Keith Rabois of Founders Fund + Airbnb's earnings & evolving customer base, SF BOE | E1388

Okay, everybody, we have an amazing interview today. Yes. Keith Rabois, investor, operator, entrepreneur, super insightful individual, kind of classic, controversial, sure, is back with us. We have him back every six months or so. And this is his eighth time on the pod. And so we took this time to go through his most interesting predictions on past appearances. We went back to 2019. And this is a really, we're giving Keith his flowers, we're giving him a victory lap, and we're giving him challenging questions. He's never not answered a question. This is one of the things that makes a great guess. Super candid, super smart, super insightful, iconoclastic, and handed. He's fearless. He'll answer any question, and he does. So enjoy this one on 0.75 or 1 XP. Do not put this at 1.5 XP because He's a fast talker and I'm a fast question answerer and I do a lot of fast follow ups. You don't want to listen to this at one and a half. Slow it down and enjoy every minute of it. But first, I'm going to break down Airbnb's amazing fourth quarter and full year earnings report. Such an impressive business, such impressive management, and really an impressive product. We've got a lot of interesting takeaways about the length of stays and new products they are going to be launching. I have some ideas. for the team over there, and I'm gonna get into them in detail. Then briefly, I'll give some thoughts on San Francisco's Board of Education recall, which happened yesterday, and a lot of tech people were driving that, supporting it. It's a big win for San Francisco, and it could be the first step in accountability coming to our wrecked city that's been run by complete wackos who are completely incompetent. It's a new day for San Francisco. Stick with us. It's going to be an amazing episode. This Week in Startups is brought to you by Vanta. Compliance and security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a SOC 2 report fast. Twist listeners can get $1,000 off for a limited time at vanta.com/twist. Gun.io the simplest way for anyone to hire world-class developers. Expertly vetted for you by senior engineers. Get $250 off your first hire at gun.io/twist and 8 Sleep. Good sleep is the ultimate game changer. Now you can add the Pod Pro cover to any mattress. Go to 8sleep.com/twist for exclusive Presidents Day savings through February 22nd. All right, in our first story, Airbnb is absolutely crushing it. Their stock was up 5% today after they had a great beat in the fourth quarter of 2021. And their full year earnings were very impressive as well. And there's some interesting consumer trends that are driving all of this. Stock is, you know, 190-ish with a market cap of 120 billion. That's a pretty rich market cap for sure. And it's a pretty great company. We all know that stock is up 28% over the past six months because they were one of the COVID stocks that got a little beat up. They basically recovered since their initial tech drawdown. So let's break down the stats here and forget about the price because the price of a stock is a function of so many things as we've learned. But the reality, which is what we try to get here and try to understand the actual business, is what's important. So let's just get into the numbers. Q4 2021. Total trips booked 73 million. That's up 59% over 2020. But you remember in 2020, we had a pandemic. And if you don't remember, you couldn't even stay in an Airbnb. Airbnbs were shut down, banned, and hotels as well. Do you remember those scary couple of months? And depending on the region, Airbnbs then became the favored place for you to stay. And Airbnb got so shook by all of this, They let go of something like a third or maybe more between contractors of their staff. It was a very scary time for that company because they had one business, people traveling, and travel was shut down. Borders were closing in 2020. The, of course, important analogy for all of these pandemic impacted businesses is to go back and look at 2019. Interestingly, total trips booked are down 3% from 2019, but the stock keeps going up. So we have to wonder why. Well, one of the things is the business has recovered, so people are now attracted to it. And so you can essentially think of them as flat between when the pandemic happened and now. That's interesting in terms of Trips Booked. But if we look at gross bookings or total volume, this is the dollar value of all the bookings, not giving money to the hosts, right? Because the hosts get the bulk of the money. Was $11.3 million. That's up 91% over 2020. Makes total sense that they almost doubled 2020 because that was really a challenged year, the most challenging year for the company since probably the first year. and they were up 32% since 2019. So the dollar value, even though they were slightly down in trips booked, the dollar value was up 32%. What does that show you? Well, it shows you some kind of pricing power, okay? That people would pay more for these Airbnbs or maybe more inventory that's high end is going up. Kind of hard to tell, but something is happening where the trips are taking more. Maybe they're longer trips, right? So revenue, 1.5 billion. And this is like, you know, the detective work you have to do. so Revenue, 1.5 billion. That's the money they take in. Remember, you have gross bookings when you're looking at something like Uber, DoorDash, Lyft or even Airbnb. That's the total value of what people spent, what went on people's credit cards. But as you know, there's another party that takes the bulk of it, the provider, whether it's the restaurant or the drivers or the hosts. So their revenue for the quarter, 1.5 billion at 78% up from 2020 and up 38% from 2019. Net income their profits, their bottom line. That was $55 million. In other words, a little cash, a little splashy cash he goes into the bank account. And their Q4 take rate, take rate is their take, their percentage. You can just think of it as a rake, R-A-K-E. Like when you're at a casino, if you're playing poker, they take a little bit out of every pot. That's called the rake. So you have the rake, take rate. You'll hear people say that, and then you'll hear someone like Bill Gurley say the rake, R-A-K-E. Rake is what you rake out of each winning pot in A poker game or a casino. And that's why they talk about beating the rake. So when people are gambling, if you've got to beat the rake, that's like there's an 11th player at the poker table, or if it's a nine-handed poker game, the 10th, you have to beat the house, which is taking a percentage, and then be up from that. So that's why playing in a home game is slightly more EV positive if they're not taking a rake, which is illegal in most states, because then you're running a casino out of your house. Revenue divided by total gross bookings equals the take rate. Very easy for you to do that. So you take the total revenue that they made and you just divide that into the gross bookings, right? So that makes sense, 13%. So as we said, 1.5 billion divided into 11.3, 13%. Very easy for you to do. Someday we'll put a little charts up and we'll that actually would be kind of cool if I had one of those Waycom tablets, are they called Waycoms, where I could actually do the math and we would draw the math on the screen as I did it. Total trip book or put a calculator up there. And I think this is important for people who are trying to understand business who are investors, whether in the public market or private, to take a calculator out or do back of the envelope math for yourself. It really lets you form a mental model of the business. What I just did for you, 73 million trips booked, and then the total number of gross bookings was 11.3. You could divide 73 into 11.3 and find out what each trip cost. You could divide 73 million into their revenue, 1.5 billion, and you can find out how much money they make per trip booked in gross revenue, not gross bookings, but the revenue that they get, their take rate. and you could divide it into their net income, 55 million. Right now, the profit, they're making less than a dollar, 90 cents or so, 80 cents maybe for everybody who books an Airbnb. That's how much profit Airbnb is currently making. Now, that's probably by design. At some point, they could cut costs, raise rates, and all of a sudden make $10 for every time somebody booked one. There's a lot of expansion there, in other words. So for 2021, total trips booked 300 million. That's down 8% from 2019. That's the really correct thing to look at. So they're still down significantly, right? no, I shouldn't say significantly. They're modestly 8%, I would say is modestly significantly would be over 15%. Gross bookings are total volume for the year, 47 billion. That's up 23% over 2019. That's the comparison we're going to do. We're going to take out 2020. Host earned 34 billion in all of 2021. Think about the economic impact of $34 billion going out into the world to people who previously probably didn't have this as a small business opportunity. That is extraordinary. Revenue, 6 billion for the year. That's up 23% over 2019. And the net loss was around 350 million, and that's two times smaller than 2019 when they lost, I assume, 700 million. So pretty interesting. The business is in great shape. It's growing. It's clear that they're back from the pandemic. And let's just look here at some of the big picture. You have the trips booked down from 2019 to 2021, but only slightly, or 8% down year over year, the 2019 to 2020. 2021 year. However, Airbnb's gross bookings and revenue are up more than 30%, right? So there's something interesting happening here. We've pointed out a couple of times now, you would think these things were correlated. They're obviously something's bifurcated. Here's what they said. Stays of seven plus days made up almost half of all bookings. Now let's pause on that. We don't know what they used to be. They're not telling us the historical significance of this, right? Were they previously 40%? Were they previously 20%, 10%, who knows? But they're pointing this out. So obviously it has some significance. Stays of seven plus days made up almost half of all bookings. That is extraordinary. That means people are going places longer and they're enjoying their lives. This obviously has to do with the work from home trend. This must be impacting it. People feel comfortable spending a week anywhere and they're probably just taking an extra two or three weeks of travel a year. Absolutely fantastic for the economy and for people's lifestyles. This is the big benefit of remote work phenomenon that's occurred. And 20% of bookings were for stays of a month or longer. So one in five people were staying for a month or longer. Again, this has to be the new nomadic lifestyle. I'm guessing the skews older and very old and very young. In other words, people under 30 without families, people over 60 with their kids, empty nesters. I'm guessing that those are the two groups. Because people in the middle, if you've got kids, you can't take advantage of this, as anybody who has kids knows. It's kind of the worst situation because you have to be home and you can't concentrate because you have kids coming home in the middle of the day. And it's, you know, I don't know if it's arguably worse, but it's a different experience for people with families because you can't just go on the road and take advantage of this. I'm sure many of you are having that experience if you have kids in school. The only other numbers we have in terms of reference points here, Airbnb's S1 2019 average nights per booking in North America was 3.7 days. So in 2019, the average was 3.7 days. Who knows how many were 7%? And if you look, 20% of stays are over 28 days and 50% are seven days plus. So I would assume the 20s in the 50% that are seven days plus are in the 20. But this is pretty, it means people are staying for a long period of time. That actually is wind in the sails of Airbnb and their hosts. You know, if you're staying for the week, that means you're going to be, by definition, staying on Monday, Tuesday, Wednesday, Thursday, you know, the slow days, not just the weekends. And anybody who's running Airbnb knows you're busy on the weekends and, you know, you can't sell certain days of the week. Basically the ones when kids are in school. Listen, when you're the founder, it's fun to trade war stories with other Founders. Recently, balloon CEO Amanda Greenberg, one of my awesome portfolio Founders, told me how vanta's sock two solution helped her save an important deal in the final hours. If you don't know, balloon sells a sas productivity and collaboration software package. It's brilliant. And when they needed 10 documents in place within 48 hours in order to close this deal, well, Vanta saved the day by supplying customizable templates and helping them through the process to close. So if you don't have your sock too tight, you can't close major customers. And you know what? A lot of startups wait. Well, the waiting has to end. You have to work with Vanta's compliance software to make it easier. to get and renew your SOC 2. They continuously test against technical and non-technical SOC 2 requirements and they partner with over two dozen audit firms who have been trained to file SOC 2 reports directly within Vanta. On average, Vanta customers are SOC 2 compliant within just two to four weeks compared to three to five months without Vanta. And guess what? Vanta is such a great partner, they're gonna give you a thousand dollars off your SOC 2. Thanks for that Vanta, here's your call to action. Get a thousand dollars off at Vanta. vanta.com slash twist. That's v a n t a.com slash twist. That's vanta.com slash twist for one thousand dollars off. Well done, Vanta. People might be taking slightly less trips in 2021 because of the pandemic, but they're staying longer. So that's pretty great. They've also been talking about their future roadmap. You saw Brian from Airbnb say he was looking for ideas. I told them they should do an airline, like a membership airline. They stated they have three major goals for the future. Live anywhere on Airbnb. Kind of interesting. So Long Trip says, unlock the next generation of hosts. That's interesting. Getting young people who have space to put their space up is an interesting idea. And Airbnb becomes the ultimate host. And I guess that has to do with competing with what high end travelers like, which is service. So high end travelers are not apt to take Airbnbs because they don't have the ability to go to the spa, they don't have room service, they don't have a concierge, and those fancy things that people love about staying in a five or six star hotel. Who did Airbnb impact the most? Two and three star hotels. People who are going and trying to save a little bit of money. Maybe they were on a budget. They wanted a $200 a night, $300 a night, or less solution. And then Airbnb, of course, has $150, $100, $200 a night. Things that you just can't find in hotels unless they're scary. and dirty. So two and three star hotels were the ones who were challenged. Let's dig into number three here. They become the ultimate host. Here is a direct quote from the earnings about becoming the ultimate host. Quote, we believe that Airbnb can be more than a marketplace that merely connects guests to hosts. Okay, so we could provide more things. Okay, fair enough. They're doing experiences, right? Like tours and whatnot. They added that many years in. Our goal, again quoting, is to provide the ultimate service for guests anticipating their needs. and going above and beyond just like a good host. So they're referring to themselves as like a six, maybe a five-star hotel, four-star hotel, four seasons of Ritz, somewhere where they know your name, they know what newspaper you like. If you've ever stayed at these kind of hotels, they kind of keep a dossier on you. If you like medium pillows, if you like lots of pillows, if you like the New York Times, Financial Times, they should have that in your profile on the computer. If you like tea, if whatever, you know, what time you want your turndown service, they'll try to accommodate you. So here they're saying Airbnb they might do that. That's interesting. Okay. How would they do that? I have some ideas. By offering a more personalized service, we can dramatically improve the experience for millions of guests around the world. Very interesting. And they mentioned personalized here. So I think the idea here of what they're going to do is imagine you filled out your profile. You said, listen, here's what I need in airbnbs. I like to drink Coke Zero. That's my favorite beverage. So it asks your favorite beverages. You say Coke Zero and sparkling water. Then it says, hey, tell us about your internet or work needs. You say, listen, I really want an ethernet cable because, and I want 40 megabits up or down because I'm gonna be doing video conferences and I want at least two desks to work on. And I love standing desks. And I also like on-site deep tissue massages. Great. Now imagine you have that in there and you're looking through the top inventory and they've set up in major cities with the super hosts, hey, put a massage table in a closet somewhere and just tell us where it is. And now in your profile, You're a super host in Napa, you're a super host in Tahoe, and you have a massage table on site. Very interesting, right? The folding ones. And those hosts have agreed that they'll go fill the refrigerator. So you say, Hey, listen, I like, these are the snacks I like to have around. Imagine the super host bought you those and then just put them on your bill. Pretty interesting, right? Or put them there. And then if you drank them, you would pay by consumption, even better. And then they said to super host, Hey, you know, people like standing desks and they like ethernet cables. If you have these, check them off. So these profiles could be a big win for everybody. If Airbnb had this, you know, I would be apt when I go to a great city. If I'm alone, I just want to stay in a great hotel. I love, you know, interesting, I like the action at a hotel. When I'm traveling with a group, obviously I like to get an Airbnb because I like to have a kitchen and I got kids or I've got a posse with me. It's more fun to have the kitchen to cook. But if they could match what I get when I go to hotels, which is, you know, the hotels I stay at, typically I'll stay at like a Ritz. or the proper hotel when I'm in Austin or, you know, I don't say necessarily the most expensive. I kind of like the funky, most interesting ones. And yeah, they'll do stuff like this for you. If you need an ethernet cable, they'll make sure it's working, yada, yada. So I think Profiles could be a huge win. We were investors in a company that was a concierge service on your phone, and they would sell the concierge service to hotels that were two and three stars that didn't have a concierge, and they would put your room, hey, if you need a concierge. you can talk to this person, you'd have one concierge for all of San Diego, where you could have a team of in San Diego and all the two and three star hotels could compete and have those. And that was an idea that actually Hotel Tonight copied the company that did it. That company's no longer around, but Hotel Tonight stole the idea from this company. And that was kind of a bummer. But you can't copyright or trademark just an idea. You know, it's the execution that you can typically patent trademark. And so. I do think a concierge like Local Service could do well with a subscription. I've always thought that nobody's ever made it work. I get pitched on it all the time. But I think some of these like Magic haven't even worked. And they, I don't know if Magic works or not, or Operator, those services, I don't know. Has anybody ever used them? Let me know, producers@thisweekinstartups. So one final stat, over the past two years, average trip legs have increased 15%. So they did have buried in that Q4 report. the average trip. So there's a lot of numbers here. And when you are assessing a stock or a business that's private, just write all the numbers down and then start dividing them and then figuring out what happens if they go 10x or they double them, how to cost change. This is the kind of mental model building I like to do. Listen, I'm not like some MBA, but I like to build a mental model and then I like to look at the product. That's my method for investing in a company. what do I think of Airbnb? I think it's gonna be a trillion dollar company. I think they're going to 10x. I think there'll be a billion people using the service at some point. I could easily see 250 million, 500 million people enjoying these services. Because if they had 70, they had 300 million already. So, yeah, I was talking about the quarter. So 300 million a year. Oh, yeah, I could see it being a billion a year. I could see a billion trips a year, no problem. I don't know how many users that is, but I could easily see them getting to a billion trips a year. That is extraordinary. And, you know, Is there any way for somebody to break into this juggernauts marketplace and disrupt them? I don't know. The only thing I can think of is if somebody made a service, this would be a really good idea where the host, instead of playing a percentage, paid a management fee, a fee. So they just paid a, like a SaaS fee, 25 bucks a month to be listed. And he had a million people listed on, your directory. It'd be 300 million a year in revenue. So you could cap your own revenue. So I could see somebody doing that, like an eBay, a Craigslist, a, a hotel provider, like if you were a hotel provider and you wanted to kill Airbnb, the power move would be to make a service where it was a hundred bucks a year to list your company, 10 bucks a month or a hundred bucks a year. And if the hotel didn't have inventory, it showed you what was there. And I think actually, correct me if I'm wrong, folks, but Bonvoy, which used to be Starwood and Plus Marriott, I think they actually have a brand. that lets you rent homes. And Marriott now has homes and villas curated by Marriott, which is, yeah, homes and villas by Marriott International. Very interesting, right? You're starting to see now people looking at the Airbnb business and saying, how do we put our brand around it? Well, Marriott, you feel safe, right? And I guess Marriott either owns or works with these curated homes and you can use your Bonvoy pounce, your Bonvoy .com points on these. And so I've looked at these and I actually was looking at it one time and the inventory seemed to not be exclusive. So I think they're cherry picking the best of Airbnb and putting it on here. That would be the only person I could see really challenging Airbnb and the hotel chains making a free version of this or close to free where they just gutted Airbnb's revenue. But again, Airbnb is a bit of a cult. The people who are hosts are really loyal to Airbnb. Kind of got like an Etsy vibe, right? You want to be part of it. So congratulations to the team over there. Yeah, again, I think no problem getting to a billion stays, no problem becoming a, I wouldn't say no problem. It's a long way to go, but I could see this company 5X-ing from here and, you know, starting to hit that trillion dollar club in the next couple of decades. Hiring software engineers can take a long time. It can take months in some cases, but gun.io is going to change that for you. right now. 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Or you can hire a remote developer directly from the gun.io network. for half of a typical recruiter's fees. I'm not kidding. Gunn.io is the easiest way for startups to find and hire world-class developers. So you get $250 off your first hire at Gunn.io/Twist. Give it a shot, report back, tell me how it went. Gunn.io/Twist. All right, everybody, in somewhat tech-related news, here in San Francisco, the Board of Education was facing a recall. If this recall was successful, it would have been the first one in 100 years that was successful. It's incredibly controversial. Now, why is this important? Why is it related to this week in startups? Well, it turns out San Francisco is part of Silicon Valley now. It didn't always, it wasn't always that way, but San Francisco really embraced the city in a major way. And the far, far, far, when I say far left, I'm a, you know, kind of moderate, the far, far, far left is really a frustrating group of people to the other community members in San Francisco. And they went on a process of not allowing kids to come back to school during COVID And even though we had some of the lowest rates of COVID and the highest rates of vaccination in the country, we were the slowest to let kids back in schools. And the board was focused on things like renaming the schools because they had previous presidents and getting rid of merit-based admission systems, which is a real trigger for high-performing Silicon Valley people. including Gary Tan, an investor from Initialized Capital. He's been on the program a bunch of times. And my bestie, David Sachs, who is a San Francisco resident and who was also offended by the lack of performance, really, and the focus of these board members. And so although there were some right-wing people, I guess, donating to this from out of state, they tried to frame it as an out of state Republican movement. And when the numbers came in, it was quite shocking. You had over 80, 90, 000 people voting to recall these three members, Gabriella Lopez, Faugha Moliga, hopefully I'm pronouncing that correct, and Allison Collins, who was a real interesting character who said some pretty horrible things about horrible things about Asian people and who actually sued the board of Education supervisors. They were recalled for between 72% and 79% of the vote. In other words, the left in San Francisco is throwing out the far, far, far left. What you would really describe as somewhere between socialist and not democratic socialist, like socialist, socialist and communist worldviews. I've seen it up close and personal. It's really trippy to use a San Francisco term, but this is perhaps a milestone in the history of San Francisco because tech people who were largely disengaged from local politics have become hyper engaged and they have engaged the Asian community, which has been the target of a lot of specific hate crimes in the city. And a general, I think a lot of Asians have been vocal about feeling singled out because of high performing children in these school systems. And essentially what we might have seen with this recall is a turning point in the history of San Francisco, where the city starts moving from, you know, a kind of socialist, communist, driven group of people to maybe more tech people getting involved, more high performing people and competency and a focus on performance, which has been, I think, the city's Achilles heel. The people running for office have been really strange, you know, to see them operate. And I think a lot of people would argue they're incompetent. So Gary Tan's tweet, common sense is rising again. It's a good night, but just the one of many to come. San Franciscans united to send a message to the political machine tonight, serve the people or see the door. We did it. Rest up. Tomorrow is a new day. The fight has just begun. Gary Tan grew up food insecure, is a native resident, was in all of the advanced programs, and is the product of San Francisco and the Bay Area. David Sachs, and he's done obviously very well for himself. David Sachs says every child deserves a high quality education. School boards and administrators work for parents and students. not the other way around. Competence matters more than ideology. That's what San Francisco voters affirmed tonight. Thank you. Recall SFBOE. So these board members are out. London Breed, our mayor, who said she's done with the BS. She literally said the word in a press conference. It's going to select the three replacements. And she's trying to, in related news, London Breed is trying to do a state of emergency to clean up the Tenderloin and the fentanyl crisis, where we have 10 overdoses a day. And I think Two or three of them tragically result in a death. Here is her statement that she released. The voters of this city have delivered a clear message that the school board, the school board must focus on the essentials of delivering a well run school system above all else. San Francisco is a city that believes in the value of big ideas, but those ideas must be built on the foundation of a government that does the essentials well. I want to recognize all the parents who tirelessly organized and advocated in the last year. Elections can be difficult, but these parents were fighting for what matters most. And you can see the yes recalls now. Allison Collins, over 100,000 citizens of San Francisco voted to recall her. I can tell you, there are no more than 10,000 Republicans in there. Those are all Democrats and very left-leaning Democrats who are voting these people out for incompetence. And, you know, the challenge, I think, for San Francisco and for the community here is who is going to take their place? We need competent people, maybe even people who have had an incredible success in technology, in business, to then go try and take some of these seats and to work in government and do a tour and try to fix stuff because, my Lord, these people are super unqualified. And it's great to see a change in the city, which most people are leaving in tech and have given up on people. It's really a tragedy to see the number of restaurants that have shut down, the number of stores that have shut down, and the number of empty apartments and people don't want to come here anymore. I've thrown events here for over a decade. We're bringing probably 10, 20,000 people a year to San Francisco, and nobody wants to come here anymore. So we're doing our events in Miami, LA, and Austin, and New York going forward, and we're not going to do them in San Francisco because I can't convince people to come here. They don't want to deal with the crime, the homelessness, the despair, the chaos. And so, Chesibooten is likely next on this recall campaign. And I think it's a pretty nice to see tech people taking an interest. and supporting change and competence, right? I think that's going to be the high order bit here. All right, next up, speaking of competence, my interview, which we do about every six months with Keith Raboy in his eighth appearance. He talks fast. He says really interesting things, and his predictions are right much more often than they're wrong. You're going to want to listen to this one twice, and you're going to want to take if you've got it on high speed, we're talking fast. So, this might be the rare instance where you don't want a one and a half X. You might even want to go 0.75 speed on this one to catch all the Nuggets of gold with that in his eighth appearance. K to a boy. Listen, good sleep is the ultimate game changer, don't I know it? And it's Nature's best medicine. There is nothing like getting a great night's sleep. You know, when I get a great night's sleep, because I've been sleeping on my eight sleep and you see me on the pod, I'm crisp. I got great insights. And according to Eight Sleep, consistently good sleep can do the following: it's going to help reduce the likelihood of serious health issues, it's going to decrease the risk of heart disease, lower your blood pressure, and even reduce the risk of Alzheimer's. But over 30% of Americans struggle with sleep, and temperature is one of the main causes. So now there's a solution, the Eight Sleep Pod Pro Cover. Pod Pro Cover is the most advanced solution on the market for thermoregulation. It pairs dynamically the cooling and heating with biometric tracking. And you can add the COVID to any mattress right away. It's easy. And the temperature of the COVID will adjust each side of the bed based on your sleep stages, biometrics and bedroom temperature. So I like it nice and cool. I get a nice sleep when it's nice and cool. Yeah, the other person, they like it toasty. So no more thermostat Wars. The results are amazing. Eight sleep users fall asleep up to 32 faster, and it reduces sleep interruptions. 40%, you're gonna get overall much more restful sleep in my experience. So here is your call to action. Go to eightsleep.com/twist for exclusive Presidents Day savings through February 22nd. Save big and sleep more with Eight Sleep, now shipping within the USA, Canada, and the UK. That's eightsleep.com/twist for those exclusive Presidents Day savings. All right, everybody, it's time for our check in with the one, the only Keith Rabois in his eighth appearance here at this week in startups. We love talking to Keith because he is one of the greatest operators of our generation in Silicon Valley, one of the great investors as well, and thinkers. You may not agree with him on everything. I certainly don't. But you will come out of any conversation with Keith thinking at a fast pace, and perhaps inspired. I enjoy our time together. Welcome back to the program, Keith.

Thank you. It's great to be here for the eighth time.

Pretty great. When you get to 10, you get the official blazer. You get the this Week in Startups blazer. I want to get right into a bunch of the stuff that you predicted. I had my researchers, I have three full-time producers on this podcast now, and they went back and they looked at some of your predictions. Greatest hits, if you will, Keith. Get ready, break your impact. Own your words time. And we even looked at some tweets in mid November of 2021, this past November. You almost to the day predicted the top of the market. Our friend Ari Levy over at the CNBC, Really Smart Cat, says, Amazing to see how many experts on crypto and tech valuations are also experts on inflation. and Keith replied, to be fair, valuations and inflation are directly connected. That makes sense. And Ari said, but didn't we have an explosion in valuations over the past decade? And you answered, this is also a crash, the internet bubble, FYI. And you said, ah, so he calling the top and you responded, yes. What were the signals at that point? You felt it was a top. And then I guess here we are in February of 2022, the markets have repriced many. shiny objects brutally. And we'll talk about what we see going forward. But take us back to your moment in time. What were the things to you that signal a top in the market?

I don't try to predict tops or bottoms of markets. It's just a function of interest rates. Interest rates are predictable to some extent based upon economic, macroeconomic factors like inflation. And so as soon as inflation became starkly obvious to everybody, there is no doubt the Federal Reserve was going to have to raise interest rates. The fact that we had inflation was pretty obvious to me in January of last year. You'll find a tweet early January where I predicted the inflation. But in any event, the government, the bureaucrats, the Biden administration were trying to dismiss inflation as transitory, which never made any sense. But by November, even the defenders of the transitory argument had given up. And so as soon as it was obvious inflation was taking off in the United States, interest rates had to go up. And basically what interest rates do to technology stocks is they immediately crash the valuation because most technology stocks of almost all technology stocks basically generate profits in the future. All companies are valued to some extent by profits to generate in future. It's called basically discount cash. So you take the profits that companies projected to generate over the next 5, 10, 15, 20 years, and you discount that back to the present value. and basically you're discounting mostly by the time value of money, which is a function of interest rates. So as soon as you change the interest rates, you're dividing by a different denominator. Anybody who's ever done division from the time you're three years old to the time you're 30, if you change the denominator, you're going to have a very different answer very quickly. So instead of dividing by two, you're dividing by six. All of a sudden, the same stock looks very unattractive on a valuation basis. And so this is inevitable. If you want the advanced version of this, you take a single capital markets theory class. And that's why I'm somewhat surprised that most people haven't figured this out. It's sort of like we've made the world too confusing. If you just go back to first principles, it's a lot easier to get to the right answer. And you can strip away all the noise. First principles work pretty well. And this is rudimentary stuff people have.

Been taught for like a century. Yeah. pretty basic. And then on top of that, we had what we saw on the dotcom market or even in real estate, which was non-traditional Market participants flooding into an asset class. We had it in 2008 or before that crash with people, maybe who shouldn't have had mortgages, doing all kinds of funky mortgages. And in 2000, you know, or slightly before 2000, we had gas station attendance or your newspaper delivery boy talking to you about which.com stocks to buy. And this time, maybe we had crypto speculation, stimmy checks. What does it take? Maybe you could talk a little bit about new market participants driving up that last stage of a bubble. And do we think that that's worked itself out or not?

Sure. So I think that can amplify the fundamental trade trend. But at the end of the day, the valuation inflation was being driven by interest rates that were basically close to zero. And so there was no discount to future profits. And when there's no discount to future profits, companies that generate profits in theory are going to be valued equally or better than companies that generate them in practice. Then the point that is a little bit more subtle is in 1999, the Federal Reserve did raise interest rates, I believe, five or six times over about an 18 month period of time. And that is exactly what precipitated the internet bubble collapsing. People have a lot of revisionist history about the bubble collapsing, but it had nothing to do with Tech. It had all to do with Alan Greenspan and the Federal Reserve raising interest rates and actually driving down the cost of capital and the discount of future profits that many technology companies would almost surely have earned.

When we look at the Shakeout today and looking forward, we've seen, you know, certain SaaS companies were getting 50, 100 times Revenue. in the public markets and in private markets. What are we seeing in this disjoint between what happens in the public market and what happens in what you and I do every day, which is seed early stage, you know, fund early stage companies. What's happening there? Because there's this overhang and people talk about the delay in the valuations going down stream or the valuation corrections, right? The compression of valuations. Let's talk about that. Are we seeing the compression yet?

Yeah, the compression on growth rounds has already happened. Dazed on the market is one early indication of that. So over the last two years, typically as founders fund runs a growth fund, we would typically have a few days to make a decision about a new investment. Currently for growth rounds, even for very attractive companies and potential investments, we have days to weeks to make an investment decision. Just like in real estate, when a house is on the market for a long time, it suggests that there's a mismatch between valuation expectations and reality. And that's basically already happened in the private markets for later stage rounds. It has not yet really translated to seed and series A investments yet. And at some point, if the current market correction continues in May, but typically you're not really funding a seed or a series A company on some multiple anyway. So insofar as you apply a different multiple, it shouldn't really change the answer. Series B's and C's are somewhere in the middle where companies typically do have revenue. And people are applying comparable multiples that are derived from, or at least inspired by, the public market comparables. And so they may get impacted sooner rather than later. To put some context around your SaaS point, over the summer, last summer, private market companies probably were valued at 50x, sometimes as high as 70x for multiple businesses.

I did see that, Michael.

The historical norm is 12.7 X. So there's a long way down. I think right now, probably the blend in the public markets around 30. But 12.7 is still very different than 30.

A lot more medicine to be taken for the companies that did take advantage of those peak multiples, a private company, let's say they were raising at 50, 60, 70. What is the best course of action you as a board member see somebody raise 100 million, 250 million at these extraordinary valuations? what's the best way to catch up if it does go down to a 20x multiple? What's your advice to the founder and the management team? Well, fundamentally, it depends very much on.

What your burn rate is. So if you're a profitable company or not burning a lot of money, it doesn't matter that much because you don't need more capital. So you don't have to remark your price. If you have a high burn rate, though, and you're going to run out or exhaust the capital you previously raised at a very high sticker price, it's going to be difficult slash not impossible to raise money. except under a very painful process known as the down round. And founders, employees, even investors really don't like down rounds. So a lot of these companies are going to hit a wall very fast and very hard. Typically, changing your burn rate rapidly is extremely painful. So if you have a high burn rate today, most companies cannot bring that to a moderate or low burn rate very quickly.

And we see Peloton making big cuts and obviously, When the pandemic hit, we saw Airbnb, Uber, DoorDash, a bunch of people just say, Hey, you know what? 25% big lop it off. We're just gonna take the medicine now.

I think Airbnb between contractors and full-time employees probably had a net cut of almost 40%.

Wow. I mean, and if we look at that as a decision-making process in the heat of the pandemic, in hindsight, how good of a decision was it in your mind?

It's amazing. Airbnb is about to release earnings, so everybody can look at the performance two years later and see what an epic company and what an incredible CEO Brian is. So I think a lot of companies were looking into the abyss and they decided to make decisive changes that they probably would have been too terrified to make. And many of these companies made very significant healthy changes that have turned out to be very successful. with the benefit of hindsight, but also probably were the right decision in the first place.

And when you say the right decision in the first place, when we look at these companies during a peak market, nobody likes to not grow their team inside a company. Nobody doesn't want to add headcount. So everybody's fighting for more headcount. Everybody's fighting for more budget. In fact, there's probably many tech companies out there that if they cut 20-30%, they would be operating more efficiently and obviously, you know, get to profitability quicker. So there's a lack of discipline maybe when a market gets this hot.

Yeah, I think over the last decade, tech companies became very bloated on average. And I think part of it's a lesson from Twitter, which under hired Engineers initially and then, you know, sacrificed a little bit of its potential because of that. And so a lot of Founders learn lessons from that, but I think we We haven't divided accomplishments by employees for a very long time. And under a more stressful system where capital is less abundant and more expensive, I think people will be much more judicious about hiring people. Larger companies, I'm sure most of the people that work there don't do anything. They're very complacent and really are just taking paychecks, but no one's really wanted to scrutinize a 90% gross margin business when capital is incredibly cheap. people will definitely start scrutinizing and building more lean, more efficient machines. Yeah.

When the money is freely flowing, you know, and you're, and you've got a competitive landscape, sure, grow the top line. But at some point, these companies are going to be valued based on their cashflow, right? Their profitability. At some point that happens, right?

Yeah. No, you're always eventually valued on your profitability and the potential profitability, and then discounted by two things, the time value of money and the risk. the probability that you can achieve those cash flows.

Yeah. You said on July 13th, I'll pull up the tweet here in 2021, biggest change in the venture landscape now. There are no VC funds with pricing discipline all of us have caved. So do we feel like this market correction has instituted some discipline on the capital allocator class and how far along are we in that process? Or are people still placing bets like drunken sailors?

I believe there's been two major corrections. I'll speak for Founders Fund first. We are definitely much more disciplined than we were 6, 9, 12 months ago. We will not fund things at valuations that don't make any sense given the public market comparables. Second, I believe that because a lot of the people inflating the valuations are cross what are known as crossover funds, meaning they have massive exposure on positions in the public market and a micro exposure as a percentage of their total assets in Private markets because they have to remark their portfolio every day. They can no longer afford to be extending very expensive offers. Think of Tiger, Code Two, et cetera. So like Tiger, for example, last time I looked up the numbers, they had about a $62 billion public market position and about $8 billion of private investments. So when that $62 billion gets shrunken to 40, that has to affect how they value the private portfolio.

And as a percentage, you just went from being an eighth to being a fifth, 20%.

It's also a problem because you may have rules in your fund structure that require you to have a certain ratio.

Got it. So when they came in for the last two years and paid these high prices, what was your thinking when you saw them coming in and maybe coming over the top of a founder fund growth or an Andreessen Horowitz growth fund When you have these new entrants, where are you like, okay, we have to keep up with these folks or okay, maybe we sell into this?

Good question. I don't think we ever really wanted to keep up, but there's a gap. There's some band, let's say we're 25% more disciplined or whatever. We can't be 50% and still work with the best founders on the planet. So I think there was some pricing pressure. that the people who weren't seeing prices definitely posed a real challenge to our normal discipline. We're not immune from the entire world. That said, they offer a different value proposition. Tiger is offering you money. And for the most part, I don't think of my job as offering founders money. It's really not solely money. I expect to provide, and I think founders expect need to provide advice, counsel, wisdom, feedback, interview assessments of executives, closing help on assessments. Tiger does literally none of those things. So the pricing of my dollars investing shouldn't be the same as Tiger's in any possible scenario anyway. But I think they were basically pursuing a portfolio strategy, which is you don't really care about the price of any one asset. You care about the portfolio construction as a whole. And in a hot market, let's say a decade long hot market, which is 2010 to 2020, having the right portfolio will trump a lot of micro pricing decisions. We at Founders Fund are in what we call our brand. We're in the business of backing the most extraordinary founders on the planet, period, what we call internally end of one companies. So Elon found SpaceX. That's the end of one company. Nobody else in 2005 was going to build SpaceX. that's what our job is. So we're trying to get the alpha, not trying to have a beta portfolio.

Here's another prediction for you, dovetails nicely back in February of 2019, episode 905, a classic you can listen to right now in the archives. Keeps that his biggest concern was how the fed would react in the next crisis. We're definitely on borrowed time, you said, 35 minutes into the program. Another quote, the government has the Federal Reserve and a bunch of decision makers have turned most of the dials already. So when there's a blip, the tools at their disposal to modulate the blip have already been used. So what that means is the ability to sort of soften the blow of some crisis isn't really available. We've sort of spent that capital, and hence the reaction is going to be much more severe because we won't be able to deaden the blow. And that scares me, and it scares a lot of my smart friends because they know how valuable those tools are and why They've been successful. So it's a pretty good analysis of 2019, considering in 2020.

I forgot that. That was pretty good. Here's exactly what's happening right now. The only tool Fed has at its disposal is basically to raise interest rates. The problem with raising interest rates is you may trigger a recession, which is not good for anybody. But there's no other more calibrated- Interest rates. Well, they tried.

That.

Yeah, then Biden tried giving away money, which just made the problem worse. So yeah, there really aren't a lot of great answers right now. But inflation is terrible. It eats away the real wages of normal people. So you take the 100 million most vulnerable people in the United States, and all inflation does is undermine their work, undermines savings, undermines their equity, and undermines the value of going to work every day. So you have to stop inflation. So the only real technique left to stop inflation in the United States would be to raise interest rates. There are other countries where you could put the government on a diet known as austerity. European Union tends to do this. Our system of government doesn't really easily, doesn't really allow for the enforcement of austerity measures. So there really isn't a lot of choice here.

If I'm unpacking there, the reason is it seems like there was, you know, we had Clinton who was really into balancing the budget. That was kind of a unique thing in Democrat land. And then Republicans have becoming money spending maniacs as well. And so are we ever going to go back to the balance the budget Clinton days in your mind? And should that be a priority or is it just impossible to do? Because how do you get elected if you're not throwing money onto people's heads like we did during the pandemic?

Well, if you read the Federalist Papers and you read anything about the founding history of this country, The biggest fear was always that people would spend money or promise money to get votes. And so one of the reasons why we don't have a direct democracy, perhaps the single biggest reason we don't have a direct democracy is to avoid that. Now that people have been successful to some extent by promising money for votes, it's hard to unwind that genie. That said, eventually you have to pay the dividend. Eventually there's a cost to giving people money. And we're about to see, we're seeing like the last year, we've really suffered through more inflation than the Fed admits. The Fed also changed its methodology somewhat subtly to sort of minimize inflation, but fundamentally real people on the streets know exactly what's happening, which is every time they go to the grocery store, every time they go to the gas station, every time they go out to eat, they're paying a lot more money and that's inflation.

Got it. If we look at startups, does inflation have any impact on early stage startups where you and I are building them and should any early stage founders change their behavior in any way based on the market concerns we're talking about right now.

So inflation would typically affect wages. The reality is most of the employees at the early stage startups we work at are more like engineers and designers who are paid and compensated at very high rates to start. So inflation will affect them too, but it's probably not the primary driver. The cost of goods of like a DoorDash delivery, Uber driver is going to significantly change and has changed. And that means the price of Uber and price of a lift just has to become expensive because the primary cost is significantly higher. And until there's autonomous driving, there's no way around that for Uber or Lyft.

Yeah. And so those costs go up. And I think the, it's amazing to look at the narrative around door dash, Uber, Lyft, all these services was these gig economy workers were being taken advantage of in some way, even though they were picking freely that job instead of Starbucks, Walmart and being a waiter or a busboy or whatever, all of those jobs, massive amounts of opening, people elected to have the freedom to do gig economy. And now they're getting paid 20, 30, 40 an hour. Maybe you could talk a little bit about the free market and the, the gig economy and, and how it's basically done more than what Bernie Sanders and Elizabeth Warren were asking for.

Yeah, I mean, freedom and flexibility are very attractive to normal people. So there's a reason why people chose to be a DoorDash dasher or an Uber driver. And it's not just a function of the marginal economics. It's just schedule flexibility. So if you don't want to work evenings, you don't have to work evenings. You don't want to work mornings, you don't want to work weekends. Most other jobs have requirements, minimum hours or certain shifts. and Uber and DoorDash allowed for flexibility. And so the politicians who are criticizing the DoorDash and Ubers of the world were basically denying people choice. Now, in the current market, those hourly wages are significantly higher than many other options. That doesn't mean that everybody will switch to the gig economy, because some people do prefer predictability and certain benefits. And some people should have the flexibility to choose what's best for them and their family. And that was the main point. And I think most voters agree with that. But the cost of service of an Uber lift absolutely is going to be more expensive. There's no doubt that if you take the primary input and you increase the wages by 50% over two years, the cost of an Uber is going to look extremely expensive compared to what we were used to in 2016.

Let's look at A business that in February of 2019, when you were on the program, you said Instagram is absolutely the future of Facebook. Facebook would be pretty much toast without it. 39 minutes into episode 905. Well, yeah, kind of a layup, but I'm giving it to you. No clear path foul. You went to the basket, you put it right up there, up against the glass, and it was a fine layup. But let's talk about, hey, you are, I think, Sheryl Sandberg. David Sachs and yourself, I would say three of the, you know, 10 best operators in the history of Silicon Valley. Tim Cook would go in there as well. You're known for your operational ability.

He's better.

I mean, we'll listen. I mean, I would say if you were in that position, I think you could do a relatively close to a Tim Cook job. We'll get to Apple in a minute, but for Facebook, this has turned into a disaster of epic proportions. What do you make of this series of decision making by this company recently? And how did they come to these decisions?

I think Facebook is in a really difficult situation. The political environment will not allow them to buy their way out of this box. So they're not going to be able to use their assets to drive innovation. They're going to have to actually innovate, which is not the cultural DNA of the company. Mark is more like Bill Gates than Steve Jobs.

And explain what that means for people. Yeah.

Yeah. So Bill was one of the shrewdest businessmen of all time. and exploited opportunities to basically build Microsoft. Steve was more of an innovator and basically saw the future and then created it. And the things that Facebook's committing to are more innovation and less business acumen. And they don't have the right team to drive innovation creatively. And they really can't hire that team right now because of the brand associated with the overall Facebook. and they can't buy it, at least in expensive doses because the regulators won't allow them to. That's a very tricky position. I don't know what the answer is, but I think the market cap is reflecting people realizing this.

Yeah. So you have, to recap, I think it's pretty good analysis. Obviously they're not allowed to buy stuff. They've had so much influence on politics and so much toxicity there, even if it didn't affect the election, there's a lot of toxicity there. And I think it's a lot of the reason why Lena Khan and other people are being put in positions is to stop them from buying the next Instagram and continuing their power base. People do not want to see them acquire power. Therefore, they're not going to be allowed to acquire a door Dash or a Peloton or anything. And he's a meme machine. He has been very good. Like Bill Gates copied Windows in, you know, office from word perfect and Lotus 123 with Excel. and thus the same thing Zuckerberg modeled his career in many ways on Bill Gates. So now you're in this dilemma. Nobody wants to go, anybody who's an innovative person is going to start their own company in a market like this with so much capital available, or they'll work for a company like Apple that is truly innovative. So what do they do? Do they just start, do you think Facebook might lay off 20% of their employees this year? I mean, they're sitting on a ton of cash.

They print money. They probably should, but that's not going to solve the problem fundamentally. It may play for time. fundamentally, you still need a creative, you need a strategy that matches your skill set. And they don't have the creative skill set. They can't acquire it, they can't hire it, and you can't optimize. So Facebook, the people who have succeeded there are fundamentally optimization people. Yes. They take something that's working and optimize it. And optimization comes pounds and magic, especially at scale. So it's a great strategy, but when you need to reinvent yourself, it doesn't work at And in fact, you actually have the wrong culture and the wrong DNA when you have to go back to the drawing board. So it's actually worse than not having those people around. And so this is basically the fundamental problem. Facebook, if you think it was a mashup of Friendster and MySpace.

Yep.

So you probably used Friendster back in the day. Yeah. And the right product optimization will trump a lot of things. And then when you have a platform like Bill realized he had with Windows, they need to throw, Microsoft Office, right on top. That's great. It's like brilliant. It really is. But when you have to go back to the drawing board and that's why Microsoft missed mobile. They had all the wrong ingredients, but they had the wrong approach and culture. They had 600 to 6,000 probably people somewhere in that zone working on mobile. They couldn't ship, you know, any problem that was reasonable.

Yeah. So is VR and their efforts there going to pay off in your mind? Would you place that bet? Would you make a billion dollar, $10 billion bet with founders fund money on that future?

Definitely not. Yeah.

Okay. So they're on the, they're off to a wild goose chase. Yeah.

Well, not, well, there is a question of, is there any VR future? That's one question. And the second question is, can Facebook capture it? Ah, so two different questions. You can probably, and I would multiply the probabilities if you're asking a question about getting into a specific company is like, is there a there there and then it can just company capture it. So you multiply x times y and you get a very low probability very quickly. But I think the probability that Facebook captures the VR moment is very unlikely. You also have to ship a full featured movie. So, you know, I always talk about startups in terms of movies. I've been on your show a few times talking about my metaphor for producing a movie. You cannot produce a lightweight fidelity of VR and expect real people to interrupt their lives, stop going outside and stop hanging out with their friends and instead using VR unless it's really impressive. And that means building a full product first. And that's like building a whole new phone or a whole new iPad. And it's not really in the DNA of Facebook.

But it is in the DNA of Apple. And Apple is clearly working on an AR headset. Those goggles, Apple goggles will be out. If you had to place your money, on one of four companies, or let's say two of four companies to be the, you know, the number one, the number two player in the space. You got Microsoft, you got Google, you got Apple, and you got Facebook, Facebook doing Oculus, Microsoft is doing HoloLens, Google just reannounced they're doing something that came out of left field. And then you, of course, have Apple with goggles. Who's your number one and number two?

Apple and Microsoft, and Netflix would be three. Oh, wow.

I had Apple, Microsoft, Netflix number three.

Well, they at least understand content and experiences, and they've reinvented the company successfully at least one time before.

Sure, they have. Great point.

Microsoft obviously has a gaming platform that is similar to where you want to go in VR. They don't have as much consumer DNA typically as you would otherwise like to pull this off, but they have the HoloLens, Minecraft, Xbox. Yeah, and now Xbox plus games, that's a pretty interesting combination activation. Well, that's, I see where they're going actually with that acquisition. So that's a, you know, a pretty solid foundation actually, if you were to build into this feature. Apple, I am sure will get many pieces correct. I still don't know consumers are going to vote with their feet, but Apple definitely understands how hardware, software, and content interact.

Yes, yes. Here is, okay, they bring me and you in and say, hey, we're gonna do this weekend retreat. Give us some ideas for Facebook. Anything make you try? Anything. Take a minute to think about it. I'm gonna give you my first one. My first one is, yeah, go with your- Just like throw no bad ideas. We are just gonna throw a billion dollars at 10 things. Just give us some ideas here because we're up against it. My first idea is to really go after revenue sharing with creators a la YouTube has. YouTube gives 45, 50, they give 55% to creators. I'm Zuckerberg, I'm Sheryl Sandberg. I say we are going to give 80% of all revenue to people who apply to this creator class. And we are going to splashy cashy. We're going to give huge tips. We're going to send money everywhere to the New York Times, to Kara Swisher's podcast, to, you know, Mr. Beast, everybody can get 80 of the revenue if they publish their content here. And we were going to be the most supportive of creators ever. What do you think? That's my first one. It's not a bad idea.

I don't know if it's sufficient. So I like doubling down on the creator economy in the future creatives. I don't know. Just the economic transformation will be enough. So I think you need a multi-prong strategy. I think you absolutely need a lobby government to shut down Tick Tock immediately.

Yes.

So get rid of competition. That's the first thing.

That's a great one.

Because they're not going to win, they're not going to win on the product merits for TikTok. They've already lost a generation. Absolutely. There's lots of very strong reasons to get rid of TikTok in the United States, which would obviously help Facebook directly. Major. The creative expansion that you're suggesting would leverage the Instagram platform. And so I think that's a very smart strategy. and YouTube and other creative platforms have their own issues, challenges. And so I think it's not a bad idea. I just don't know if it gets you all the way into the future.

Yeah, no, just we're putting ideas on the board and I think, you know, going saying, hey, listen, TikTok is a lot worse for teens than we are. You need to go after them first and the Chinese are running a spy operation here, obviously, on all these people. Other than that, carry on. I mean, the fact that, I mean, two presidents couldn't get this thing out of the I mean, it's very simple. Either Facebook, Twitter and Snapchat are allowed in China or TikTok's not allowed here. 3-2-1, bye.

And then there's more and more disclosures. I read an information story this morning. The CCP has definitely been exploiting TikTok and they were in denial about it. US operation was in denial about it, but they were factually lying to the American people and to politicians.

Okay, here's my next idea. We'll throw it up. you log into Facebook, Instagram, and it says, Would you like to pay? And we will collect no data, no ads, six bucks a month. This is not going to generate massive revenue, but it is going to give a Trump card. Hey, listen, 8% of people want to pay to protect their privacy. The rest of the people want a free service. What do you think? Got legs there?

Well, not really, because I don't think they have an economic issue as much as a user attention issue.

Okay.

And so I think the future of users and consumers time is more, they're more vulnerable to that than can they mint money? They can exploit the audience they have. It'll decay slowly enough that they can still generate revenue. But the fundamental shift is users want, consumers want to spend their time on TikTok and other platforms and not on Facebook.

Okay.

I'll give you a tangible asset test.

Okay.

For a while, I think a lot of people were locked into Facebook for even events that you get invited birthday parties and stuff. Facebook. I haven't received a birthday event through via Facebook in over 18 months. A single one. No.

And no more group invites. I'm not getting these crazy group invites constantly. Nobody's sending me a post. Did you see this? You have to respond to it. It's really waning. And we've seen this movie before. I mean, Facebook and Myspace and AOL and Yahoo were fixtures in our lives for hours a day and then we don't ever go back to them.

Yeah, and they can't buy the kinds of things you would typically try to do. You'd buy SAP, which you could, you'd buy Reddit, perhaps if you could. You can't.

Yeah, it really feels like they're in a super dilemma. When we look forward in the market, what do you think's gonna happen? We have record, pretty close to record low unemployment. participation is a little bit weird. Obviously, a lot of people have just decided to not participate. Maybe they're trading crypto, maybe they're doing gig stuff off the economy books. We have a record number of jobs available to people. Consumers are spending money. They want to get out there. And let's face it, you said in a previous episode, I don't remember right here, but you said Q4, your prediction was COVID recedes in Q4, you missed it by 40 days. you know, you can't get everything right. Sorry, Keith, you were six weeks off on that one, but I'm retiring.

No more predictions.

What, what, what are the next two years going to look like? If you had to, you know, Sachs is panicking about a recession. I'm looking at it going, God, this feels like a setup now that we've repriced everything for a comeback. I don't think it's going to be dramatic, but does feel like with this reopening, people want to get out and about. People want to spend their money. They want to travel. So. what's your prediction for the economy the next two years?

Well, I don't know if David's wrong. I think if you raise interest rates too much, you will induce a recession. But I think there's a fair amount of demand, consumer demand.

Yes.

So that may offset these things. I'm not like a macro, believe it or not, I'm actually not a macro forecaster. Peter, I'm sure you know, get founders fund. Yeah. Is when I, where are my predictions, you know, my sort of orthogonal predictions that You know, everybody ridicules at the time come from is really a specific topic at a time. And so, you know, for example, Bloomberg wrote a profile of me in May of 2020 that dismissed my COVID comes from a Chinese lab.

Yeah, that's another great one.

As a quote, fringe theory, literally in quotes, not citing a source and a very nice journalism. But it was more that I was studying you know, the sort of the virus. And it just occurred to me that the theories that are being proselytized made no logical sense whatsoever. Yeah.

Somebody in a bat in a wet market.

Okay. Yeah, exactly. And it just happened to be, you know, in the wet market located next to the virology lab. Lots of other issues with that theory too. You know, it basically defined common sense. To per my point about inflation and interest rates and valuations being connected, I think sometimes just common sense like gets you to like logical conclusions. So for example, one of my best predictions ever was on July 4th, 2016, I predicted the exact percentage of the vote Trump was gonna get. I said he's gonna get 46%. He got 46.1. So I missed by 10 dips six months before the election. It wasn't actually that hard. It really wasn't. And then the day of before the election, I said Trump's gonna win the electoral college and lose the popular vote. The only person in the world, I believe, that explicitly stated that, I don't know of anybody else who publicly stated that. And it wasn't rocket science, actually. All you had to do is take public opinion polls, weight them by state's electoral votes, get rid of California because it's skewed because of the population, and you wound up with that answer. It's like there's so much noise in the world. I remember my husband and I actually interviewed the former head of the Mossad, or got to meet him and then he used it as a partial interview for the book he wrote. And the point he made was fascinating at the time. This is probably four years ago. And he said, There's nothing, there's no secrets in the world anymore. There's literally none. The only thing you have to do, everything's in the public domain. The question is, how do you find what to pay attention to in the public domain? And that's kind of my general belief about the world right now. There's so much noise and stupidity that if you do nothing else except just ignore it all, it's really easy to get to the right answer.

And if we look, oh, and by the way, Jacob's book, the Wires of War must read, and he's been on the program twice himself talking about China.

If he's out twice, he's gonna catch up to me.

Yeah, well, maybe someday a crossover episode where you both put numbers on the.

Board, get a little pick and roll going here. We did one podcast together with Eric Tormbarger.

It's actually pretty good. That should be, yeah, that's an interesting.

Way to get into parenting tips and strategies. We're definitely not doing turning tips together. We'll get a big debate.

Okay, so let's think about this from first principles. I know you got to go soon, but you got record savings. Balance sheets are great for consumers. You got record unemployment slash jobs available. You got crazy Rising wages, and you got massive pent up demand in the reopening. And you have companies with massive amounts of cash on their balance sheet, innovating at a massive level. and China has decided that they're going to close their economy off and retreat and not compete on a global basis anymore. This, to me, feels like the setup for American exceptionalism for a decade. What do you think? I'm thinking from first principles here. Who's gonna compete with our entrepreneurs?

I am pretty optimistic because I think there's a lot of lessons from the last 40 years that the best time to start new companies is during a recession. And so one way or the other, I believe we have a lot of entrepreneurial skills, talent and financing ability here in the United States. And in many parts of the United States, Miami specifically, we have the great culture for entrepreneurial success. So I think we will build solutions to problems we have. And right now, I think it's hard to build a company successfully when everything is inflated, you need critical density talent. This is the key lesson of PayPal. You need to assemble a Marshall, critical density talent. You have to hold that talent together. And in a hot market, when anybody can raise money, when everybody thinks they can build things easily, it's very difficult to marshal that talent. In a more conservative market, a more difficult market, a more fearful market, assembling the right team and preserving that team, and keeping that density of talent together is much more possible. And that leads to much more success, higher magnitude successes and more impact in the world.

Absolutely. All right. Your boy Peter is off the board of Facebook. I know you don't speak for him, but just as his friend, and he's been on the prod before, he's ramping up to get super involved again in politics. Chances he's in if the Republicans win, chances he's in the cabinet or do you think he would ever run for office himself? Knowing what you know about Peter.

I would doubt that. Well, I very much doubt that he's going to run for office.

Okay.

And I cabinet positions. I would be very skeptical of that as well.

So behind the scenes, being supportive and taken that route, which is taken so far.

Well, Peter, Peter has ideas that he believes in, and he's always looking ways to channel them. The Teal Fellowship is a way to channel the, you know, sort of the monstrosity of higher education and the terrible status of it at the cost and a poor ROI. So politics is just one vehicle for.

Channeling ideas he believes in.

Yeah.

What do people misunderstand about him? You should think about it like, because he's, he's kind of an enigma, right? He's, he's contrarian, but like what's his best quality? What do people misunderstand about that guy?

Well, the two best qualities are his ability to assess people. You can't be in the business of backing founders and building a team at PayPal without the ability to assess people that are under the radar, undiscovered talent. That's when most one thing he's taught me is the need to do that, the urgency of doing it, and to some extent, some of the insights of how to do it. And then secondly, Peter is in the top two or three macro thinkers in the planet, putting connecting dots that do assemble a lot, do create a line when nobody else sees the connection between the dots until later. And so his ability to do that every three to five years and have a theoretical connection of dots is just incredibly impressive. Some makes it into the public domain, some doesn't. But he can do it regularly and consistently and is mostly right.

What's gonna happen in real estate? I know you have a lot of bad news.

We have much more cushion in residential real estate than people realize. So the residential real estate market can easily survive 100 to maybe even 150 basis point rate hike. People, for a variety of reasons, get somewhat technical, but having studied this very carefully, there's no reason that people should fear that housing sales are going to change radically if the Fed raises interest rates 50, 60, 70 basis points. You get outside 100 into 150, then there might be you know, some some distortions in the market, but nobody's pricing that into the current stocks.

Right. And the supply going to change in any way at any time. I mean, that seems to be the biggest problem in our country is that we can't meaningfully add to the supply in the places we need. I mean, you do get Miami, New York and Houston maybe adding a lot more units than other places, but it's still pretty dismal in terms of, you know, how many houses we need. And is there ever going to be affordable housing in the United States again in your mind, or is it just.

Going to be a perpetual well, affordability is a function of what people earn. You know, it's a fraction of income. So as real, real wages go up, affordability is easier. That's why actually during the Trump years, you need to buy, too. Absolutely. But in the Trump years, real wages went up very considerably. And so people can afford housing. Now, there are cities that restrict housing artificially. And anytime you do that, prices are going to be ridiculous. Miami, we have currently 22 skyscrapers under construction this year. Crazy.

22 skyscrapers.

That's just a lot of cranes.

Looks like Shanghai down there.

It's very difficult to match supply and demand instantly. You can't just suddenly build housing. Yeah. Now we are at Founders Fund, funding technologies that are changing the artisan nature of building a home into a product. And once you have a productized experience, then you will be able to ship homes fast in days, weeks, not months and years.

Homes built in factories. I forgot the name of the company in Austin.

Cover. Well, we have one in cover, one named cover, but we would fund versions of this. Some of them are 3D printed, some of them are prefabricated.

How many modular one? Yeah. Called blockable.

There's a way of matching software design with quickly assembled, accurately assembled with no Stakes. And that will allow for more responsive product, you know, product demand Supply matching. But a lot of it is a political problem. We like Miami costs currently 50% the cost of living in San Francisco or New York. It'll come back down actually because we're adding more units. And now it may go up to, it was 33%, it's up to 50%, it'll come back down. It may not come down tomorrow, but it will come back down because we're just going to add more supply.

San Francisco, California have crashed since you left and the debt spiral continues.

How's Detroit 2.0? Exactly.

I mean, it's scary, literally, you know, and my wife is Asian, my kids.

Are- and it was incredibly predictable, by the way, if you look at Patrick Hallahan, quite brilliant and quite prescient. He tweeted this in October 2017, that San Francisco was going to be, unless it changed course, the greatest example of ruining prosperity by politics, by politics and policy ever in the history of mankind, and he's going to be proven to be correct.

It feels like it. I mean, people need basic safety and when things are run this poorly from schools to everything, it's just a disaster.

All right, listen, I know you got to go. Yeah, I have to go.

I have this really exciting trip to the dentist.

Oh, yes. As much as I would rather We should stay. Maybe we should talk for another hour.

Which would be more painful. Which would be more painful. The grilling for me, this one's been easy on you. It's not a grilling. You got all the great, I gave you a Victory Lap episode. I'll see you in six months, my friend. Or actually, I'll be in Miami for the All in Sun. We'll see you then. And good luck at the dentist.

Great. Thank you. Take care.