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Featured Episode: Yes, Now’s Actually A Great Moment For Venture

Bradley Tusk


Jordan Nof, co-founder of Tusk Venture Partners, joins Bradley on Firewall to address the aftershocks of the Silicon Valley Bank failure, the growing premium on founders who aren’t stuck in 2021 and why their fund is writing the biggest checks it ever has.

Bradley Okay. Welcome back to Firewall. My guest today is someone who’s pretty familiar to our audience. He’s on 4 to 6 times a year. You know him pretty well. He is my partner at Tusk Venture Partners. Jordan Nof. Thanks for joining us.

Jordan [00:00:22] Thanks for having me.

Bradley [00:00:23] So, love having you on every few months to sort of talk about, whatever the latest things that have happened kind of in the venture world, but also just generally, I think what I hear from listeners is you’re able to give a perspective of here’s why things are the way they are. And from your view as a VC, here’s where they’re going. Right? And so I think of the different topics that we go through, that’s the framework that we should try to stick to. So the first thing is obviously the 800 pound gorilla or elephant or whatever it is, which is, SVB, I know it’s been discussed to death, but I also know because I was in the trenches with you dealing with this, that you had thoughts and perspective on this that I thought were really interesting and unique. So first, what happened and why?

Jordan [00:01:06] Yeah. So and like you just said, like we’ll try to keep this really high level because there’s no shortage of opinions on it. Look, I think that there’s a few things that, part of them regulatory, part of them not, and that those are starting with the rollback of regulations for smaller and medium sized banks that occurred during the last administration. So that’s just one overarching kind of less regulation, less oversight. Now, that doesn’t mean there’s been a lot of criticism around were regulators doing their job, Are they paying close enough attention? It shouldn’t have been catching people off by surprise, rates are rising and this impacts all banks. Look, I think that the probably the piece that everybody missed here was that you have a bank that their entire customer base is our businesses that are technology businesses that are extremely correlated, it is an inverse correlation, but it’s very strong with rising interest rates. They technically do poorly because of discounted cash flows and so on. So that is one piece and then the other part of their customer base is other financial institutions that invest in those companies. So you have a very, very exposed customer base to rising rates. And in addition to that, they’re also the most hyper connected group of individuals on the planet. These are startup founders, these are VCs, these are people that

Bradley [00:02:35] Are all on one giant slack 24/7 seven.

Jordan [00:02:38] I wish that was just the case is, you know, between the number of group chats, on every single messaging app, between people’s opinions on Twitter, I mean, if you look at how long it took Washington Mutual to fail, seems like a decade compared to the number of hours it took Silicon Valley Bank to. So I think that just the ability to initiate wires out of accounts so quickly you know, this was a first bank run that happened kind of in this modern era where it’s table stakes to have the ability to transact in material dollars over your phone. And like these are all kind of perfect storms that line up. The irony is Silicon Valley Bank being a bank that many, many, many people are very loyal to because they deeply understand the needs of their customers.

Bradley [00:03:22] Right. Look, I recall, it’s hard not to call this, the conversation you and I had when we tried to pull our money out. And we almost felt bad about it because we’re like, they’re a good bank and they’re a good partner to us and they’re useful. And this is just a bank run that’s not really fair. And yet, of course, what are you going to do? Be the last person standing and lose all your money? So we reluctantly did it too. But yeah, I mean, look, we’re back to doing some stuff with them now because they do fill a role in the marketplace that’s really useful.

Jordan [00:03:52] Safest Bank in America. You know. I think that, look, it’s also I feel for the employees that work there, the new employees that came there, they have really been scaling their operations. They got some great talent to come join from other banks. And now that’s all that’s all kind of going back to normal. Normal being not a new expanded Silicon Valley bank. Right. But there’s a ton of different pieces here. The advice we were giving to founders, the advice that we were taking for ourselves, it’s not really about depositors losing money from our perspective, it was much more about how long does it take to get money back and to be able to facilitate payroll and so on. So the jitters here, those are very in the moment answers. But I think this is just one of probably many aftershocks that we’re going to continue to feel from what happens whenever you shut down the entire global economy for two years because of COVID.

Bradley [00:04:52] Right. So in terms of venture funding and valuations activity since SVB. So it’s been about a month, I guess, since it all started going down a little less even. Has anything changed?

Jordan [00:05:05] Yeah. I mean, I think that you have people still stumbling over their own feet trying to open up secondary bank accounts at your large financial institutions. So, your big four banks. Which is kind of going back in time here, you know the flight to perceived quality. But you know, what that also means is that you have a lot of less meaningful relationships with big institutions that don’t understand your business quite as well. And that is ultimately, you know, it impairs the small and medium size business.

Bradley [00:05:41] So what would have, if you could go back in time, have prevented all of this? Would it have just been keeping the threshold for banks sort of proving their stability at 50 billion, as opposed to it raising 250 billion?

Jordan [00:05:55] I think this is an answer that I don’t know how popular it’s going to be, but it’s going to be one that you and I will have a great discussion on. I think just the regulators needed to wake up and realize the idiosyncratic risks associated bank by bank with what’s under their jurisdiction. You can’t blame the Fed for this. You can’t blame COVID for this. You know, COVID created the boom as well of deposits. Right? So all of a sudden, you had all these deposits coming in. That’s great. And it’s important for the ecosystem for that to happen, it wasn’t rocket science, that these are eventually being drawn down. So poor risk management for me.

Bradley [00:06:27] But the regulators, I think would say, ‘look, were that our regulatory mandate, we would have, we used to, but it was taken away from us when the threshold got raised for assets of 50 billion assets of 250 billion. And as a result, there’s nothing we could have done about it.

Jordan [00:06:42] They would have still failed the stress test at 250.

Bradley [00:06:45] Right. But they couldn’t, the problem was SVB was at like 180 or something. So they weren’t eligible for the stress test, but they would have been under the old system.

Jordan [00:06:53] As they go. But then I’d say go back in time, go back and go look at your accounting rules that are, at best, you know what? I can’t even say at best make no sense, because just the ability to hold to maturity an underwater treasury or an underwater safe asset and not have to take a realized loss on it is ridiculous.

Bradley [00:07:16] Right, it seems to me. There are two big regulatory failures. And then one thing that would help. One is when they raise the threshold from 50 to 250, stuff that might have gotten noticed and dealt with now did not. Two, the practice of letting people not have to mark ten year treasuries to market is crazy because it just creates this false dichotomy of information that’s like, oh, you know, ‘we look on paper like this, but the reality is that’ and the problem is once that becomes known, people f — king go nuts and panic.

Jordan [00:07:49] And it’s just like a norm that people have had. And look, I’m sure that there’s another podcast being recorded right now, or it’s like everybody’s saying that those investors wearing their sweater vest walking around San Francisco or New York, you know, they’re the ones to blame here. And that’s fine. They can think that. With that being said, I do think that we’re going to see a lack of banking services that this ecosystem has become not dependent on, but one that really did help.

Bradley [00:08:25] So, give an example of where as a venture capitalist an SVB is uniquely useful to you in a way that like a Chase or Citi just can’t be.

Jordan [00:08:34] In lines of credit. So as you know, as VCs we have various capital call lines of credit, so every time we’re doing a deal we’re not actually asking for a wire that day, not hitting up our investor base every single time that we’re looking to make an investment. And that’s just working capital, that just helps smooth out the frequency of which you’re pestering your investor base. That’s a very basic product. Venture debt is one where we’re spending more time on. Venture debt is something that has really taken off. It’s been the broad topic, or at least it was at the beginning with SVB, that this was the failure of the bank. It really wasn’t. I mean, at least from what I’ve seen, the numbers are not as staggering as their exposure to the ten year and longer dated securities. But basically, if you think back on it, venture capital exists as an asset class because we’re supposed to be investing in companies that are not creditworthy. That’s why with the risks, the expected return is so high, because these are supposed to be companies that should never be able to get a loan from a bank. They’re on un-bankable. They’re people. They are not creditworthy businesses. They’re running at a loss. We are investing in the vision of that founder and in the future, very deep future, cash flows of that business, hopefully. And that we are filling a void in the system. And all of a sudden banks realizing this is a pretty lucrative industry. If we’re able to figure out a way to underwrite some form of small loans that we get equity kickers in, and they made a lot of money on that in a bull market. That’s a great strategy. Whenever the wind’s at your back, when the wind’s at your face, it’s a little bit different. And I think it all comes back to just the fact that they were operating in a completely different type of industry where what’s very valuable for a small, emerging early stage startup was it felt like it was just as important to SVB than for a very late stage company, you know, debt financing in the hundreds of millions of dollars which they were still competitive in.

Bradley [00:10:54] So we’re about a year and a half overall into kind of a venture downturn, right? We’re seeing a lot less liquidity, a lot fewer exits, valuations starting to decline. Where is the market now and how strongly correlated are the economics with the actual quality of founders and new ideas?

Jordan [00:11:13] That’s a great question. I think that where we are in, I have an opinion on the IPO market the exit market, I think the exit markets there. I just think the bid ask spread is just too wide. I think the hedge funds, the people that are on the roadshows, the bankers, everybody. This is where this deal gets done. This is what gets the retail market excited. This is what’s needed. And you have founders that are just anchoring in 2021. And that’s going to take a lot of coaching and a lot of sleepless nights for people to either come to grips with the fact that we are in a completely different economy than we were in 2021. We have interest rates that are not near zero by a long shot. I think that piece obviously plays a direct role in the expected valuations that these companies can go public at. However, M&A activity is picking up. I think that you just have to get some of these really excessive valuations. Like founders ready to take that as a down round or as to go public or get aquired at a lower price.

Bradley [00:12:24] By the way, in terms of down rounds, you know, even during the boom time, once tech companies IPO, they were cut by about 70% by the public markets anyway because quite frankly, as you and I both know, they were just wildly overvalued.

Jordan [00:12:37] Yeah. So we’ve talked to founders. I was on a panel with a founder of a very well-known, very large, high profile company that went public. And he talked a lot about his obsession with his private market valuation. And that was something that was nearly an obsession. And then every day he wakes up now and it’s every day is a new down round, his company’s down 90 plus percent. And, you know, the public markets don’t care about the story.

Bradley [00:13:15] They’re pretty efficient.

Jordan [00:13:15] They’re pretty efficient. And you also are going up against, you know, a lot of new market dynamics that you may not be used to navigating, such as pretty ferocious hedge funds that are very transactional, that are not rooting for you as a founder. They’re not “founder friendly”. Their reputation is solely contingent on economic results that have nothing to do with building those long term relationships.

Bradley [00:13:39] So if a founder comes to you and says, look, Jordan, my board pressuring me to go public or do an M&A deal or something like that, I think I’m better off holding out for a few years and waiting for the market to recover. What either is your advice for them or what questions are you asking them to try to give them the right advice?

Jordan [00:13:57] So chances are I’m not having that conversation if I’m not on their board.

Bradley [00:14:02] Were lucky where we don’t really have anything like that, at least in a meaningful position, maybe one or two little things for fund one. But basically we’re not in that spot, which is why I made it theoretical.

Jordan [00:14:12] Yeah. It’s kind of like an ‘FYI we’re doing this thing’. And so, I think that for the companies that we are in a position where it’s about thinking towards the future, it’s about managing those expectations for the founder and taking the zoom out view and getting a realistic expectation in their mind about what could happen, what is the series of outcomes that are potential here? And what are we looking at and what does that mean to them? Because as companies get more and more valuable, particularly if they’re solo founders or a limited number of founders, you have multi-generational changing wealth that can be created today, you know. We can be in the worst market of all time, there are still companies out there that can generate an astronomical amount of money for founders. And, you know, that is going to be the most important outcome for them. They have 1/N of a portfolio size, whereas in venture firms, who knows why they’re saying what they’re saying. Right now in this market, there’s a lot of pressure on VCs to produce DPI. Do you need to distribute not just what was on paper?

Bradley [00:15:25] Explain to the listeners.

Jordan [00:15:26] So, VCs are typically gauged in a metric, two metrics, three metrics called, you know, let’s call it total value to paid in. And so TVPI, that’s your total paper and realized gains across your portfolio net of fees and carry. So then your DPI is the number that everyone cares about that is what is the ratio of what has been distributed back to you net of fees relative to what you paid in? You made $100 commitment to a fund, $100 was exactly drawn and you’ve received back $200. That means you have a DPI of two. And if you still have an unrealized value of another 100, that means you have a residual value of 100. So the DPI plus RVPI equals your total value to paid in. So of the 3X, so where the rubber meets the road when you’re having LP conversations, as we all do, is amazing. You have your performance, your quote unquote performance was fantastic in 2021 because everything was written up. You had a company that was pre-revenue, that was series F….but really what it comes down to is how much of that were you able to exit? And those are the conversations I think you start to separate the firms that have the staying power to be around versus the ones that row the markets on the way up, but really didn’t show that they had the ability to do the hardest part in venture and that’s drive an exit.

Bradley [00:16:55] Yeah. And then also you have been doing something that’s, I think, a little controversial in the sense that you’re more aggressive than most at looking at the secondary market opportunities. Right? And I think VCs are afraid to do it because we don’t want to send a signal to the founder that we’re not fully bought into their vision and their confidence and everything else. But nonetheless, that does generate DPI. How do you think about it?

Jordan [00:17:18] So one, there’s part of it that we can think about, some of it that we can’t. Right? We are capped up. We don’t buy positions in the secondary.

Bradley [00:17:28] Yeah, I just mean we sell it.

Jordan [00:17:29] It’s the strategy around transparency with the founder. There’s always a reason for someone to be selling. And whenever we are looking to the secondary market, we’re either looking for an indication on sentiment in that industry, in that particular name or if it’s a company that is vastly oversubscribed and it makes up a material percentage of our portfolio, we will look to de-risk that position and produce a little bit of DPI to send back to our investors, that a little bit in terms of the total firm’s position in that company. And that’s a conversation just with the founder. You’re running a business just like we are. And I mean this is just prudent risk management on our end.

Bradley [00:18:17] Have you ever had any of those conversations go badly?

Jordan [00:18:20] Never.

Bradley [00:18:20] So do you think there’s a little bit of cognitive dissonance where VCs play out the conversation in their head. It plays out badly in their head that deters them from having it, when in reality, as long as they approach it the right way, it’s probably going to be just fine.

Jordan [00:18:33] It’s probably the nicest way to put it. It’s either that or they’re just like, I heard this is something that’s hard to do and I don’t want to do something that’s hard.

Bradley [00:18:40] So right now, you and I meet with companies multiple times, every single day. What are you looking for? What do you want to hear from them and see from them that might be different than, say, two years ago?

Jordan [00:18:55] So from two years ago, what we want to see is probably the same thing. What we’re able to see is a lot more, because we’re able to spend a lot more time with those founders. We’re able to really get a sense for them as a person, as a human, who they are, what’s driving the vision and build a tremendous amount of conviction around the companies that we want to invest in. Everything isn’t rushed. There is a few great catch phrases that are partially true, due diligence is you just searching for ways not to do the deal.

Bradley [00:19:32] That’s part of the job.

Jordan [00:19:32] Exactly. And so that used to be said in a negative sign but that literally is our job. Founders obviously don’t like it because they want everything to be based on their limited interactions and the theatrics that they can bring to the table. That’s over.

Bradley [00:19:51] Right? We don’t get any more of like we have a first call with a founder and then we’re told, like, you need to submit a term sheet in 20 minutes.

Jordan [00:19:58] And if it is great, you guys are great. We’re done here. And like, you know, just I don’t know why you’re wasting time talking to us about that. Why aren’t you negotiating your term sheet? So, you know, it’s part of that piece. I think that we are also going back to a system where there’s no more just perpetually funding the idea. There’s no more perpetually funding the vision about what I’m going to do. You have to have done it. You have to do the thing. There’s no more pre revenue series As. We’re going back to a milestone based funding, this is the way that companies used to be funded whenever I first got in this industry and in my opinion is the way a company should still be funded. This is not a momentum driven market. This is you raised a seed round, you raised a series A. Those aren’t just letters, they represent that you have derisked this business. You have built a team. You have a business model that at least gives us the line of sight to what we think is product market fit. At the Series A, we hope we’re seeing strong signs of product market fit. We’re seeing real revenues. We’re able to talk to real customers. We understand why they love your product. We understand if there are some form of network effects, we understand the market expansion strategy. We can get fully aligned on that. And we’re not just digesting a pitch deck of something that we barely have time to look at. And that’s why you look at capital deployment cycles and they really slow down in 2021 because you just can’t effectively do your job.

Bradley [00:21:27] Well, but our capital deployment slowed down, right? You know, I say we maybe zigged when everyone else zagged a little bit in that when the market was super hot, we pulled back and said, we’re not going to wildly overpay for these deals or fund deals that are stupid just for the sake of doing deals, wrote smaller checks and fewer checks. And now we’re jumping in with what are, for us, pretty the biggest checks we’ve ever been writing and because the opportunity to us now is there.

Jordan [00:21:54] And I think that has to do with what vintage fund you’re investing out of. So our current fund is a 2021 vintage, there are some 2021 vintages that are fully deployed. They’ve invested it all at the top and that’s the end. You know, we walked into the end of 2022 being just north of 25%. Now we’re looking at 40. So now we’re looking to put that money to work. I think that part of what’s going on with the economy, the recession that appears to always be on the horizon, but never right in front of our faces. It’s just the endless doom and gloom. This is what private funds are made for. The case to take on risk right now is low from an LP perspective. But if you have dry powder, meaning that you have capital to deploy into companies, you’re dealing with far less competition because you’re as expected, you’re nontraditional investors. So your mutual funds, your corporate VCs, your hedge funds, the people that are not doing this, this is not their core business model, they have retreated significantly. Unfortunately, they were a major participant in later rounds of financing, but enough of them are still around that it’s not creating some sort of existential risk for companies to get to the series C.

Bradley [00:23:14] But we are definitely, as we’re talking through and debating different companies, more concerned now with who on the cap tables may be able to provide bridge financing and money further down the line and less of just an immediate assumption like of course fidelity will jump at some stupid valuation.

Jordan [00:23:31] Yeah. And so that changes the type of business that you’re looking to fund. So to me, it’s far less compelling if somebody comes in to our partner meeting and wants to talk about a tech enabled services business versus a technology business, because to me that’s just here’s a very capital intensive business model that uses some tech to maybe do some stuff. Versus a business that you can scale for very low dollar amount where they’re not dependent on raising hundreds of millions of dollars in venture capital, that produces margins that are 80 plus percent and ones that are valued at a very high multiple in the public markets.

Bradley [00:24:08] I think when founders hear you say 80 plus percent, they probably go ‘what the f — k that’s so unreasonably high, what kind of business does that?’ So tell me why we are insisting upon or at least sort of highly value such a high number.

Jordan [00:24:29] That’s the gross margin I should say. There’s several different ways you can look at this. You can look at gross margin, you can look at once you get to cash flow positive, you’re talking about your EBITA number and your EBITA margins. I think that a big part here is that there’s two major components that really factor into kind of why companies fetch the multiples that they do. And that’s the growth rate that they have year over year. How fast are they growing still? And so a company that is growing 100% year over year, 50% year over year, let’s say, in the public markets that, you know, north of 40% year over year. Clearly, that’s more attractive than a company that’s growing 5% year over year. Now, a company that has gross margins that are 10%, that means that you’re literally every dollar you make, you’re only keeping ten cents. That seems like a very capital intensive business as what it would be, a high margin business, like a software company. You can get ten engineers that are writing code that you’re able to ship that out. Your marginal costs are nothing. So the only expense, now they’re engineers and the cost of salaries and so on, that’s a below the line item. So that’s going into their net margin, but their gross margin is really just their top line revenue less the cost of goods sold. So if they’re using some software to help enable them build a write code or whatever. So that’s what we’re looking for.

Bradley [00:25:56] So if gross margins are in the eighties, where should the net margins be?

Jordan [00:26:01] That just depends on the stage. So it’s like, you know, basically you’re going to have a negative cash burn for a while. And so you start to look at companies where you evaluate them differently as they’re approaching maturity like your rule of 40, which is that your free cash flows or your margin there, which can be negative, plus year growth rate, should be north of 40%. So if you’re growing at 100% and you’re losing 60% or even -60%, EBITA margin, those are the two numbers you’re adding together. Now, ideally, you start to look at a world where you’re still growing very, very quickly. Your top line revenues are very meaningful. And so the reason why the margin also matters is because of your top line revenue numbers. And if you’re doing, you know, 200 million and top line revenue, you have 80% margin, and you’re growing 100% year over year. You’re talking about a real public market ready business that can produce a lot of value for shareholders.

Bradley [00:27:04] So one thing that, you know, keep in mind, my only perspective on VC, is our fund, because it’s the first time I’ve ever done it, where as you have more perspective on it. So something that I know we care a lot about, talk a lot about sort of normative change, right? Alma is a great example of this, where Alma is a mental health company that basically does all of the back end services for therapists so they can really focus on treating patients. And I remember the conversation that you and I had, was the first deal we ever led. I have one of those times where you remember like where you were standing, the whole thing, like pacing around, talking to you about this. And effectively we realized what we’re doing is making a bet that stigma around mental health treatment would decline, that the norms around it were changing. Obviously, we believe strongly and Harry Ritter, the founder, and we made the bet. Now, obviously, COVID sort of took that on with steroids and sort of validated our bet very quickly in a big way. But do you think most VCs think about normative change? And if not, why not?

Jordan [00:28:11] Look, it’s hard to tell what VCs are going to say in their partner meeting versus what they’re going to say whenever you’re catching up with them or, you know, in a board meeting about another company. What people are looking for are really either transformative business models where there’s a lot of unknowns, where you don’t know how it’s going to work. But there are very strong indications that that would create a very sustainable business model with a recurring revenue stream that’s highly defensible, that can get large enough to produce an outcome that, if you happen to own ten plus percent of that company upon exit, you’re going to make a fortune. That’s what they’re looking for every time that we’re looking to do a deal, we need to be able to underwrite it to where that deal can return our entire fund. Most VCs do take that approach and to get there, if it’s a product that already exists, you know, this is a very kind of well-known concept. You know, at one point in time, people would say, you know, you need a ten times better product to overcome the friction that’s associated with it. You know, other people would say, no, you need a completely different type of business model that seems crazy at the time, like getting into a stranger’s car or staying in an apartment to really do that. I don’t think there’s one correct answer here. And I think that what’s really compelling, really exciting, and to kind of come back full circle outside of the doom and gloom of where we are as an economy and a Fed that’s going crazy. And, you know, everybody’s got an opinion about that. We’re in this stage where it’s a really, really great time to be an investor because we’re in the midst of a very, very, very important product innovation cycle. And the world just got what I like to view as kind of, you know, AI is not brand new. This is not something that just fell out of the sky. It’s been around for a very long time. It just requires a lot of resources. And it’s astronomically difficult to kind of digest unless you have a very deep understanding of that space. ChatGPT was like the best demo of all time that they just dumped on to the entire world. You didn’t need to be a VC. They’re just like, check this out. And now I don’t want to go and say, like, my mother was like, on ChatGPT, but like a pretty wide span, right?

Bradley [00:30:30] Pretty sure my mother was not.

Jordan [00:30:31] Yeah. So, you know, so there’s that. But it was not something that was limited to just a really cool demo for venture funds. But what it did was it really sparked the imagination. You didn’t see all the noise on the back end. How is this happening? On my side and on your side for sure, we’re thinking about privacy. All sorts of ramifications on the regulatory end and some risks that are associated with that. But then you start to think about how do we, just like vertical SAAS existed, where they said, okay, this software is a service business model that produces these 80 plus percent margins, very, very valuable. There’s playbooks to scale these types of organizations. Let’s go vertical by vertical and see what type of software we can produce to solve really, really distinct pain points. FinTech, health care…vertical by vertical. Now you take AI, apply that vertical AI. So we’re investors in another company, elaborate, which I’m on the board of as well, which is AI for lab results. So you’re taking a monotonous task that you know something that there are regulations that were behind that basically saying that you get lab results back, you’re on the clock, you really need to provide those back to the patients in a timely fashion. And that’s hours not days. And essentially what it can do is scan your lab results and create generative text that goes into every EMR that’s out there. The doctor reviews it, approves it, and saves them an astronomical amount of time.

Bradley [00:31:57] And by the way, a lot better for patients. I think all of us have got these lab results back and then Googling like glucose levels, 0.78 good or bad? and is being off of the mean by 1% a lot or little? You know, like elaborate which is why we invested and clears all that out.

Jordan [00:32:23] You never had that longitudinal data. And look, I mean it’s very early innings for them but like these are astronomically strong use cases that people fear. There’s a lot of fear that AI is going to replace everybody. I hope they replace me with a better version of me, at every job, at every level that I had, since I started my career. It’s always the thought, I wish that I could get this busy work off of my plate — There was always less valuable tasks that needed to be done, it just allows the ROI, the output per employee, white collar or not, to be much higher because they’re focusing on the human element, right? There always needs to be a human element here. I think that is case in point. Nobody is going to allow a machine to just say, here’s your next steps, whatever, and then just auto publish up to a patient. The stakes are far too high for that. I think that it allows them to spend more time sitting, explaining, talking to the person, their patient, it allows them to spend time doing the things that matter with those human connections. And it also allows investors to streamline parts of their processes. It allows banks to maybe provide some more generative oversight around some elements around risk management. It really kind of opens up a whole new universe around research, around content creation. And we’ll see. We’re in the very, very earliest of innings. But this is like somebody just dropped an iPhone in front of you for the first time and said like, I don’t know what this thing’s going to do, but it’s going to change the world. And then you just started to see that unravel with Web 2.0.

Bradley [00:34:09] So if you go back to kind of the boom market and ask what are all of the things that went wrong or people got wrong, it’s pretty easy to make the list, right? We’ve covered a lot of already. So one would be, you know, heavy focus on growth at the expense of margins of unit economics, funds less worried about DPI than just sort of the overall return rate, companies you know, that are not really technology companies being created called technology companies and getting venture funding, family offices, corporate people who really shouldn’t be investing in super early stage deals because that’s not their skill set jumping in. So it’s easy to find all of the mistakes that were made. We also know that at some point we’ll be back in an irrational market again because that’s how these things work. They’re cyclical. Which of these lessons hold and which ones do we just go right back into the same mistakes?

Jordan [00:35:02] We are fundamentally wired and this is very unfortunate to kind of make these mistakes over and over and over again, because it’s almost like regulations are changing constantly. If you go back to 2008. It kind of mutes the downside for people. Not as businesses, but it’s the norms of capitalism are being kind of brought together and that’s what rewards this bad behavior. Where the fear of not buying that house in 2008, that ultimately was not a good investment for you to make, it worked out all right. I know a lot of people that bought places in 2008 that I’ve been annoyed at ever since and that they have since owned three more houses. And so those are okay. The Fed has a role to play here. People have been chasing yield for a long time. We’ve been an interest rate free environment forever. So VC was obviously a very attractive asset class because the wind was at our backs for so long. This went from a cottage industry that had very few players in the space that required very little differentiation to becoming a grown up industry or a real asset class now. And we’ll see these business models of venture capital continue to evolve. I do think that it comes down to, there’s a few things that LPs control. So are investors are limited partners. You know, their allocation to venture capital ultimately trickles down to the entrepreneurs ability to get funded. So as an asset class as a whole, if there’s less money coming into venture capital, which is a fact that is the case, there’s whether that’s the denominator effect or just the sense of look, like if I can get 5% for free, why am I going to go chasing that additional marginal gain from yield from a higher value? If you’re sitting on cash and you’re getting zero, that’s a big difference. So I think that we’ll see some innovation around, you know, the products that I don’t think should exist like venture debt. You know I’m sure there’s 5 million venture firms that are spinning up pitch decks to go launch venture debt divisions, which we’re definitely not going to do. But, you know, I think that we will come out of it. And I think that at the end of the day, just like every boom and bust cycle, this one feels a little bit weird. And I feel like everybody’s in limbo because they’re looking for the person to blame. And that has not yet appeared like what happened. But to be clear, it was a not a fun weekend but like, Monday was just fine.

Bradley [00:37:40] Right. We’ve seen the enemy and it is us. Yes. So last question, which is kind of half political, half economic. And it’s it’s been fun over the years to watch Jordan’s comfort level with politics and regulation really grow. And part of the reason that our partnership works is we have a lot to each teach the other and we each find the other person’s expertise interesting and so kind of works. So one thing that Hugo and I were talking about the podcast yesterday is all the different factors and permutations that are going to impact the 2024 presidential election. Usually the criteria that’s far and away the most important is the economy, right? When you don’t live in a world of Donald Trump where all of a sudden 20 crazy f — king things are also all of a sudden in the mix. And the best way I could describe it was like from a scale of 1 to 10, the economy now is like a three and a half or a four. Everything is just kind of stagnant. Inflation is not going up. It’s not going down. Stock markets is kind of stuck where it is. Unemployment is still relatively low, but it’s softening. Where do you think if team Biden came to you and said, ‘okay, Jordan, we need to know how to plan this campaign, where do you think the economy will be in fall 2024?’ What would you tell him?

Jordan [00:38:54] I mean, I’d say, you should to talk to my partner, Bradley is the first one. I just think that the where the economy is in 2024 is going to be largely set by, one, this cascading effect of what happened and the ramifications of COVID. Where we are today. You know, we’ll see what happens with interest rates. That is going to play a huge role. And I’m not sure what you know, what this looks like in terms of homeowners, a lot of people’s wealth and what their view of the economy is described in their home prices, the value of their homes. And that’s like a proxy that a lot of people use for perception of wealth, perception of doing well. And if people are stuck, if prices continue to go down on homes, they’re modestly coming down now. I think that eventually, the talk of the town is the value of commercial real estate, that’s multifamily included, right? That those are going to plummet, but we’re not too far off from that. I think that it is going to come down to an election that probably is going to be hinging on the candidate that can present a case to make people feel warm, safe and fuzzy about their nest eggs and that everything is going to be okay from an economic perspective.

Bradley [00:40:12] Right. So last, last question then. Which is if you’re the White House, right? and you’re trying to game all of this out. On one hand, lower interest rates mean more development, more growth, better economy, better stock market, better everything. But it also means, at least in this particular case, more inflation. Which hits voters very, very directly. And so, you know, when you’re trying to weigh the two, if I were, you know, President Biden, I said, ‘Jordan, you know, I could try to quietly push the Fed in either direction here. But it seems like I’m damned if I do and damned if I don’t.’ What would you tell him?

Jordan [00:40:50] You know, I’d say that it’s time for somebody to take the position of being of playing the long game, which I know you’ll tell me is impossible to say, like, look, this may not help you get elected right now, but if you actually care about the future of America, it’s time to take our medicine.

Bradley [00:41:08] So let the rates stay high.

Jordan [00:41:12] Right now they just did the worst thing possible. You didn’t pause rates. You didn’t raise rates into what was expected. You just did the uncertain thing, which no one wants. And you just play this 25 basis point nonsense, let’s solve the problem. The amount of debt that this economy is taking on, that the global economy is taking on, is insane. I think the only way to really pull that back and get back to a balanced budget across the board. And something where we’re not going to see a catastrophic fallout from government expenditures that are very needed, that I don’t think anyone’s going to complain about Social Security and Medicare and Medicaid. Okay? These are spending initiatives that are astronomically important. You know, we cannot kick the can down the road anymore and someone’s going to lose an election.

Bradley [00:42:05] Let me know when you find that person. I’ve been doing this for for 25, 30 years.

Jordan [00:42:09] At a certain point, you know, at a certain point, someone’s got or, you know, I mean, last time I checked, I thought that was the whole concept of the Fed.

Bradley [00:42:19] The independence of it, right?

Jordan [00:42:20] Which it doesn’t feel that.

Bradley [00:42:23] Well, yeah. Well every president seems angry at the Chair of the Fed if the economy isn’t what they want it to be, regardless of who it is. So anyway, we could keep going on forever. But Jordan, thanks so much for joining us.

Jordan [00:42:32] Thanks for having me.

This episode was taped at P&T Knitwear at 180 Orchard Street — New York City’s only free podcast recording studio.

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Bradley Tusk

Venture capitalist, political strategist, philanthropist and writer.