E141: State of Series A's, VC dry powder, IPO window opens + more with Bill Gurley & Brad Gerstner

because of hyper competition and investing in 99, 2020, 2021, there was a term removed from most term sheets that gave investors the right to protect their LICPREF on an IPO. That's gone in most of these cases. So you could convert LICPREF under, which for a founder or an early stage angel investor would be a huge win.

if you were a investor in that last round of Instacart and you were buying preferred shares and thought you were protected, that preference is washed, right? So you're going to be down 50, 60, 70% on those preferred shares because you're going to be converted into common in that IPO.

The other thing is many LPs are actually bonus on the paper mark. And this is something that a lot of people don't realize. And so they don't have an incentive to dial around to the GPs and say, get your marks right, because it's actually going to reflect poorly on them if they were to roll those up.

Both of the LP and the GP are in a dance there. Hey, we know that Stripe is not worth $100 billion right now. It's worth $50 billion.

Think about what that means. If a lot of those unicorns are fake, what does that say about innovation in the American economy?

But I would say a lot of the positive arbitrage that we saw in 22 has been squeezed out of the public markets, and we're close to fair value. So now if you want to generate alpha, this is going to be about picking individual winners versus individual losers.

I think a lot of people realize that if you can get 2.5% or 3% management fee investing $300 million at a pop, that's an easier lifestyle than actually taking board seats and doing work. And so I think a lot of money and activity got pulled into the late stage market. Nearly every firm started doing that.

But now they have a lot of mouths to feed. So when you put money to work, you pull down more fee. And so, you know, these funds now, I mean, if you're Tiger or some of these big funds, you have giant cost bases that you've created because of the size of the firm that you created.

And China just saw CPI down three-tenths of one percent in the month this week. Annualized, that's over three and a half percent. That is a major problem for China. So I think you have some yellow flags here, right? That say, do we have too much tightening? If one of the global engines of growth is experiencing this level of disinflation, that's going to impact the global economy, global demand, et cetera.

Yeah, consumer debt is high, this real estate, commercial real estate is high. We've got debt everywhere. And people are going to have to belt tighten and maybe austerity and stop spending on some YOLO trips.

So, we have record household debt, 17.1 trillion, record mortgage debt, 12 trillion, record auto loans, 1.6 trillion, record student loans, 1.6 trillion, which, as Druckenmiller points out, have to start being repaid, I think, as of September because Supreme Court overturned Biden's unconstitutional debt forgiveness. Record 1 trillion in credit card debt, that I think should be pretty worrying because credit card rates are now around 25%.

There's two things. I think that cleaning up complexity is a great reason for the public market. And Brad already said, we've seen a massive recovery in software stocks. Like, the marks are better than they were two years ago.

I don't think it'll look like a light switch, but it will be. I think we're going to see five, six, seven IPOs, good size IPOs in Q4. We'll probably see closer to 10 in Q1, and then it will start opening up in the back half of next year

I would say the market's actually betting here that the Fed is overdoing it because of what you see in that blue line and that the economy is going to slow. The lag effects of this tightening have not yet been felt.

Remember, we're seeing inflation roll over huge, and we have a chips act and an infrastructure. We have massive government spending going on, and we still see inflation rolling over. So I just find it interesting that within six months, we've gone from worrying about hyperinflation to Bloomberg running a headline summer of disinflation.

In 2022, we had this massive correction in the public markets. We believed that they overshot. In part, we believed that because we didn't think we were going to have hyperinflation forever, et cetera. And so you and I invested in, you know, Metta and a lot of other things that were on their ass.

the AI deals, one thing that might be interesting is if you pulled the AI deals out, I bet those numbers would be more akin to what they were two or three years ago

I think there's a mania going on with AI, both in terms of the size of these rounds and the valuations. It's like 2021 for a lot of AI companies. We're not participating in that craziness.

We're seeing four, five, six hundred million dollar deals get done on zero revenue, two, three million dollars in revenue.

But this is the worst software recession we've been in. I think since the dot-com crash. I mean, the buyers have been laying off employees by the thousands. And since software has bought on a per-seat basis, the market has really condensed.

The last piece of it is government debt. So at the rate that the government is racking up deficits, the Treasury is going to have to float something like $3 trillion of new T-bills by the end of the year. And we're rolling something like $9 trillion of old government debt over the next 18 months at new higher interest rates.

we've seen Lina Khan, we've discussed it many times, seems to be saying, all business equals bad. Any merger equals bad. She's going to, you know, attempt to throw cold water on any merger that's happening. So M&A seems to be being taken off the plate by not just Lina Khan, but also the EU seems to be turning the screws. So if we don't have an M&A market, then that means there's only an IPO market.

they lived and grew up in a day and age where they were told growth at all costs. And it's super hard culturally to go from that type of execution to the principal type execution you guys have been promoting over the past several months. It's just hard. It's not impossible, but it's very, very hard.

this seems like the greatest setup ever. Feels like the setup last year of buying equities when everybody was scared. If everybody is tightening their belts, if VC funds are not going to deploy, this feels like the time to be deploying.

And while this might happen, while this might happen, I'm going to take the other side. I don't think that's what the lived experiences of most VCs in Silicon Valley today on Series A, Series B, Series C, is certainly not in the area we're competing.

I think there's going to be a one to two year period of distress for all these companies that raised in the peak, 2020, 2021, and are now running out of money and they don't have enough revenue, they're not growing fast enough, and or their burn is too high, and all those companies are going to be facing down rounds or restructurings or they're not going to be able to raise.

Remember, we had 1,000 unicorns at the end of 2021 And I've said 100% of those are going to do a down round. And we're still in the early stages of that reset to occur.

over a 20-year investment period, if you basically just buy the top 10 public tech stocks and at the end of each year rebalance to the top 10 at the end of the year, your multiple over that period of time is 24X.

Why not top 20? Why not top 100? I mean, are you willing to say that for the next 10 years that you should only buy the top 10? What if over the next 10 years it's more of the field versus the next 20?