In a conversational interview, Keith Rabois, a partner at Founders Fund, argues that the economic fallout from the coronavirus pandemic will be measured in years rather than quarters, with a prolonged, pronounced impact on the tech sector. He notes ongoing and upcoming layoffs, citing historical parallels such as post‑9/11 travel recovery. Rabois advises portfolio companies to focus on achieving break‑even through cost reductions and revenue growth, and to secure sufficient cash reserves to avoid pressured fundraising for up to two years. Regarding government intervention, he differentiates between bailouts and loans, suggesting that bailouts are unwarranted unless a company is forced to cease operations by government policy, using airlines as a nuanced example. He emphasizes the importance of scenario planning and reasonable risk assessment. The discussion then shifts to commercial renegotiations, where Rabois supports voluntary rent and cloud‑service concessions, arguing that market‑driven supply‑and‑demand dynamics are preferable to government price caps. He predicts a wave of renegotiations as demand for office space declines and suggests that landlords may prefer reduced rent over tenant bankruptcy.
Chapters
You've got Google slowing hiring, more startups announcing layoffs every day, VCs funding fewer deals. How much worse does this get for the economy and the tech economy and how much longer before it starts getting better?
Well, I think I suspect this has a long term impact measured in closer to years than quarters. And I think it may not be deeper, but it's very long and pronounced. So there's definitely going to be more layoffs. There's a lot of layoffs. and slowly hiring two layoffs that are forthcoming that aren't yet public. But I think the impact will be very, very long. We're like 2000 to 2003, then like 2008, which is really a three to five month flip.
So you're saying years, several years?
Well, it depends on what parts of the system. But yes, I think the impact could be extremely long. So for example, post 9/11, if you just looked at the travel industry in the United States, Just before 9/11, we hit a peak in all-time domestic travel. It took until May 2004 for travel to rebound back to its peak. So that was almost three years.
You're a noted contrarian, and we always love hearing your contrarian views. We've been speaking to investors who are saying, Look, if you're going to lay off folks, do it all at once. Cut deeper than you might think you need to cut so that it's not death by a thousand cuts. What's your advice to portfolio companies? that might be contemplating this?
Well, I don't think there's a one size fits all piece of advice for all portfolio companies. Companies have different sizes, different balance sheets, and different impact or there's differential impact. There are some companies actually are growing. I think telemedicine companies, DoorDash are actually growing in a new world order, but most companies are affected and impacted in a negative way. So the general advice is either control your own destiny, which means get to break even or something close to break even, which is either lowering your costs, raising your revenue, or some combination thereof. Number two, have enough resources so that however long this takes, that you don't have to raise money under pressure for a very long period of time. Let's call that one to two years, so that there's more visibility into what's going on in the ether. Right now, everybody's kind of driving blind because no one can predict when the healthcare crisis ends, let alone when the economic mass sort of fixes itself.
What about big companies? There's some debate about whether the government should be bailing out airlines and other big companies, should they?
I think the answer varies. I think where the company has made miscalculations and has failed to engage in scenario planning, I don't think the government should be bailing out anybody. But there are some industries where the government legally is banning you from engaging in business. Think an SMB down the street in San Francisco. The government by fiat is saying you shall not sell to customers. If the government is prohibiting you by law from engaging in your business, I don't think the business is at fault and the government should take some responsibility for the policy decision of banning the commerce.
So then would that apply to airlines?
Well, technically you're allowed to travel right now. In most cities to most states you're allowed to travel. So for the most part, no. I do think also the airlines kind of knew that things like viruses and pandemics were likely. If you read their S1 or a couple of S1 documents, they identify these as serious risks. I don't think the airlines really We're able to forecast there'd be a global pandemic all at the same time as opposed to route by route that travel from Asia might be affected to the US, which might be 40% of their business versus travel everywhere.
But.
I think it does matter what the company could have reasonably planned for, what the industry could have reasonably planned for versus what the government has all of a sudden out of nowhere dictated must be the case. And in those cases, much more sympathetic to creating whether they're loans or bailouts, because there are different options here. I think loans are less offensive than pure bailouts. But so again, I don't think there's one simple answer.
The mayor of San Francisco put a cap on fees that restaurants can have to pay food delivery companies. You call that stupidity. We are seeing a trend now where Companies are asking their landlords to reduce rent. Companies are asking Amazon Web Services to give them a break on their cloud services bill. Do you think that this is something that companies should grant or not? Because I think we're gonna see a wave of this over the next few months.
We're gonna see a wave of renegotiations and there's nothing wrong with commercial renegotiations. the market is going to move in real estate like the supply and demand. Supply and demand was a slight amount of work. There's going to be less people that want office space either because the failure rate of SMBs increases, the demand for remote work increases and minimizes the need for real estate. So landlords are going to have to adjust and the landlord may very prudently decide that I would rather you pay me less per square foot but extend the contract or fail, right? Or literally fail because then I have to sue you in bankruptcy and see if there's any money left. So voluntary renegotiations, I saw Amazon said no on the AWS stuff, but voluntary renegotiations are always a good thing. There's something like, would I rather you pay me 50 cents on the dollar versus fail? Often I'd rather 50 cents or 50 cents times bankruptcy risk. But government dictating prices is basically a terrible idea. Supply and demand always works. And if the government manages price caps, you're going to get less supply.
