seeking. And, uh, to me, that is the great virtue of short sellers generally. It's, you know, people that are looking to identify where, uh, not just accidental misinterpretations, which are generally the fundamental analysis gone wrong, but overt manipulation of credulity of masses, uh, which I find to be a great virtuous thing. And it's, to me, very resonant with what the fundamental people and asset that we invest in, which are scientists and engineers, are trying to do.

They are in some, what I consider to be a righteous pursuit of truth.

You know, there's, uh, you know, some scientists out there that claim something, and then because of the system of peer review, you have somebody else that says, no, that's total bullshit, that's not actually true. You know, and through that constant iteration of like conjecture, which could be done innocently or maliciously, and then criticism, you trend towards truth.

It's the same thing in markets. And so I like to think that I'm on this holy quest of funding people in science and technology that are creating something virtuous and, uh, and truthful.

And I like to have lots of friends like you that are, I think, on a similarly virtuous quest when it comes to capital markets to call bullshit on people who are just either, you know, outright lying or manipulating other people. So, um, yeah, and the virtue of technology, you know, we have lots of friends in common that that are focused on short selling. And, and I think my attraction to them and vice versa has been sort of my focus on the fads and the frauds and the technological obsolescence. And in one case, everything we do at Lux is premised on, you know, can we find somebody that has solved the problem that's going to disrupt one of the big guys? And so yeah, when we first met thinking about nuclear waste, uh, you know, most of the big people in that industry were CH2M Hill and URS and Flor and Bechtel, big engineering primes that were basically, uh, almost the equivalent of Beltway Bandits, but, you know, just capturing large money from DOE. And when you learned about the enormity of the nuclear waste problem, both domestically and internationally, specifically for pre- and post-Cold War bomb making, there was a big opportunity to, uh, you know, find technology that, that might be superior. And, uh, so we went and assembled a team and, you know, found technology and people and put it all together.

Yeah, so I think the great virtue of, you know, having an appreciation for technology is recognizing that in some sense, you know, if we're super cynical about it, although it is true, most future shorts are going to come from the vast majority of what venture guys are funding and taking public. Because there are things that will be legitimate, I think, great compounding business like an Amazon, which was venture-backed.

And then the vast majority of companies that go public, you know, probably shouldn't be.

Are premised on a narrative, have set unreasonable expectations, have attracted a cost of capital that is undeserving, and have a business that will never ever be able to earn that cost of capital. And so, you know, some people in the early days are rewarded for the speculation and pursuit of, you know, these momentum and growth stocks. And certainly for the past few years, you know, I think valuations afforded to companies with growth metrics were somewhere between 2x and 4x.

People who had, you growth and profitability, let alone, you know, the top line.

And I think eventually we'll see a return in discrimination towards like, you know, not just quality of earnings, which most companies don't have today that are in high value, but like the quality of the revenue.

And I think there's a lot of games that are going to be revealed about people goosing things for top line growth that just is not organic or authentic and, you know, requires scrutiny from people like you who can be rewarded for identifying that.

And saying the emperor's got no clothes. Yeah.

When, when we talk about stuff that gets venture funding, you know, I'm talking more of the typical, you know, venture firms that fund this, you know, in the social media space or what have you. You know, somebody I spoke to a few years ago, and I won't mention his name just because I don't have permission to, although he probably would be okay with this. But in any event, he, he came from, he came from that world of, you know, having been at some startups, including some very successful ones. And so what he said to me is that when you take a typical, say, you know, software type start or online startup, he said, you know, you maybe 3 or 4 founders and, you know, they're working together and they all want to code the sexy stuff. They want to code the application and nobody really wants to code the applications that measure, you know, that actually, you know, that actually track the metrics or create the metrics. And that kind of, you know, whoever gets stuck with that is often like, you know, like, fuck job here, doesn't put his or her all into it often. And so then by the time they go and they're getting looking for Series A, Series B, they probably have bad measurement of metrics But what I was told is that the VC firms never really diligence them. You know, they come in, they get the, you know, the founders come in, they've got their, you know, they've got their pitch and nobody really says, you know, hey, we need to dig into this and see whether, you know, the user growth is blah or the engagement is whatever. They just are taken at face value. And then if they get funding, they hire a bunch of people and, you know, eventually somebody kind of tries to straighten out you know, they get some people in-house who are trying to deal with this really flawed metric system. But it's often they're just building on top of that. So you have these companies that are going public that, you know, inadvertently a lot of times have just really bad data on, you know, on what they're, you know, on what their actual users are doing. And, you know, this person also made the point that certain percentage of these companies that get venture funding and even go public there's been deliberate deception, if not outright lying, about what these metrics are. How much of an issue do you think that, you know, that these, these two really, you know, present? I mean, how often do you think that this can be a problem?

I think it's the majority of the time. I think, you know, I've got this dictum that I've taken from Theodore Sturgeon, which— 1957, apropos. it's called Venture. It was a science fiction compendium. But November 1957, and Ted Sturgeon basically said, 90% of sci-fi is crap. And I actually think that eponymous Sturgeon's Law applies to everything. So 90% of everything is crap.

90% of people are crap.

90% of music on Spotify is crap. 90% of Netflix shows are crap. 90% of SPACs are crap. 90% of companies are crap. And there's actually sort of a separate Bayesian trick, which I think always is interesting to reveal how much luck there is in, in investing. Um, we'll talk about that in a moment, but I think it's abundant because I think 90% of companies are crap. And so, you know, 10% of companies have probably a totally legitimate operator who has the experience and understands a priori the metrics that they have to hit. They understand CAC, they understand LTV if it's a software business. They understand the product differentiation. They understand the incentives that they have to give to salespeople to hit quotas and drive business. They understand the attachment rate of, um, you know, service or maintenance revenue. They understand, you know, how to run a real business.

And they also understand their cost of capital and how to raise it and lower it and hit it.

And so, um, those people are few and far between. I mean, great entrepreneurs are by definition scarce and rare. Now, some of the great entrepreneurs aren't great operators, but are phenomenal storytellers. And if you're a phenomenal storyteller and you can raise money by raising expectations and lowering your cost of capital, then you can do exactly what you said, you know, sort of fake it to make it, or, you know, recruit a team and, you know, you're attracting more and more money on the sexiness and the sizzle of it. And then maybe you've got enough capital in cash or stock currency where you can actually, you know, make a tuck-in acquisition or some acquihires and like get some substance. I mean, Larry Ellison was sort of famous for this, right?

Of, you know, he was the first pioneer of vaporware and just lying about products that didn't even exist.

And, you know, in part to send negative signal for competitors, in part, you know, to attract capital to be able to fund that kind of stuff. And then, yeah, I think it's pervasive. The difference is also a big function of the macro. And so, you know, if you zoom out and just say like, what's good for society, you know, is it better when the cost of capital is higher, better when the cost of capital is low for like innovation? And my answer has always been yes, because when the cost of capital is low, very, very few things get funded. And you can argue that when cash is scarce, capital is dried up, you know, people are sort of going back to like their motherships if, you know, they left banks or accounting firms or you know, big engineering firms, they're scared and they go back to shelter. And sort of like the most risk-taking, high-conviction entrepreneurs that really believe in themselves and are like, okay, it's not just a rising tide that floats all boats. Those are the people that sort of dig in. And same thing like investors, the level of scrutiny when cash is scarce becomes way higher. The amount of diligence that an investor is doing in venture is way higher because the risk that somebody is not there to fund you is way higher. And so you got to trend closer to truth and be closer to getting it right. When cash is abundant, it's great for innovation broadly because thousands and thousands of experiments get tried. 90% of those things will fail, you know, and has always been the case going back, you know, to time immemorial. But even looking back from, you know, 20-plus years ago with the dot-com boom and bust, the detritus, what's left behind, becomes the combinatorial fodder for the next wave. And you pick up the pieces and like post facto, it's like, oh, of course, like this is great. It's obvious. We were just early. We weren't wrong. But I think, um, when cash is abundant, diligence basically becomes non-existent because your financing risk is very low. And sometimes you have financing risk that's low because of like a SoftBank that comes in and is basically playing a totally different game, right? And they're just buying into businesses and pricing them up themselves and capitalizing these things ridiculously. And, and, and in some cases that then creates the social proof for other people be it growth funds or some public market crossover funds, to basically say, well, we can do the same thing but with maybe a better reputation. And so if you're an early stage venture guy in the past few years, you know, the price you paid didn't really matter because it was relatively certain that a reasonably high quality management team and a good story, you were going to get funding, you know, in a later stage round. Now the risk that you were taking was that the terms of the financings that you would take would be a preferred financing with, you know, 2x liquidation preferences.

And my God, like, if it doesn't work out, your part of the cap table is screwed. And, you know, the later stage guys are going to basically capture everything.

But because there's so much competition, everything has been super founder-friendly.

You know, in some cases, big funds that would normally want 2 board seats are like, yeah, we'll give you not only our board seats, but we'll give you our votes.

You know, it's entirely yours, right? And so, um, I think in a period where You know, cash is abundant, um, diligence is scarce. It invites bad behavior, it invites fraud. Um, and, and I think, by the way, we're in a period where, you know, both you and Jim and other— Chanos and others have, you know, referred to as the golden age of fraud.

And I truly believe that.

And it'll take some years, you know. I've been wrong for the past 2 years thinking that this was imminent to end. So I have no idea if it ends in, you know, 2 weeks, 2 months, or 2 years. But I do think that the, the positive feedback that companies have gotten from promoting top-line growth—

and we, you know, just alluded to this before— the quality of that growth is probably very poor, that they're going to employ all kinds of tricks.

And some of those tricks will be legal. They will be immoral, but they will be legal to buy revenue, um, from companies, to make horrible acquisitions. And they'll find ways to just conflate the way that they categorize, you know, product segments and not reveal others. And, and the really scrutinous analyst will be able to discern, but they will be doing that in a minority of investors when the majority are basically just going off of, you know, the Reuters or Journal or whatever headline or Yahoo News or whatever, who have just been spoon-fed the thing from the CEO or the celebrity CEO. Who that journalist wants to continue to get access from. And so it's a cycle that is just going to take a really long time, I think, to shake out.

So how complicit are, you know, is the venture capital industry in these promotions and frauds? I mean, you know, is there, is it, you know, very willful ignorance? Is it just, hey, you know, we only provided the money, what these guys do with it is is their responsibility. Or by— some people might think this is kind of tinfoil hat, but I've speculated for some years that there's something that I call the Silicon Valley Mutual Welfare Society, which is where, you know, the well-established Silicon Valley VC firms, you know, they all have portfolio companies and they kind of scratch each other's back. So you've got a portfolio company that's kind of dogshit. I'm going to have one of my portfolio companies buy yours, you know, later you're going to have, you know, you're going to have one buy from this guy and then he's going to buy a shit company off me at some point and we'll all kind of be able to sweep stuff under the rug. So how complicit is Silicon Valley in the promotions and frauds? And does the Skull and Bones Society really exist?

Do they run the world?

If it does, I'm not an invited member.

But, uh, the—

there, there's, there's definitive reciprocity in venture, more in getting into deals, you know. Um, if we, if we form a company, which is something we love to do, where you start a company with an entrepreneur, you have very high ownership for very low dollars, you've originated something interesting, you're not competing, you know, for with everybody else for a seed or Series A, then you get to choose like, okay, let's go to these 3 firms.

And the people that you pick might be people that you think are both going to be legitimate value-add investors they're well connected, they're high signal, you know, they're going to be supportive in future rounds, but also they're interested in companies and they will reciprocate by showing you something in their portfolio, right?

And so, so there's that for sure in the ecosystem, which I don't necessarily think you see as much in the public markets. I mean, you have some high correlations amongst like, you know, ex-Tiger Cubs or people that sort of think alike or have been trained alike, but I don't think that it's like as overt of— and it's not like, hey, like we would never say, hey, we're showing you this, well, you know, it's just sort of like an implicit We're bringing you deals. And if everybody else is like, thanks, and never show us anything, we're not going to come back and bring you our next best deal. And so there's some expectation in terms of deal flow that's just sort of premised on relationships, you know, where you're sharing ideas and making introductions to entrepreneurs. But at the end of the day, we can make an introduction, uh, you know, I don't know, Founders Fund, somebody that we like doing deals with, and the entrepreneur gets to decide.

Like, we never have the heavy hand to say, because we're not like private equity firms where you control the company. You know, you own between, I don't know, 5 and 25% of the company, or, uh, that non-passive minority shareholder.

You have a board seat, um, in most cases. But, uh, it's at the end of the day up to the entrepreneur about who they want in the syndicate. And the best entrepreneurs have a sense of who they want, and the worst entrepreneurs, you know, are almost begging for help to have you help, you know, raise the money for them. Um, in the case of like you have a crappy portfolio company I think it's the same sort of thing where, again, the best firms, you're only as good as your last deal.

And if we went to another firm and like, ah, you know, these guys are just like flailing and we need help being bailed out, you know, and don't worry, we'll take care of yours later.

I don't think that that happens as much and certainly not, you know, amongst the people that we co-invest with. And the reason is the magnitudes of your winners are so much bigger than your losers.

I mean, if you take an average venture fund, a third are 10x, you know, a third are total zeros, and a third you make your money back, and you end up with like a 3x cash-on-cash fund over that, you know, decade or 7 years or whatever it is.

And so if we've got a company that is like, you know, flying high, the idea that we would take some, you know, shitty culture or crappy technology and try to roll it in to do a solid for some, you know, peer VC, or that they would expect that. I just, you know, I, I don't—

I think that's more apt in private equity, you know, where they're in control positions and, you know, they sell a company or they're doing some tuck-in acquisition.

But I haven't really seen it in venture, although I will say there's times where you see combinations of companies where they merge, and sometimes it's in within somebody's own portfolio. And it could be because, you know, and there's one VC again, who I also won't name, who does this all the time. And like, when you see it, you know, I'm just like, oh my God, it's like, you know, another so-and-so special. They have a company that's got cash, another company that's basically low on cash. This company's got better management team. These guys have some management coup. And so they take some elements of the assets, where it's the people or the technology or bigger market or better story. They combine these things.

and then they try to live another day. But they typically do that within their own portfolio.

And then, then they might come to us and say, hey, do you want to invest in this combined entity?

And we're looking at it, we're like, no, you know, we're good.

Because it really is, in that case, you know, one pile of shit, another pile of shit is like, you know, three piles of shit.

You said something also that a few minutes ago that is particularly interesting to me as well, um, something I've wondered a lot about. You said that from the— that the the entrepreneur, the founder of the company, you know, he's got to, you know, he or she has to choose, you know, if they're in demand from among the different potential venture investors and, you know, decide like who you really want in that, you know, in your, in your company. And I was wondering, especially for somewhat, you know, sort of non— maybe non-Series A or maybe it's, you know, it is in Series A. I mean, how much thought is or should be given to the relationship between the venture firms and investment banks? And I've always really— I mean, you know, diving into that a little bit more, I've always really wondered about this relationship between large venture firms that, you know, produce lots of IPOs, the banks that underwrite those IPOs. What's that like? And, and then I have another maybe kind of tinfoil hat question on the back end of that after I get your, your comments there.

So banks, for the most part, I think are relatively held in relatively low regard.

And maybe there's one exception because they have an incredible capacity on a daily basis to print multibillion-dollar deals, which is Catalyst and Franco Quattrone. Um, whose involvement in deals typically is a signal to a potential buyer, you're not going to pay a cheap price for this, you know. And, um, and anyway, so, so I, I think they have sort of a magic touch. But by and large, most bankers—

most, you know, not all, but most bankers— do very little work on companies.

They give some signal value, and you basically have an offer in hand from an acquirer, uh, and you know, they happily collect their fee and give some advice and clean up, you know, some of the presentation stuff. But if you talk to most venture guys, not, you know, not just the cynical ones, they will say bankers, you know, don't really matter that much.

And in this current market, where between SPACs, direct listing, and IPOs, it used to really matter the quality of the bank that you had.

And so Morgan Stanley and Goldman Sachs, and, you know, to an extent maybe CS, you know, when they had strong technology. It was a higher quality because they had a reputation of being more discriminating and discerning. And then when you see them taking, you know, crap out, you know, I, I just don't think that the institutional buyers today, uh, to the extent that there are active ones remaining, really care. And to the extent that it's the passive ones or large complexes, you know, Fidelity, Morgan Stanley, T.

Rowe, etc., like, you know, they, they know which companies they want to be holders in.

In some cases, they've come in pre-IPO, you know, and got in an allocation.

That's really been a big change over the past 10 years. I mean, I'll give you like, you know, peel the onion back, like where there's reciprocity and sort of the, you know, the secret inner workings of venture. Um, we are constantly courting entrepreneurs and we're constantly doing right by our peers that are, you know, both competitors and collaborators.

And I always think that the game theoretic of the number of transactions that you have with somebody on a given year and the number of interactions is like inversely proportional to the morality. You know, Turkish rug salesman, you know, if you're visiting Istanbul and you go to the Great Bazaar or whatever, is going to screw you over because they're never going to see you again.

You buy a house, you know, you're a real estate broker, you know, they're typically not the most reputable, honest people because the frequency of the transaction is very low even though the magnitude of that transaction is very high.

I think in sort of game theoretic situations where you're interacting a lot with other peer VCs, like you screw somebody over or you get screwed over, like that's it for a very long time. And it ripples across, you know, the partnership. So like I've been very defensive.

One of our partners got screwed over by somebody else in another firm.

It's sort of like, I'm very quick to be like, you're dead to me. And so the ethics of how different firms treat each other, I think is one thing. So that's one layer just between GPs.

At venture firms.

And we might compete, somebody else might outbid us, somebody else. But typically, you know, there's an allocation game, particularly in very hot deals where somebody might be raising, I don't know, $50 million and we're coming in for $25 or $30 and there's $15 open. And somebody's like, hey, we'd really like to invest in that. And like, if we can try our best effort to squeeze them in, oftentimes it's best if it's the entrepreneur making the decision, then, you know, we get a chit. So this idea of chit trading is something that matters when it comes to like allocations and deal flow. The entrepreneurs themselves, then, um, think about every VC has limited partners and limited partners vary from like high net worth individuals to big wealth managers to large endowments and pensions and nonprofits and charities. And, and we have, you know, migrated very significantly towards the foundations, endowments, charities, philanthropies, because there's some meaning when we invest those people's money. We actually feel good when we're fighting for a basis point of allocation in a company.

Our partners are reminded, and we explain to the entrepreneurs, we might be doing this for the Cystic Fibrosis Foundation or a children's hospital, and it feels good to know that those are the end owners.

But there are also money managers who, you know, on the first sign that a company looks like it's going to exit, uh, they've aggregated a bunch of high-net-worth clients, you know, into your fund, uh, and they're coming to the entrepreneur because they want the entrepreneur, you know, to be a a client themselves. And so they might work at a big bank and they might say, hey, let me introduce you to the bankers, um, you know, that run life sciences or healthcare or whatever. And, and at the end of the day, the board still will have to do a bake-off between multiple banks, but they end up being sort of value-add, right?

Let me give you the front line, you know, speed dial call to the head of banking for that group.

And so that's sort of valuable. But when it comes to capitalizing the companies from round to round Banker's involvement in any of those situations is almost always a negative signal. You know, if somebody's coming and showing us a deal because, you know, they're shopping it as a banker, it's just, it's a low-quality deal. Usually it's directly from a board member that reaches out to another GP and says, you know, hey. And then you're, you're asking them honestly, like, is this one of your top 3 teams? And if they're like, oh yes, this guy's amazing, you know, and then you're like, no, this is like not, you know, then you've lost all credibility. Um, but like that, that whole IPO allocation game, and I think that that's really been undermined in the past decade. And, and specifically now, and we can talk about this too, but the SPAC phenomenon, which has, you know, horrible behavior and then some good virtues, um, when you do the PIPE for the SPAC, you're effectively getting to choose who you want your shares to be in the hands of. And that's a market itself, which, you know, I used to joke was like, you know, it was like the Roth Capitals and some of the lower-tier banks and the places that you would go to go identify shorts. You know, usually if Pitbull or Snoop Dogg were performing, it was like a, you know, a bell to be like, okay, like there's some shitty companies here, you know, to look at, right? And so even a year and a half ago, like if somebody was like, yeah, we're really interested in potentially taking one of your portfolio companies threw us back, we would have been like, thanks so much, you know, enjoy the concert. No, you know, you start to get some legitimate, um, sponsors that, um, added a little bit more prestige or sheen to it. And so, you know, whether it was Ackman or Sternlicht or, you know, people that would normally not be associated with shady practice, um, and then you had more promoter types like Chamath. But, um, it started to just sort of get interesting. Now, the SPAC itself went from like these very high promotes to the sponsor to effectively what would be no promotes to the sponsor. And I think the most natural evolution— oh, and then by the way, the, the main thrust and driver was you had all of these SPAC arbitrage people at a time when rates are low or, you know, virtually real rates negative, that saw this as a cash alternative. And many of them were borrowing from Canadian banks at 10 to 1. So they would put down, I don't know, $3 million, borrow $30 go into the SPAC itself, um, get this cash yield. Uh, if and when they found a target, they, uh, would hold it. And, uh, if it had some price momentum— many times these participants in the SPAC had no idea what the company even did. Uh, the start of this year, 2021, January, that started to change. If you were a seller into a SPAC like us, we have 6 companies that have been acquired by SPACs. You don't want that SPAC mafia in as holders, you know. You want legitimate long-term, traditionally long-biased funds. You want Fidelity, but more importantly, you want Tiger or Coatue or D1 or Viking or Senator or Exon or Bill Miller, uh, you don't really want the ARKs, you know, or Baron, or, you know, people that are just— or Bailey Gifford, you know, more growth-oriented less scrutinizing at, you know, less high signal than somebody else that, you know, might run a long-short book. But, but that was your opportunity to sort of control effectively who was getting allocations, because you didn't go out randomly. You basically said, like, let's go to these 4 or 5 long funds. And, and so, but what I think the next natural evolution is, is you'll look at those same people and say, wait a second, if that's who we want on our cap table, and those are the people whose shares of this company we want to put in their hands, why not just do a PIPE basically as a pre-private round, as you've seen many of these guys do, and then just do a direct listing? It's the cleanest, most honest, you know, you're not, uh, you know, playing any funny games. And, and then I think that combined with the scrutiny that the main arbitrage between a classic IPO and the SPAC boom was the ability to give forward guidance. And so you have these companies, you know, and I won't name them, but that are putting out basically renderings, you know, like Elon has done with Tesla, and renderings of financials and renderings of products, and none of those things exist. And so there was a call, which I think was a good call, that, you know, if you're going to put out those renderings, management and insiders should be locked up, you know, for that same period of time.

That seems like a good, you know, uh, alignment of interest and a way to reduce conflict.

So, um, I think all of that will shake out rightly, and there will be abuses. But the other thing that I think is also interesting is it's very hard to bet against some of these companies because of the amount of cash that has been delivered to their balance sheets. And I, I think there's like 3 phases to this. The first phase is just like the boom in SPACs. And again, applying Sturgeon's Law, 90% of these SPACs I call craps. You know, they're going to go to the— 10% will survive and thrive and deserve it. And some portion of those 10% don't deserve it, but they will still thrive and survive. Some portion of those 90% will trade far below their cash value, and you will see activists come in and basically say liquidate.

And so what the macro giveth, the macro can taketh away, and I think should.

And so you'll see some liquidation of these SPACs, which I think will be quite interesting, and it'll shake people. Um, but the, the people who are able to get a lot of cash and still maintain a high multiple of the ones that survive, I predict that there's going to be an M&A frenzy, and the M&A frenzy will be catalyzed by that multiple arbitrage. So if you take, um, you know, a company that's trading at—

that, that de-SPACs and is trading at a 25 or 30 times multiple and whatever, right, revenue or profit today doesn't matter, and they find a target they want to consolidate and that's trading at— and they buy it for 15 when the incumbent competitor is trading at 10 or something, And the boardroom of that incumbent competitor was like, we can never buy these guys.

We need to buy something at 8 or 9 that's accretive on the downstroke. And, you know, one time they seem disciplined, two or three times where they miss a target to a higher multiple competitor, they say, wait a second, Mike, this could be existential. Like, there's a lot of advantage that's accruing here.

We need to do something about it.

And then they lax in their discipline and they lower their standards. And they do bad acquisition. And I think you'll see a bunch of people do these kinds of things. There'll be an M&A frenzy is my prediction for sort of the next wave of how this all shakes out. And that will reach peak fever pitch, culminate in like a January 6th, 2000, you know, going back 20 years, 21 years, uh, AOL-Time Warner-like merger where high-flying, high-multiple, reasonably high-growth but unprofitable business buys a declining secular but still cash flow positive business.

And, um, and that'll ring the bell. And who that is, or, you know, I've, I have no idea, but, um, but, but that I think is sort of the way that this whole market evolves.