Key Moments
E81: All-In Summit: Bill Gurley & Brad Gerstner on markets, downturns & investment cycles
All-In PodcastKey Moments
Market downturn is a sawtooth, not a sine curve. Expect volatility and a swift return to fundamentals.
Key Insights
The market downturn is characterized by abrupt 'risk-off' periods rather than gradual declines, resembling a sawtooth pattern.
Inflation and interest rates are key drivers of market valuation multiples; rising rates significantly reduce company valuations.
The current economic environment offers opportunities for disciplined investors to re-underwrite businesses based on long-term averages, not recent highs.
VCs must deploy capital strategically, potentially focusing on more capital-intensive sectors due to the shift in market dynamics.
Founders and investors need to focus on unit economics and sustainable business models rather than growth at all costs.
The market is returning to a state of dispersion, where true value and fundamental strength will differentiate winners from losers.
THE SAWTOOTH NATURE OF MARKET CYCLES
Bill Gurley and Brad Gerstner frame the current market downturn not as a smooth sine curve, but as a sawtooth pattern. This means that while 'risk-on' periods can be slow and reflexive, 'risk-off' phases are abrupt and often shocking. This dynamic requires rapid mental adjustment from investors and founders, as the shift from boom to bust can happen very quickly. The historical context of market cycles, from the dot-com bust to the great recession and subsequent booms, highlights this inherent volatility.
INFLATION AND INTEREST RATES AS VALUATION DRIVERS
A central theme is the direct impact of interest rates and inflation on market valuations. A mere one percent change in interest rates can lead to a 15-20% shift in valuation multiples. The current collapse in multiples is attributed to a dramatic change in expectations regarding inflation and rates. The Federal Reserve's efforts to combat inflation by raising rates signals a significant shift from the era of near-zero interest rates that fueled the recent bull market.
RE-UNDERWRITING IN A NEW REALITY
Investors are urged to re-underwrite their businesses and investments based on long-term averages, not the inflated valuations of the past 18 months. Historical data, like 5- and 10-year averages, should guide new strategies. The 'iron law of investing' states that interest rates are paramount. Anchoring to recent high prices is a major mistake, as the market is unlikely to return to those levels without a significant, unforeseen event. This disciplined approach is crucial for surviving and ultimately winning in the current environment.
CAPITAL ALLOCATION AND VC STRATEGY SHIFTS
The $250 billion of unallocated capital in venture capital presents a complex challenge. VCs are being forced to deploy capital more carefully, and the expectation is that the upcoming vintage years will be more rational. There's a potential shift towards more capital-intensive sectors beyond software, such as mining, semiconductors, and biotech, as these may offer better value compared to overvalued software businesses. The strategy of deploying capital from LPs relies on maintaining trust and partnership, not forcing investments into unfavorable market conditions.
THE CHALLENGE OF GROWTH AT ALL COSTS
The era of 'growth at all costs,' characterized by negative unit economics and massive subsidies, is ending. Sophisticated investors are now scrutinizing metrics like net dollar retention, operating margins, and free cash flow. The market will experience greater dispersion, separating companies with strong fundamentals from those that were propped up by cheap capital. Founders must focus on unit economics and sustainable business models, as the ability to grow at 50% or more annually becomes significantly harder and less valued at scale.
GOVERNANCE AND DISTRIBUTION STRATEGIES
Discussions also touched upon governance structures and the importance of founders honoring their commitments to shareholders and employees. The trend towards permanent capital structures is questioned, with an emphasis placed on distributing wins to LPs when opportunities arise rather than holding onto stock indefinitely. While some exceptions exist for truly exceptional companies with long-term potential, the general consensus leans towards realizing gains and returning capital to investors to maintain partnership trust.
LEARNING FROM MARKET MISTAKES AND OPPORTUNITIES
The conversation reflected on how sophisticated investors were 'gaslit' by the market, influenced by herd mentality and confirmation bias, leading to mistakes like paying 100x ARR multiples. However, the current downturn is seen as a significant opportunity. The market is re-establishing dispersion, allowing for more rational decision-making. While predicting the exact market bottom is difficult, the expectation is a return to a more predictable and investable environment, favoring disciplined investors who underwrite fundamentals.
THE RETURN OF DISPERSION AND FUNDAMENTAL VALUE
The market is moving away from a period where all assets were inflated and towards a state of dispersion. This means truly great companies will stand out, while others will fall below the mean. The historical success of software, for instance, relied on a few dominant players. Now, with inflated valuations on smaller companies, the risk of dilution and decelerating growth means many may never see those valuations again. Investors are now applying a microscope to evaluate companies based on core financial health and sustainability.
Mentioned in This Episode
●Companies
●Organizations
●Concepts
●People Referenced
Common Questions
Venture capital cycles are not smooth sine curves but more like a sawtooth pattern. Risk-on periods are slow and reflexive, growing gradually, while risk-off periods are abrupt and quick, requiring rapid mental adjustments.
Topics
Mentioned in this video
Cited as an example of a company whose financial metrics, like free cash flow and multiple expansion, are critical for evaluation.
Mentioned as an example of a firm that, despite perceived risks of a 'wipeout,' did not necessarily fail, and also for its massive funding initiatives.
Mentioned as a company that did an incredible job in executing a strategy of using negative unit economics to drive growth.
Discussed in detail regarding its competitive landscape, the impact of Masayoshi Son's funding on its profit margins, the emergence of network effects, and its strategy of negative unit economics.
Cited as an exception where Bill Gurley knowingly bought back into the company at a low valuation in 2009, holding it until it was sold to Booking.com due to perceived network effects.
Mentioned as a firm whose LPs are experiencing declines across their investments, highlighting the difficult environment for fundraising.
Mentioned in relation to CPI projections, indicating their forecast for inflation trends.
Used as an example for tracking consumer behavior, specifically new home searches, as an indicator of market trends.
The acquirer of OpenTable in a deal that Bill Gurley held onto from 2009 until its sale, believing in its compounding network effects.
Discussed regarding its valuation reset, failed IPO attempt, and the nature of its business model, which may have relied on unnatural or near-negative unit economics.
Mentioned as a legendary investment by Benchmark, characterized by a 'winner take all' dynamic.
Discussed in the context of the ride-sharing market, specifically its financial performance on earnings calls and its strategy of continuing to subsidize operations despite negative unit economics.
Shared as an example of a company where the Global Financial Crisis (GFC) was a transformational moment due to a lack of alternatives for employees. Also mentioned in the context of founder David Sacks' urge to sell shares post-IPO.
Cited for a statistic regarding the number of SaaS companies with over 50% growth and their corresponding multiples.
Mentioned as an investor that makes deals at a very high multiple (75 times ARR), which Brad Gerstner states he would refuse to participate in.
Mentioned as an example of a company's staffing levels, contrasting it with startups and their growth strategies.
Mentioned as a large tech company for comparative analysis regarding staffing and operational scale.
Mentioned as a firm that attempted to 'kill the fund and get out of the overhang' and start fresh, similar to a recapitalization.
Mentioned as examples of founders who have built exceptionally valuable companies, comparable to Bezos and Zuckerberg, suggesting the rarity of such ventures that might warrant long-term holding.
Cited for his advice to 'ignore what everybody else is saying, follow the tips,' which the speaker agrees with regarding the inflation narrative.
Quoted as a source for research on how the ability to calculate risk decreases in herd behavior.
Mentioned as one of the independent board members for Slack during its direct listing.
Mentioned as a famous bond investor whose observation about the venture industry being systematically set up to rise and crash was a key influence on Bill Gurley's thinking.
Mentioned as someone who highlighted certain exceptions when discussing the long walk in the desert after the dot-com bust, potentially referring to PayPal.
Mentioned for raising $100 billion and injecting it into the market, which negatively impacted Uber and Lyft by enabling dis-economic strategies.
Mentioned as part of the Slack board during its direct listing.
Cited as an example of successful entrepreneurship, particularly his strategy with Amazon in 2001 and his personal angel investing approach.
Discussed as the subject of 'WeCrashed', highlighting his salesmanship and the impression he made on investors. His future ventures are also speculated upon.
Mentioned by name in relation to a question about Bill Gurley's future investment plans, though the exact context of the question is not fully clear.
Mentioned in a humorous anecdote about an Instacart delivery, used to illustrate observations about the company's business model.
Mentioned as part of the Slack board during its direct listing.
Cited as an example of a founder who created a highly valuable company (Facebook), similar to Bezos and the Collison brothers, implying a rare caliber of entrepreneurship influencing long-term holding decisions.
Mentioned as an individual that both Gurley and Gerstner invested in, known for having super voting rights but also a clear duty to shareholders.
Described as a nuanced and gritty individual, a hard-working founder, intelligent, and charming, traits not fully captured in the depiction of his character in 'Super Pumped'.
Discussed extensively regarding its role in stimulating the economy with low interest rates, its current effort to combat inflation by raising rates, and its neutral rate expectations.
Mentioned in relation to CPI projections, indicating their forecast for inflation trends.
Mentioned as a potential Limited Partner (LP) that a venture capital firm might have to justify capital calls to, especially after deploying funds into risky assets like crypto.
Mentioned as a potential Limited Partner (LP) that a venture capital firm might have to justify capital calls to, especially after deploying funds into risky assets like crypto.
Mentioned as an example of a company where a commitment to naming a stadium might not be true, implying potential fragility.
Mentioned as a venture capital firm that made a significant profit by selling WeWork shares early. Also mentioned as a firm whose LPs have multiple investments that are currently declining.
Mentioned in a humorous anecdote about the company's valuation rounds, used to illustrate observations about the company's business model.
One of the firms represented on the board of Slack during its direct listing.
Mentioned as a company whose direct listing provided David Sacks with his first opportunity to return significant money to his LPs, but he initially held the stock and later distributed it in panic during the pandemic, missing out on gains.
Mentioned as a company that Benchmark did not dislike, but distributed shares from due to a triggered framework in their partnership agreement with LPs.
Mentioned as a documentary that was watched by the participants. One participant believed it was not accurate due to made-up scenes, particularly regarding Travis Kalanick's role.
Mentioned as a documentary that was watched by the participants to understand the story of WeWork and Adam Neumann. One participant noted inaccuracies in 'Super Pumped' but found 'WeCrashed' to be a better portrayal.
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