E165: Vision Pro: use or lose? Meta vs Snap, SaaS recovery, AI investing, rolling real estate crisis

Alright, Friedberg is back. Welcome back to the All-In podcast episode 160-something, your favorite podcast in the world? Yada yada yada With me again the chairman dictator from off-polyhapatia, the rainman, yeah definitely David Sacks is here and back from his time in the metaverse we found him somewhere out in space in the solar system in his apple goggles your favorite, the Sultan of science David Friedberg is back from the metaverse.

Welcome home. Thanks for having me. What did you discover when you went to your anus in Google class? Sorry. I've actually used the Apple Vision Pro takeout. I ordered them. I ordered them and I walked by the Apple Store and I was going to go in and try them and there were so many lunatics in there I was like yeah I'm not doing it. But I ordered them. You actually used them. I ordered one online to be delivered and it was like delayed by a month so I went down to the Apple Store and picked one up. Okay. And my kids cannot stop.

Using it. Really? I went down to the Apple Store but got cleaned out by the thief to stole everything. So that was crazy. That was crazy. Well put the video in here to the idiots who are robbing Apple Source all the

devices get wrecked when you steal them and they all have GPS in them. Have you tried it? No it was too busy working out making love and winning. Oh okay. So you were you were making sweet love. You were watching your portfolio go up and you were just generally winning. Got it. Got it. Yeah. Yeah. So Friedberg the rest of us were being men in the world accomplishing stuff but but do tell us about your time in the metaverse. Do those goggles come with a lifetime prescription of SSRIs?

You guys sound like one of these like tech journalists that are actually anti tech people. You guys are actually a journalist like it. Talk to your channel. It seems like Jen computing platform. I remember when the iPad came out and everyone pooped with the iPad. I thought it was stupid. I tried to use it. I couldn't get any value out of it. And in 2010 or 2011 when did it come out? 2010. 2011 we started using it with our sales team selling to farmers.

We gave every sales guy and iPad and they went out in the field with 3G and they were able to close sales in the field meeting with farmers which had never been done before usually it's going to come into an office. How many iPads sold a product?

Oh so we had like. We started climbing up on software. We had dozens of these sales guys we gave them out to our sales agents as well the independent agents they started using them. And it was like a real game changer in how sales was done in agriculture.

And I had never even contemplated that when I first used the iPad. Let's get to the rest here. What is the killer app? What do you think in the next five years people are going to be doing with this thing on a daily basis? Is there a daily use case? I'll say a couple things. One is like I feel the same way I did about the iPad which is I don't know what it is today but I can tell that there's something there. And I'll give you an example of something I thought about.

First of all the AR is game changing. If you've used like the meta. Yeah the Oculus Quest. It like makes me super dizzy. It makes my head hurt. It makes my eyes hurt. Like you're super. What Apple solved is that you're like still in reality. But then you get to interact with these three dimensional kind of objects in reality and it's like really well done. It's definitely the one and there's going to be incredible changes in the next couple generations.

But it gets rid of all that dizziness disconnected kind of stuff that happens with the full VR experience which I thought was really incredible. Then last week. And I'm sorry I missed the show we have a facility with my company in North Carolina. We have this giant greenhouse facility and I was doing meeting with farmers and stuff. I go to the greenhouse facility and there's so much work that the greenhouse text and lab texts are doing.

Where they're using an iPhone and a barcode scanner and a printer and they're holding all these pieces of equipment scanning the QR codes on flowers taking the pollen out putting it in the next flower. Training each other how to do it. And I was like I put this in ApplVision Pro on. And I was like man all the apps and all the tools that we had all these different pieces for that was taking people tons of time.

Image collection data collection could all just be done streamlined while you're working. You can have a task list report. Yeah. You have a task list of the right cameras are taking images in the middle QR codes are automatically scanned. Data is being ingested. The task list is kind of you know giving folks next steps they could listen to music while they're working. And I realized for that job and I met with all the team out there and spend time with them.

And I actually did the work that they do to get a better sense for the workflow. And I was like man literally every aspect of this job will be massively improved and productivity will go up by 10x with these goggles will happen in the next couple weeks or months.

I don't know but my engineering team is looking into it. Can we take it. Can we use some software. Can we build some software and can we put this on folks to give them a better work experience increase our productivity to do automated capture. So I don't know exactly where it goes but I could start to see how this can become a more ubiquitous part of a workforce setting and not just be a video game and movie tool for consumers.

So I'm I'm reasonably optimistic about where this goes. It's definitely V1. I feel like it's the iPad days where no one's really sure where the applications are but yeah. Enterprise applications. Unbelievable. Makes total sense and also training training right assembly line workforce. Sure house workers.

Where you're getting real time kind of task updates data is being ingested all in real time and and by the way the other thing I'll say is training is incredible this spatial video recording on it. So it looks like you're living through the experience that someone else had. So you can train someone how to do a difficult task and rather than have a human go spend hours training a workforce the workforce can be trained by the goggles in a way that you cannot do with two dimensional video today.

So I'm I'm pretty optimistic very strange days right I don't know your your fan. So five member strange days. So from off what's going to happen first here. Are humans going to become more like robots by putting these on and do this factory work or is Elon with optimists and some of humane I think is the other one there's a couple of other people building general use robots figures you've

figure yet which one wins the day is it going to be humans having eyes and you know data collection like robots or robots having appendages like humans well let me let me put two ideas together and see what you think of this argument if you think about the generation of human beings that have

as close to any other generation before it lived in a totally immersive world I would say the best representation of that are current teenagers and 20 year old people and maybe at the upper edge the early 30s people.

And why is that you know they've lived inside of social media their entire lives they've lived inside of immersive video games their entire lives but the question is are they better off and happier as far as we know from an evolutionary perspective and I would tell you that the answer is a is a huge gaping no.

So if you believe that the rise in depression the rise in suicide the dependency on drugs the dependency on SSRIs the sexual promiscuity the lack of marriage the lack of kids if all of those things are in some ways

a correlated by product let's not say it's causal right let's just say it's a correlated by product of this entire immersive almost exclusionary detached world that these folks have grown up in taking that to the limit I'm just going to put out there may not be the solution to our problems and so I guess the more directed answer to your question is I would hope that the latter wins so that we take these goggles off and actually learn how to talk to each other and look each other in the eyes.

Get married and have children because I think that's actually better for the world. And I would probably say that it's almost better for the world than a 10 X in a productivity. Interesting and then you see the correlation to cancer and disease that is disproportionately higher amongst these young people so I think it's at some point to ask ourselves what is structurally happening in the lives of these 16 you know 15 to 31 year olds that is just so poor in

terms of outcomes and if you look at some of the environmental variables that they live in and then take some of those and take them to the limit I think that there's a reasonable argument that their lives get worse before it gets better. Yeah I mean the amount of time you spend on social media is correlated with the person.

Social media just saying just this immersive like I'm going to detach from the world and live through a microphone and glasses taken to the limit I'm not sure is the solution to these kids feeling detached lonely isolated. I said yeah yeah I mean it correlates all of these things that we're seeing in this younger generation correlates with the introduction.

So could it be a good productivity device yes of course I hope it's a good product to device yes but if we try to make it the panacea for anything and everything I think we're going to.

We're going to compound the systemic issues that these young people have and I suspect on the margin if you were going to bet all of these things that we see in these young people today will get worse as a byproduct of technology not necessarily get better so if you can take a different path like Optimus or the figure AI robots where that work is done at least we have a different problem probably maybe even more existential abundance.

But a different problem which is now how do you find purpose but maybe you can find purpose through connection and that the types of things that humans have been bred over billions of years to actually optimize for okay.

Saks I remember when you were starting craft you fired up like a group for VR and you got pretty heavy into you made a couple of small bets I remember I don't think any of it worked out really you can tell me if I'm wrong here but you got in a little bit earlier maybe talk about the business case for this and has that change because you believe I believe a lot of folks thought hey maybe this is the time.

When Zach really start you know had bought Oculus and they started putting out some good product seemed like it was a fall start is this the actual starting pistol and is this the start of the VR AR adoption race. I don't think we're quite there yet okay we've been talking about VR being a thing for over a decade yeah no more like 30 remember the Nintendo VR stuff it's like always on the verge of happening.

I think that the big complaint about the Apple devices has a lot of capability but it's still a pretty huge device to wear on your forehead this is not really going to be comfortable enough to be something that people want to use all the time. I mean there's also a question of use cases but they're getting there with the use cases.

In any event I do think that Apple Vision Pro is it's like I said last week it's a useful prototype or proof of concept and it will get better so I'm glad they did it because I think you need to start somewhere and then just keep iterating. But eventually for this to I think really take off you need to shrink the form factor miniaturize the technology just every version of it make it simpler lighter easier to use.

Yeah I mean eventually it will feel like sunglasses and so that is I guess if they become like regular glasses I think we all agree it becomes. I don't know I feel like it's pretty damn comfortable I don't know if you guys you guys haven't really used it but that's what I've heard that's a surprise. I was totally surprised online saying it's unlike any other headset I've ever worn they did an incredible job designing.

What is it feel like ski goggles it doesn't feel heavy it doesn't feel pressure compared to ski goggles. If you were wearing ski goggles it's less constricting than ski goggles it's more comfortable it like floats on you a little bit they did a great job with this cushioning device they built and the band you put on it feels very natural it's Apple design right it's like a really well designed product that's unlike anything else you've ever tried.

I've always felt like when Apple comes into the race that's the starters pistol and I think this is it because I've heard the same thing from everybody you have to try it it feels like different than Oculus and some of those versions that came out previously.

And they have the app ecosystem and I would not discount that when you know the ability to monetize the app ecosystem and have all the people who are already building the com app the Uber app whatever notion you know all the stuff that people use and love Spotify.

And then port it over here for tonight whatever I think that's going to be the magic and the statistics are not lying here I mean this is unbelievable they've sold already 200,000 units which doesn't seem like a lot but for a V1 that is a lot and they're going to sell a half million this year. It's going to be close to like that's not that many well it's a couple of billion I mean met a sales more.

They do yeah but you know this is four thousand dollars this isn't five hundred so to sell that many of a four thousand dollar devices incredible concept it's not like a regular Apple products that is a mass market device that tens or hundreds of people are going to buy but it puts them on a path yeah where they can iterate and keep making it better.

See I think and this is I guess what I asked freeberg do you compare this to buying a MacBook Pro buying an iPhone or buying the Oculus you know whatever they you know five hundred dollar unit because everybody I see talking about online is comparing it to the purchase of a laptop because of the desktop and you can kind of do your coding or surf the web and do all that way.

What do you put this is buying a TV is buying a laptop is a buying a smartphone what would you have to be really productive on it uh-huh if you're going to use it for writing purposes or coding purposes so doesn't really. Work with just the headset but you could do that. Yeah it's definitely like buying a new computing device but people felt the same way about the iPad get back to twenty ten when the iPad came out.

And everyone was like who's it for it's a whole new computer who's in for you already have a phone you already have a computer why do you need an iPad and then they sell tens of millions of quarter now yeah so I really I as I do the math on this I was just kind of doing some back to the envelope stuff I think they're going to sell a hundred billion dollars. Of Apple vision pros not this version but this version plus the next version probably over the next.

I would guess for them to get to a hundred billion in sales it'll take them less than five years I think they're on the table on everybody I think they're going to own the entire. Everyone's underestimating this as a new computing platform and once these applications particularly in the enterprise setting start to kick in and I will say that the movie watching experience is way better than watching on a TV in your living room.

This cannot stop asking me to use the goggles to watch instead of an iPad or TV the because you see 3D like all Pixar movies are natively 3D and so you got the Disney plus app on there you watch a Pixar movie and you're watching in 3D it the kids are blown away so I think we're all going to be surprised by how this.

Yeah Disney's all in on it remember when our parents told us not to sit too close to the TV now it is strawberry the thing to our face yeah I had the most certainly valid moment ever I go to buy a cup of coffee. I was going for a little walk I see blue bottom like you know I get myself a mocha you know lost a little bit of weight I'm going to treat myself $9 for a mocha number one that in the city tilted me.

$8 for a mocha it was $8 and then I gave a dollar tip and then I felt cheap giving a dollar to you know it's 899 for a carton of clover milk all organic. You can make infinite latte said home anyway I'm going to go for your $9 mocha I was I'm in palo Alto right now because we lost a bottle yeah I posted this I'm like $9 what am I doing you know I just I felt like buying a chocolate bar and the state of the lips left on the cup.

I look at the fact you know you're a little obsessed with my lips pick it easy so anyway then there's a kid in the place wearing the goggles with the keyboard no stop pounding he's getting work done this kid was doing work and I tell you the truth in the hours he's putting in the hours no one looks at your laptop no one

that's what you work without anyone seeing what you're doing this kid had four desktop stop this guy was probably on porn hub Spotify writing code how many words did this person say to another human being while you're there no zero and you know when the laptop they're the same what's the difference he's coding nobody bad it and I I think this is going to run the table on this I think it's a hundred billion sales hundred five years I take the over yeah I take the over what do you got the over the under could they keep it.

They keep it at three grand they got a sell 30 million units to get to a hundred billion they're going to make up a lot of money in this app store to buy you guys are right that it's going to be successful in terms of revenue what I'm asking is a more societal question is do you guys actually think it's better no I don't want my kids in the cell day no I can see this because I'm

freeberg I can I buy three for your kids just have them walk around with them I even know I know the house rule as well but wait a minute hold on what about productivity freeberg my kids are trying to be productive they're using it. I'm not a child. You don't have a productive childhood supposed to be not productive you guys understand that at some point you guys will be the only six kids whose parents haven't given them the stupid thing to put on their face.

This is going to be time restricted I even know I've had no phone no like to I let the headset is so good for them so good no I've burned their brain away burns are brain away.

I totally agree with you social interaction the loss of our ability to communicate is critical and it's a fail point I do think that their applications where these things create great unlocks I think this is an enterprise device can you imagine giving your sales team on the farms to go there they can take off their sweaty headset when the sun is shining and then give it to the farmer to put on and then he can put it on in field

the sweat in the headband will be wet. No that's not the use it. It does it by the way it's a very personal device in order to log in you know it does like a ice can. Or you have to have like a lock in like login like you do with your phone but then you got to reset the eye because it automatically sets the eye position. So when you put on someone else's headset you got to reset the eye it's a whole thing so it's not a transferable device it's a very personal computing you know kind of thing.

So I don't think it's going to be the same as like an iPad or a phone it's a very different kind of thing I don't know what it's going to look like it I don't know I say next week we do the show inside of these or at least me in your free bird will be will be there is actually for this. There's a there's an avatar thing and so what it does it scans your face while you're talking and we'll see each other as the avatar yeah let's do it it would be hilarious.

I had a moment this week in parenting I had a moment this week where I told one of my children that when I send a text message I expect an immediate response. Otherwise I am going to cancel that child's phone and take it away and then separately when they respond it has to be in structured well thought out perfectly formatted English.

And then then third I said every single email I see from you interacting with your teachers or anybody else that's there to help you needs to be incredibly well written and formatted and if I see garbage English I'm going to take your phone away. Okay so you don't want them on their phones but they have to respond right away well they have very strict rules and what they can use they're there for literally all they can do is communicate like they can use i message.

But it is shocking to me that despite the lack of games that they have or whatever how poor they are in being able to communicate and what little access to devices they have have already made them orders of magnitude less able to communicate then frankly I was able to when I was there.

And so I can just imagine what happens when you become even more in sconce in something that you can cocoon yourself with and not have to interact with the rest of the game I don't disagree with you I don't disagree with you not to say that it's not going to be a revenue generator but I think that you could just as easily frankly. Instead of impacting Apple the revenues you can probably go along the makers of SSRI's.

Here comes a spread trade but. Bumble and Tinder and you'll get to the same place economically. All right here we go we got a lot on the what a great leap forward for humanity I can't wait. Sorry I just see this as a laptop replacement.

OK I wanted to talk a little bit about what apparently is going to be the spread trade of the last year meta is continued there unbelievable run and snap dropped like 30% here's a chart for y'all of snap versus meta you can take a quick look at it here and just for context both companies.

Degrade during covid and Zerp hit all time highs in 2021 but they both got flush due to the at spend pullback obviously but then meta started to get less focused on their headsets and more focused on AI started doing their reduction in head count 22% year over year from 86,000 to 67,000 the last quarter for meta and their quarterly profits have increased to an all time high of $14 billion that profits folks in q4 for meta all time high for the stock price $470 a share 1.2 trillion

dollar market cap snap down 60% from its closing price on a type of day in 2017 let me just jump to chama up before I get into more charts and everything you pointed out chama that maybe you could explain to the audience just how ridiculous the voting rights were and the massive dependence that the snap team and the executives had on stock based comp two issues for you to moth.

I mean I think I said it before I think that case studies have been written about how tilted the governance is in snap I think the point is that they basically have infinite to zero voting power over common shareholder so there's no real feedback loop and I think that that has probably adversely affected the types of people that traffic in their stock now look activists

and short sellers sometimes have a very bad reputation but if you steal man their side of it what they are there to do is the shine a light on inefficiency and in the short seller case sometimes in propriety but it should all lead to companies being better run

right I think meta have this example where they had a really big hiccup and everybody including us sort of pointed out the levels of spend that they were making really didn't make any sense I think we had a chart that compared the level of spend of meta second only to

like the spacia program right just like bonkers an enormous amount of money and look mark got the message he heard it loud and clear I think he got fed up with whatever was going on there and he fixed it and it's in the numbers now I don't know snap because to be honest with you I've never taken more than one second to look at that company

and the reason is there is just zero ability for me to have any useful say so I've never honestly looked at its performance I've never started a single characteristic I've never trended it and I think the point is that I am probably where a lot of other reasonably smart folks who could give a reason to pinion on how to make it better land and part of the reason is because there is no feedback loop that matters

and when you know that why would you waste your time at least in the other options right there other options and meta was another one you know you can write a letter it gets picked up on cmbc and Bloomberg and whatever and all of a sudden they kind of pay attention and I think and you look at Disney Nelson Peltz goes and gets like pearl motor shares buy some more takes a lot of position

and Peltz will see whether that fix itself the point is that in all of these other cases people are investing the time because they think that there's even a small shred of a chance that the company listens but if you literally have no say you couldn't even do a proxy you couldn't vote the shares why would you bother and I think that that's more of an example where maybe there is a I so I don't even know why snapped it poorly and again I'm not going to really take the time because it's like why bother taking the time

section should they unwind this like no voting common shares super voting shares nonsense and and should this go away as a concept in the stock market well I mean Facebook or meta has a pretty similar concept I mean I guess the Zuckerberg has 60% of voting control whereas

even speagle is 99% so snap is more egregious the difference is that Zuckerberg is listening and speagle is not the reason why snap is doing poorly is not because it's revenue has deteriorated so I looked up as part of this fast chat GPT for their key metric so assuming GPT is not hallucinating if you compare 2021 to 2023 their total revenue went up from the market

total revenue went up from 4.1 to 4.5 billion and gross profit went from call it 2.4 to 2.5 billion so not a huge increase but revenue and gross profit were slightly up but if you look at operating expenses they went from 3 billion to 4 billion a year and that is why their operating income

was going to bring loss went from a 700 million dollar loss to 1.4 billion dollar loss in 2 years so that's the source of the problem is that they increase their operating expense by a billion dollars a year from 2021 to 2023 they seem like they're the last ones to get the memo yeah they were the last ones get the memo and just just finish the point so you saw that a few days ahead of this quarterly announcement where their stock got crushed they put out a press

Lee saying they're going to cut their head count 10% it's too little too late yeah they knew right they need that problem so they release the press Lee saying oh we're going to cut well you should have done what Zuckerberg did you know Zuckerberg did a 20% cut last year he got serious he got lean and fit and instead these guys held out did nothing then when they know that the markets can a crush them they put out this

layman announcement 10% no not 10% really if you just want to get back to where you were two years ago in terms of operating expense you need a 25% reduction yeah yeah that is more than that if you look at the numbers let's use operating cash flow it's 165 million for snap for the quarter so their operations generated 165 million a profit but for the entire year because they lost money in the quarters prior they generated free cash flow of only 35 million dollars so the business net

produced 35 million dollars of incremental cash you know how stock based comp accounting works the charge happens when it vests so this is what employees are vesting during the year of 2023 employees vested 1.3 billion dollars of stock based comp so that means new shares or options were issued that on an accounting basis the options are valued using black

sholes and the shares are valued based on the share price so they issued 1.3 billion of stock based comp so they generated 35 million of free cash and they used 1.3 billion dollars to compensate employees beyond their

op x so that means that they hate employees 40 times the free cash flow that was generated for shareholders during the year which is also equivalent to 10% of the enterprise market value of this company so the enterprise value the company is 15 billion dollars 10% of that it was issued to employees to compensate them now let me give you the the story of another city meta and by the way snaps share count because they issued all the stock the number of shares

outstanding increased by 4% during the year during the year meta's number of shares outstanding decreased by half or percent because they used cash to go and buy back stock so they were able to reduce the shares outstanding now as you guys talk about meta cut employee count by 22% and snap cut employee headcount by 3% during the year but here's the crazy difference in performance the stock based comp expense for meta during that year was about 14 billion dollars that

that year that company generated 71 billion of operating cash flow so while snap gave employees 40 times the free cash flow meta gave employees you know about a 20% of the of the free cash flow and then and then meta went around and they use some of that extra cash to buy back 20 billion dollars a stock so they bought back more shares than what the employees were issued back that

that your work so it shows such a difference in looking out for shareholders so if I'm an investor and by the way meta is creating it like 25 times free cash flow which is not a crazy multiple given all the new businesses that they have in llama to and the progression to cloud and other things that they might do if I'm looking at those two businesses as a shareholder you got this guy that

you know the whole stock he's giving employees a billion three of shares a year when he's only making 30 million dollars of free cash flow year and then the other guy is issuing 14 billion dollars of shares buying them all back and he's making 70 billion of free cash flow year I don't know it's very hard to decide which one will be able to get brought it up in an interview I saw in a lot of the layoffs were top heavy so he got rid of a lot of the top people who

come packages and then what I'm hearing from a lot of executives is cutting these highly stock comped executives who are you also have big cash comp cutting them putting a lieutenant's in charge and then moving more jobs to other locations where people don't expect stop stock based comp you know if you're in India where you're in South America

whatever you know stock based comp is not like the obsession is here so as everybody optimizes these businesses I mean Facebook even 5,000 employees so they announced roughly 500 job cuts out of what 5,500 employees that's crazy I mean should that company be operating with 2,000

employees good question a lot of the number of Twitter employees from 8,000 to 1500 when you look at the number of apps that they're running in the number of products that they're running compared to meta right meta has far more apps far more infrastructure meta is serving 3.2

billion daily active users snap is about 400 million so meta is 8x the users with many more applications and much more infrastructure so I think it's a it's another great kind of ratio to look at the performance of these two 12 exactly right exactly yeah the other advantage that meta has is because

they're so profitable they have the resources to go big and AI big time which is very expensive so yeah so they are the leader you get all this option value at meta which you don't get it snap there's all this infrastructure that they can leverage much like Amazon did with AWS into things like cloud AI tools for third party developers third party applications and then obviously the you know

meta is the biggest advertising platform next to Google in the world now and there's much more that they can start to do to extend further into the they did not some say remember Apple screwed them and was like you can track devices now and like that just took a massive hit in the ad network and was all those headwinds they're like okay we're just going to use AI to optimize ads and supposedly the AI optimization of ads I was talking to somebody

they said like yeah we got it all back we gained it back we've got massive AI advertising optimization going on so totally that's great that Tim cook you know kick us in the nuts but we don't care by the way that's a great point to tell it really says a lot about how meta was able to respond to that change which a lot of people speculated would destroy the advertising business and the fact that they were able to engineer solutions to drive advertising revenue up to $40

billion dollars it's just mind blowing it's a really kind of impressive outcome for the team and I think it speaks a lot to the quality of the engineers there I think it's a great point yeah sacks you tweeted that you're seeing a little sass bounce back all of a sudden that's interesting I am seeing something similar last year or last two years you had a ton of people cutting their sass spend maybe removing the number of sass vendors they had consolidating vendors you tweeted many

private software companies are experiencing accelerating growth after six to seven quarters of deceleration sass recession appears to be over according to the sass master David sacks you want to pack this for us what do you see well it's so pretty early because I was reported but if you looked at the big tech cloud performance in q4 you could see that there's a bounce back in here this is net new AR are added for AWS Azure and Google cloud so you see here in q4

that there's a huge increase in net new AR are for the big cloud computing platforms and then I think another bell weather is that last year we're seeing so we're still waiting to hear from how spot sales for zoom Adobe companies like that they were reported yet but if you look at the last

year amongst other products their base in Australia the major yeah exactly collection of sass companies right it's a collection of sass products yeah so net new AR are would be the amount of growth in that quarter and this on a year over your basis so you can kind of

who q4 21 was the absolute peak and then plummeted and then actually went negative for about a year that's that's tough to be in a company with new AR going negative yeah that doesn't mean by the way the company shrinking it just means that the amount of net new AR

which is the amount of growth is actually smaller than that same quarter year before yeah and then in q4 you could see there's some acceleration here that there's starting to add more they added more net new AR are I guess 33% more in q4 than they did over the previous year and part of

that sacks is because the cops are lower and they kind of bottom down yeah they bottom down now they're accelerating so we're you know we're starting to see this in some of my board meetings as well where in 2022 everybody was missing their numbers and

reforcasting down and then they would miss the reforcast so by 2023 the forecast were very very conservative and I would say announcing companies beat the sort of the lower forecast in q4 this wasn't happening earlier in the year but finally I think people

are going to be there sort of their lower forecast for q4 that's the question that I was curious about what do you what do you actually think is happening is that we've rebased line these businesses so now what would have looked like just a massive miss over the last two years now look like a beat because we've just completely reset expectations is it that or is it that economy is actually expanding and we can count on some reasonable growth rates is it a combo to what do you think

it actually is yeah I mean it's definitely a new baseline in the sense that you go back to 2020 or 2021 we considered good growth to be you know 2 to 3 x year over year and now if it's going from 60 to 80% growth you're happy so there's definitely been a lowering of expectations that being said you still see in these numbers there has been a bottoming out and we're starting to now grow from this new baseline so for example I think with that last year here we are seeing an increase in

basically in growth right so the way our sessions typically defined is 2 quarters of negative growth right we had 6 to 7 quarters of decelerating or negative growth in sass in tech in sass which is what I call it the sass depression or B to yeah it's actually kind of a depression you're right but now we're seeing quarter over quarter growth so growth is re accelerating growth is going to get to where it was that probably will take some time but it feels like the problems in the ecosystem work

themselves out and now we're back to growth again that yeah I can add psychologically because I'm in a couple of sass boards as well and psychologically it felt like you tell me if I'm right sass sacks or you saw the same thing there were 2 years of calling up customers and they were like we're worth solidating vendors and by the way we did a lot of the same thing and we're going to have a lot of growth and so we need 20% less seats so we're going to have 20% less

sass companies that we're buying from and we're going to have 20% less seats so you start putting that all together man everybody was just in psychological triage mode we cannot spend money I don't want to lose my job so you're if you're a procurement person you're the CTO you don't want to lose your job you don't want to cut some software costs do I get points for that and the points you would score for the last 2 years was cutting costs

with the market ripping and you know you now got a really you know a fishing company you're like hey can we spend a little bit on sass to make the remaining employees even more you know productive okay maybe that's a reasonable discussion and then people are playing ball in terms of negotiating prices so that's the other thing I see is like people will take your software but here's what we want to pay and then they're coming to the board and saying can we do this

deal would have been a million dollar deal but it's a 200 thousand dollars to get take the money take the money let's let's bear how that customer the market is generally an escalator on the way up and elevator on the way down so the recovery is going to take a long time but at least we bottomed out and we're in recovery as opposed to continuing declines yeah by the same token if you're a startup and you're not seeing improvement in your

Q4 sales then you no longer have a macro excuse for why you're not doing well interesting and then freeberg you added you know you're like I'll make my own software you said you know some sass for a software is too expensive I'll put a developer on it and so how's that working out for you are you still in that mindset of like yeah maybe we just build our own software yeah I mean it's not just us I think we're seeing a lot of

companies pursuing this path a couple engineers can rebuild the functionality of core applications particularly because I think if you think about the business model that makes sass so great is they could value share rather than charge the cost of an engineer plus some margin the great business model the equity value that comes in software if you can build something once that creates a hundred dollars of value you can probably charge your customer

thirty forty dollars for that product because it's saving them sixty bucks seventy bucks and they'll make that switch the software so you know the ROI driven value share model in sass has made it incredibly valuable the problem now is that an engineer can be hired to build the replacement and so it creates price compression so the sass company can no longer capture that much value

because the savings is actually less than that because the enterprise might say hey I'm going to hire someone instead of spending sixty grand a year on your software I'm going to allocate a quarter of an engineer's time to build that software and it's going to replace that that cost so I think that that's still the case so while there might be bookings there's still which are driven largely by a search for efficiency gains

a search for more profitability for more productivity within an enterprise there are other options for that enterprise to realize that productivity gain today and that's what's going to cause perhaps price compression and more competition than has been the case but I don't think that the adoption of software is going to slow down it certainly seems to be self re accelerating which is more competitive right we're moving into a hyper competitive market right especially with AI

it's a mix of internal software it's a mix of internal software and as you guys know there are very few traditional non tech enterprises now that don't have a software team that can write code so now that so many companies have software teams at right code they're all going to be asking the question

should we be buying the software or should we be building something internal it's a classic buyer build situation all right let's talk a little bit about vcs and how they're investing in AI there seems to be three camps shaping up your you know one group is like I'm being compensated going to win you know Microsoft Google Amazon everybody they're going to win the day so they're going to wait and see then there's another group who's sitting at because they're like hey open source is going to win

Metas committed to open source and collaborative platforms I've been playing with hugging face with Sondip as well as you can move and it's pretty amazing what's happening over there and then a bunch are obviously placing bets right now the valuations are absurd founders fund and in recent harrow its two notable firms are approaching it differently founders fund bought into open AI at a twenty nine billion dollar valuation but aside from that investment there generally avoiding the

ideals my other hand in recent is betting heavily character AI replete eleven labs miss your also in rippling sacks so what do you think is open source going to win the day you've been fixing shovels the whole way you've been talking about compression maybe this isn't actually a good market

what what you're thinking as a capital allocator I think foundational models will have no economic value I think that they will be an incredibly powerful part of the substrate and they will be broadly available and entirely free wow so if you think about that any closed model

especially a closed model that operates on open on the open internet is not very valuable and any open source model that operates on the open that trains on the open internet will make that so so in that world things like mistral and llama will essentially decay the market to zero

so if you if you're looking at any economic value that has been captured up until today if it has been captured by having a proprietary closed model trained on open data that economic value will go away and I think Google and Microsoft and Facebook and Amazon

and all these startups have a deep economic incentive actually to make that so so now you can evaluate what that means so if you get an open model from hugging face that's just kick ass where do you spend money well you're going to have to spend money to actually train it

to fine tune it maybe to have some pretty zippy inference and all of that means that there's a new kind of substrate that has to be built which is all around the way that the tokens per second are provision to the apps that sit on top of the model

what that means is you need to go back to 2006 and 2007 and say okay when we first created the cloud who made money and fast forward 18 years later it's the same people that are still making money so the people that made money in 2006 and 2007 were Amazon principally because of EC2 and S3 the perfect analogy of EC2 and S3 in 2024 is the token per second provider now there you have to double click and say okay well what does a token per second provider need to do to make a lot of money

and I think the ultimate answer is you need your own proprietary hardware so who is in a position to do that Amazon has announced that they have an inference and training solution for training Serebrus has announced a pretty compelling solution Google obviously has TPU then there's a handful of startups including one that I helped get off the ground in 2016 that I funded called GROC all of those companies are in a position to build a tokens per second service

then you have companies like together AI which basically just go and take venture money and wrap and video GPUs and you can debate what the advantage will be there one could say well it's not really a huge advantage over time so my refined thoughts today are sort of what my initial guess was when we started talking about AI a year ago which is the picks and shovels providers can make a ton of money and the people that own proprietary data can make a ton of money

but I think open source models will basically crush the value of models to zero economically even though the utility will go to infinity the economic value will go to zero did any of you guys see Chimoff's interview with Jonathan Ross?

Nope, you put it out right Chimoff you made it public you know I did it just for my subscribers but Jonathan is the founder and CEO of GROC the company that I just mentioned and the quick version of that story is I would I would pour over the Google earnings results in the mid teens of 2000 because I was pretty actively investing in a bunch of different public equities and Sundar said in a press release he mentioned that they had rolled their own silicon for machine learning called TPU

and I was like what is going on that Google thinks that they can actually roll their own silicon what must they know that the rest of us don't know and so it took me about six or nine months but through sunny I got introduced to Jonathan and then we were able to get Jonathan to leave Google

and he started and he was a founder of TPU at Google and then he started GROC which I was able to lead that funding round in 2016 so eight years ago anyways I did a space with Jonathan talking about the entire AI landscape and AI acceleration to my subscribers

but it was so good I got to say he was so impressive that we kind of like figured out a way to just play the space and tape it and then we published it to everybody so it's on it's on my Twitter for anybody that wants to listen to it it is amazing he is really impressive I was sitting on the 17 going to Santa Cruz not moving for hour and a half and I've listened to it so I kept me alive but I thought it was really great yeah he's great no he's great and some great insights

and I think he's very compelling in arguing why some of the big cloud providers today that are offering infrastructure for AI model training and inference are going to be challenged if someone can build full stack and do it successfully so it was a really good interview

I actually think it's really worth listening to but I enjoyed it yeah thanks for putting it out there I was like literally just sitting in the car browsing Twitter and I saw your thing and I clicked on it and I just said it up well it was a little hard actually when you do a space for your subs

you can't actually just flip a switch and then release it to all of your followers so we actually had to like literally play it and then just capture the audio out and then republish it but anyways despite that inconvenience if anybody's interested in learning about AI hardware

he is very compelling and he's very educational So Saks your thoughts on just how you're approaching investing in AI if you're specifically investing in the underpinnings of AI picks and shovels yadda or if you're just looking on the application level and it's you know that kind of approach

Well we divided it into three categories one is the models themselves, the foundation models which can be either open source or closed source there's infrastructure so like I'm not saying it could be like model training it could be vector databases tools that developers use to create the AI stack

typically inside their enterprise and then the third would be applications which can be things like co-pilots or it could be a free AI app that's using AI to kind of turbo charge its capabilities yeah most Saks would be in the application bucket

and so that's principally where we're focused although we do look at infrastructure plays and models however I do think there is an argument for I mean really with a question of commodization well like all the model companies just get totally commoditized

we're really we're talking about open AI right because we're the leader so the question is can they maintain their lead I do think there is an argument that open AI will stay in the lead and actually do quite well and I think there's a few points there one is that if you're a consumer

you just want to use the best GPT you want to use Google it's just like search right if Google is a little better or the perception is it's a little better than being or the other search engines you don't win a plurality of search traffic you actually end up winning it all

because consumers just want the very best one so most of the tests show that open AI is still ahead of the open source models and I think even people in the open source movement will tell you that open AI is called six months ahead they have no doubt that open source will get to where open AI is now

in six months nonetheless if open AI just maintains a little bit of a lead over open source then it could compound yeah it can basically win the vast vast majority of the call of consumer search or consumer GPT market so that's point number one point number two is now that open AI has these hundreds of millions of consumers using it that's a pretty attractive audience for developers to want to reach and open AI has done a really good job

creating a platform for developers to create you know what I call custom GPT's so most developers don't want to go through the hassle of training a model fine tuning a model doing all that work that you have to do in the open source ecosystem they just want to point chat GPT at a repository of data or documents information have it learn what it needs to learn fine tune it in that way maybe add some lightweight functionality using open AI's platform to create a custom GPT

that's what I think most developers want is they just want a simple stack to work with and they're going to prize again simplicity and the power of the developer tools over the theoretical control they get by rolling their own models training and fine tuning their own models and open source and so I think what you're seeing now is I mean how many custom GPT's have already been created I mean that's it might be tens of hours I mean they're so millions yeah it's so easy to create them

so you have a classic developer network effect where you've got open AI aggregating hundreds of millions of consumers because they perceive that chat GPT is the best then you've got developers wanting to reach that audience so they build custom GPT's on the open AI platform that actually gives chat GPT more capability yeah and that's something that open source can't easily catch up with actually just finish the point so yeah so it is a flywheel where you know a classic operating system

developer network effect where you want to use the operating system that is the most programs written for it yeah and interestingly hugging face has realized this and hugging face release this week their own version of GPT's which is really interesting and you can pick sacks which open source project you want to use to make it so unlike GPT is on chat GPT we have to pick theirs on the hugging face one

you could pick you know llama or whichever one you want there's an account called artificial analysis that you can follow the thing to keep in mind sacks is that for any of this to be true these APIs need to be usable right I mean I don't know if you remember but when we were building apps

even as back as the late 2000s and early 2010s one of the things was there was a pretty important paper that was published by Google about attention span and it would look at page load times in a cold cash environment right and it basically said you have to be at like 150 milliseconds right that's like best in class performance or faster and I remember when we read that at Facebook we went crazy so much so that at

one point a small team and I kind of actually launched a stripped down version of Facebook to compete with Facebook if there's a Nick you can probably find this article on tech branch and we did it without

telling it was called like Facebook zero anyways the point is speed matters because in the absence of having very snappy response you could have the best model in the world but if it takes 10 20 30 seconds to basically initiate and get back data from a fetch request it's an impossible thing to do

so I think one of the things that you have to keep in mind is that there are these two things that need to move at the same time one is the quality of how the model is but two is the speed and its responsiveness which is a function of again hardware and your ability to basically tokenize

tokens per second very very quickly so that developers are incentivized not just play around in a sandbox but to actually build production code and I don't think we've seen that second thing happen because nobody is delivering it and that's the big thing that nobody talks about for example like AWS if you look inside of how expensive it is to build an app there I've tried even when they give you credits the credits they give you aren't sufficient enough to even pay for half the power

and then the way that they schedule and the way that they try to orchestrate you to use hardware makes building production apps unless you are willing to spend millions and millions of dollars for a very slow app unfeasible and so if you go back to a startup economy raising money here

the venture investor should start asking the question well what is the speed and usability of these services that I'm funding and the reason is because you could build the best experience in the world that runs on local host but if all of a sudden you actually try to launch it

as an app and the thing takes 35 and 40 seconds to generate something it's DOA and I don't think enough people ask those questions or understand that that's true so this is why I think you have to sort of be looking at both of these two things at the same time but this account is interesting because it kind of just strips things down to the bear facts and they start to allow you as a third party to understand what you can do.

Yeah, speed is just such a critical component of this and what Google found was as you know free brokers you were there every time they lowered a certain number of milliseconds the usage went up right people did more searches which makes sense if you get your results back faster. Yeah, it was a key metric from day one at Google Marissom Air she ran all the consumer facing products at Google during this earlier era she was like

beat it into the team. I mean if you guys remember one of the first the first kind of early feature of the Google results page was the amount of time it took to load the results they show you how many milliseconds you took. Yeah, they show you that. Yeah, they literally put your North Star metric exposed to the consumer and that must have lit a fire under the asses of all the develop person server people.

Well, I mean they were kind of showing off the quality of the infrastructure and the way they did indexing and everything but the result really played out in usage. The faster the results the more frequently you would use the search engine and the more likely you were to come back and it's amazing how much consumer behavior drifts based on milliseconds. Like you have a few milliseconds of the way.

Donald's learn this right? I mean if you look at the if you ever see the movie The Founder where they explain the McDonald's process they learned it too. Guys look at this this is really interesting on this analysis. I mean, Samantha are you saying that you don't think open AI can achieve the necessary levels of performance? No, I'm saying two things open AI is three different businesses. Open AI has a closed model that's trained on the open internet.

I think economically it's going to be very hard to sustain that unless they start buying all number of apps so that they can get some fine tunes that they control that are proprietary to them. So for example, if open AI were to buy all of Reddit that would be a really interesting development that would improve the quality of open AI in a unique and differentiated way relative to where things like Lama and Mistra will get to at the same time as well as X's GROC.

I think they're all going to converge to the same quality in the next probably 12 to 18 months. That's point number one. Your belief there is there's enough data in those pools that everybody reaches parity. No, did you guys okay Nick did you so I published this primer on the primer? Yeah, there is a slide in there Nick that you can pull out but it just shows you that there is a converging in the quality of the results as the number of the parameters of the model gets higher and higher.

And what it effectively shows you is that we are already in the land of diminishing returns when models are trained on the same underlying data. So if you are using the open internet, Lama, Mistra, Open AI, they're all getting to the same quality code point and they will be there within the next six to nine months. So that's business number one on open AI. Business number two is a consumer facing app called chat GPT. That has a lot of legs because I think people are you know develop habits.

It'll be very sticky and I think it'll get better and better. And then the third business that they're in is selling enterprise services to large fortune 500s. In fact, if you look at their open AI days, what they talk about is they sell they've sold already to like 94% of the fortune 500. What does that mean? I think what that actually means is they've sold a lot of test environments and sandboxing.

But again, in order to translate that into functional production code that's used by Bank of America, right? Or Boeing in production, you have to have zippy, zippy fast SLA's and a level of performance that no cloud provider yet. Has delivered none nobody. So Nick, if you just go to that, please the thing. I just wanted to show you this because it's really interesting. Sure, this is not mine. This is theirs.

If you look at quality versus price acts, it starts just starts to show you like where do you want to be? You want to be in the upper left quadrant in their analysis, right? And so the point is what you can see is that a ton of different models are getting to this same place. And so obviously you'd want to use the model that's the cheapest or most convenient.

Well, who's going to pay for that? If you and your LPs want to pay for that, the person that figures out the way that it's the cheapest to give you the same answer will actually end up winning because you will run out of money and they will not. I don't know. I mean, I think that there's a lot of business problems inside companies where people just want to very quickly set up their own, again, custom GPT.

Without having to go through the time, the cost, the hassle of trying to do model training or fine tuning. So let's just back up. Here's the path that OpenAI is on. So step one, get hundreds of millions of consumers using it and getting them to view OpenAI or ChatchyPT as the Google in this area.

Right? Strong presumption. This is just the one you go to when you have a question. Step two, these same people, these same consumers now want to use ChatchyPT at work because there's some research they want to do. So OpenAI has just rolled out both enterprise licenses and teamwork spaces. So you can work collaboratively on the same queries in a teamwork space.

Step three is rolling out a very easy use dev platform that allows developers to again create custom GPT's by just pointing OpenAI at repositories. Okay. And so let's say that you are the customer support team and you want to create a GPT to help customer support answer cases. You could basically then train ChatchyPT on let's say every customer support ticket and email that the company is ever produced.

Right? Now you could wait for the company's IT department to get us act together and figure out how to train an open source model on the same thing. But do you really want to wait for that or do you just want to get going? You know, and now OpenAI has given you the enterprise license that you need to passify the concerns about security and privacy and all that kind of things to some degree.

There's always going to be those super paranoid Fortune 500 companies that will insist on doing on owning everything and doing it doing an open source. Let me build on your example. So I run a small software company during the day called hustle and we saw a lot of tickets related to this specific legislation that exists whenever you're texting or you're doing auto dialing stuff called 10 DLC.

And so we wanted to eliminate those tickets, right? So I actually went and I built a GPT which was called the privacy policy generator because a lot of these trouble tickets were because the privacy policies were bad. And we trained them using a handful of ones that were good and a handful of ones that are bad with a bunch of rules and I trained them on and it's wonderful except I can't run it in production because it's not the kind of thing that is usable in that way right now.

It's still very difficult. And so all I'm saying is I'm happy to keep spending a few hundred dollars a month, a few thousand bucks a month, whatever it is that I'm spending I don't quite exactly know. And I agree with you it was very easy. I think opening eye doesn't excellent job of getting off the ground, but what I'm also saying is that when you actually translate that into a main line use case, right where I want to now give it to my support team and say this is now a tool you can rely on.

It's integrated into your workflow into your other tools that's integrated into how you pipe out data into sales force or what have you. It's just very hard and I'm not saying it's not going to get fixed. I'm saying we're just not very yet and one of the ways in which it's not there is that there is no place I can go including open AI that actually makes it fast enough to be usable in production.

You wrote this on open AI stack you wrote a custom GPT. Yeah, don't myself. Yeah, and you can do the monogamous face now it's going to be a lot of option in terms of integrating into your workflows. I think it's a really interesting point because I saw a demo somewhere where now actually open AI announced this that you can you can mention a custom GPT. Yeah, yeah, sunny show me that this week on the pond. Yeah, in chat GPT, you can now mention a custom GPT to kind of invoke it.

Yeah, so how it works is you'd say, hey, I'm heading to New York. What flights can I get at Expedia at kayak, whatever, and then it gives you, you know, the results here and you you're kind of pulling that up just to the point about about where data advantages lie and that's ultimately going to drive value. I cannot I've tried to think a lot about this. I cannot think about a better data advantage that is orders of magnitude better than anything else say you to say you to say you to say it is.

So here's here's the numbers. I pulled this up. You guys know like GPT three and three and a half were trained with a heavy waiting on common crawl, which is this open source.

Yeah, we talked about this before. Gil L. Bass runs it open source crawling of the web, the total amount of data in common crawl, which I think accounted and I could be off on this something like 40 to 60% of the waiting in GPT three or three five on off on this probably so the total amount of data in that common crawl data set is about 10 petabytes. Okay, based on YouTube's public statement recently, they're seeing about 500 hours a minute of video uploaded or 720,000 hours a day.

And if you assume somewhere between, you know, just under 1080p on that video, we're talking about probably one to two petabytes of data being uploaded to YouTube per day.

So if you assume like over time the definition of the videos gotten better and the amount of uploads gotten up, you could probably assume that there's roughly I'm guessing there's probably somewhere between 2000 and 3000 petabytes of data in YouTube growing by one to two petabytes per day, which makes YouTube data repository 300 times larger than common crawl, which makes it bigger than anything else that anyone else has.

And here's the amazing thing about it. It has video, it has image, it has audio, it has text, it has everything. Multimode is growing. So if you were to take a bet or build a thesis around this point that the data advantage is going to drive value creation, if Google gets its act together and leverages the data repository at YouTube, it is an insurmountable moat that will only continue to extend because the quality of the YouTube experience and the network affects continue to accumulate.

So I think it's the most valuable asset in the world today based on the species that AI value is going to accrue to the data owner. I think you're making such an important point. This is why the counterfactual is is true and it's actually showing up in the data and Nick will show you this slide again from from the AI primer, but that is why we're seeing these diminishing returns for your burger and all of these third party bench parts of these models.

It's all using the same data set. So what we are proving is not that the underlying hardware can't scale nor that transformers are only efficient to a point. That's not what all of this convergence is showing. It's that in the absence of proprietary data, you're just going to get to the same model quality.

And we're seeing a bunch of different models get to a very early finish line, which again, if people like Facebook are doing for free, that's much easier to underwrite because you don't have to underwrite it. So I'm going to do a differentiator in five years, but if you have a start up with equity value tied to a model, I think it's very. It's much more of a tenuous place to be in the absence of proprietary data and everyone in the world.

As a camera and a microphone in their pocket and high speed internet now from the phone in their pocket and more and more people are uploading that content that data that's being generated. And that's not the free data vacuum. And that just out in the world. And most of it's getting up. It is public facing now. So it's not just true for text. It's also true for all of the image generation. So they can train more than just an LLM on it, right? They can build all sorts of. Yeah, go ahead.

No, no, no, I was just going to say like the version of common crawl for training these image models also exists. And so to your point, it's like we are all operating from the same brittle, very fixed, small quantum of training information. And so that is why I think like Facebook and Google are doing a really important job by deciding that these models should be free. Right. And then being able to the so then the question that just accentuates their data advantage.

It does. And I think that it allows them to decide how much to leak out. So for example, whenever like if you were using a lot of Google services like GFS, Bigtable, Big Query, you know, TensorFlow, the versions that you had access to via GCP was always one or two generations behind what the Google employees got to use, right? But it was still so much better than anything else that we could get anywhere else that you would still build to those endpoints.

And I think there's a similar version of this where Facebook and Google probably realized like look, we'll have version five running internally to optimize ads and all of this other stuff that makes our business that much better. And we'll expose version three to the public, but version three is still trained on so much proprietary data that it's so much better than version 10 and anything else is just operating on the open Internet.

Right. And you know, to your point, freeberg, that's the outward facing stuff. YouTube is a collection of things people want to share. What Google also has is Google docs and Gmail, things that people say privately. So they have another data resource there that they can tap, you know, and there'll be regulations and privacy around that. But maybe there's a difference there, but I honestly can't think of the quantum coming close to YouTube, not even close.

Well, the thing to Jason's point, which is really interesting is like, you know, there's a modality in AI called rag where you can actually just augment with very specific training on a very specific subset of documents to improve. It's like a, it's like a hacked version of a fine tune. But the beautiful thing about that is like if you have a Google workspace, my entire company runs on Google workspace.

In fact, most of my companies do at this point to click a button where all of a sudden now all of that stuff and all of my G drives, all of a sudden is trainable. So that the N plus first employee comes in and has an agent that's tuned on every deck, every model, that's every document. That's a huge edge. Huge edge. By the way, and as a CEO, if you gave me that choice, I don't think anybody underneath that reports to me has any right to make that decision.

But as a CEO, I would click that button instantly and I have that right as a CEO. And so like that's the CEO pitch is like, look, I can just give you these agents that are that are like the next version of a knowledge base that we've always wanted inside of a company. Right. Notion has this, you know, they basically you can start asking your entire notion instance questions about notion, which is incredible.

And yeah, you can just and as a CEO, you can see across everything, Chema, because as you know with Google docs, if you're on a compliance based industry like finance, you can see everything, every message, every email, every document, and you can start the security model and the data model becomes very complicated in all of that stuff.

Like for example, how do you know that this spreadsheet is actually you should learn on it, but who gets to actually then have that added to the subset of answers, right? All of a sudden like salaries, right? The information information gets put into the training model very dangerous or subset a of a company's working on a proprietary chip design, but they actually like the way that Apple runs highly, highly segregated teams where nobody else can know.

So there's all kinds of complicated security and data model and usage questions there, but yeah, for every world. So there's been a lot of discussion real estate. You shared a video with us. Why don't you kick it off for us here, Prieberg? What's going on in commercial real estate and sacks you've got holdings and a lot of that as well. So let's kick up the commercial real estate challenges of the moment.

Well, I mean, I think we're teeing off of Barry's comments at this event last week. He and I met backstage because I spoke right before him. And then he gave this talk, which is available on YouTube where he talked about the state of the commercial real estate market, particularly he talked about the office market.

Just to take a step back to talk about the scale of commercial real estate as an asset class in the US, Nick, if you'll pull up this chart, the total estimated market value of commercial real estate in the US across different categories is about $20 trillion.

With about $3 trillion being in the office market, which is specifically what he was talking about. He was saying that in the US, we're seeing people not coming back to work and all these offices are empty and we've talked a lot about these offices being written down. So how significant of a problem is this? So $20 trillion asset class, obviously the multifamily market is probably not as bad as office and retail, which are the most heavily affected each of which are about $3 trillion.

A piece, the rest of these categories seem relatively unscathed in comparison, industrial hospitality, healthcare, you know, those real estate sectors are probably pretty strong data centers obviously growing like crazy, self storage, the great market. If you pull up the next image, so it turns out that of the $20 trillion of market value, there's about $6 trillion of debt.

So you can kind of think about that $20 trillion being $6 trillion owned by the debt holders and $14 trillion by the equity holders. And the debt is owned roughly 50% by banks and thrifts. And this was this concern that we've been talking about with higher rates is the debt on office actually going to be able to pay the debt on retail going to be able to pay.

One half of that debt is held by banks and thrifts that as we talked about have such a close ratio to deposits that you can actually see many banks become technically insolvent if the debt starts to default berries point that he made was if you look at the office market, which, you know, is marked on everyone's books as $3 trillion of market value.

And I think it's probably worth closer to 1.8 trillion. So there's 1.2 trillion dollars of loss in the office category. And if you assume 40% of that $3 trillion is held as debt, you're talking about 1.2 trillion dollars of office debt. And the option from $3 trillion to 1.8 trillion means that the equity value has gone down from 1.8 trillion to $600 billion. So they've lost equity holders in office real estate have probably lost 2 thirds of their value.

And who owns all of that most of that 60 plus percent call it 2 thirds of that is likely owned by private equity funds and other institutions where the end beneficiary is actually pension funds and retirement funds.

And so if 2 thirds of the value has to be written off in these books and it hasn't happened yet, what's going to happen to all these retirement funds. And this is we're going back to my speculation a couple months ago kind of gets revisited if you're actually talking about a 2 third right down on the value in these funds most of that being pension funds.

You're not going to see governments let that happen. You're going to see the federal government. It's going to there's going to be some action at some point. And it's unlikely the office market is going to not suddenly rebound overnight. If this stays the way it is, who's going to fill that hole for retirees and pensioners because we're not going to let that all get written down someone is going to step in and say we've got to do something about this.

And there's going to need to be some sort of structured solution to support retirees and pensioners because that's ultimately who ends up holding the bag in this massive right down. He didn't go all the way there in his statements. He was talking more about his estimate of 3 trillion to 1.8 trillion. And then I tried to connect the dots and what that actually means. And ultimately there's going to be some pain felt by retirement funds that's going to need to be dealt with somehow.

So I said I don't know if that if that sits right with you. I mean, I think the big picture is right. I think you're applying a lot of averages. Right. I think in the office market in particular, the typical office deal is more like one third equity and 2 thirds debt. There's just a lot more leverage.

Right. So to be point number one, which makes the situation worse even worse. Yeah. So I would say that there's a huge amount of equity that's been written off. But in addition to that, there's a lot of debt holders who are in trouble too. Yeah. And that debt is is held by regional banks. So these commercial loan portfolios are significantly impaired. That's what we saw with community bank of New York is that they're stock cratered when they reported

higher than expected losses in their commercial real estate portfolio. So freeberg, I think the point is just the pain from this is not just going to be on the equity holders, but also on these banks, which can't afford to lose or not. It's not evenly distributed. Yeah. Right. Yeah. Right.

And we saw this in San Francisco where some of these buildings have 70% debt equity ratios and you know, the value puts them in the hole and that could be wiped out completely and the debt holders have to take a head normally. You know, that debt is not really written off very often. Well, this is why that the debt holders, the debt holders don't want to foreclose. They don't want to get these buildings back because when they do, they're going to have to write down the loan.

As long as the loan is still outstanding and they haven't foreclosed, they can pretend that the value of the building is not impaired. Kick the candle road is the best strategy for them. So it's called pretend and extend. So what I do is they'll work out a deal with the the land with the equity holder that the equity holder say, listen, I can't pay the interest. So they'll just tack on the interest basically as principal at the end of the loan.

And they'll extend out the term of the loan, which would wipe out the equity at a certain point. Yeah. And all that what it does allows the equity holders to stay in control on the building, right? Because yeah, the equity holder can't pay make their debt payments today. But they're going to postpone those debt payments sold the end of the of the loan.

And again, in the meantime, just kind of hope that the market could manage that at some points that they have so little equity in these buildings, typically just exceed the value of the property. And it's like, I'm just working for the bank now. And why am I even putting this work in? Because everyone kind of hopes that the market will recover the value of their equity will go up.

And they'll be able to make their debt payments again. So if you're the equity, if you're the equity holder, you'd rather hold on and have a chance your equity being worth something in recovery. Then definitely lose the building. And if you're a regional bank, you'd rather blend and extend a pretend and extend as opposed to having to realize the loss right now. Yep.

And showing the market that your solvency may not be as good as you thought. The same thing happened with government bonds. Remember that with SVB and these other banks had these huge held to maturity, port bond portfolios. Yeah. These are being mostly just T bills that were worth, I don't know, 60 cents on the dollar when interest rates spike from 0 to 5%. But they didn't have to recognize that loss as long as they weren't planning to sell them.

Right. And then when they had the bank run, they had to sell. Well, yeah, that's right. So when depositors left because they needed their money or because there was a run or because they could get higher rates in a money market fund. And all of a sudden these banks had to sell their held to maturity portfolios and to recognize that loss. And that's when everyone relies away to second, they're not actually solving.

Okay. So, Jama, supply demand matters in real estate. We have a tale of two cities here on one side in real estate for commercial real estate, no demand for office space, which is in way too much supply paradoxically on the other side. We have this incredible market for developers, which is gosh, there's not enough homes. I think we need 7 million more homes. And the demand is off the charts for homes. Yeah. Yeah. I mean, I think I think you're basically right.

It's not I keep trying to explain residential is not a great market either because interest rates have spiked up. So there's not a vacancy problem. Multi-family developers are still able to lease the units. They're still able to rent. The problem is their financing costs have shot through the roof. So again, let's say you were a developer who built multi-family in the last few years. You took out a construction loan. That construction loan might have been at 3, 4%.

Yeah. Now, you want to put long term financing on it. But if you can even find debt right now because there's a credit crunch going on, you may have to pay 8, 9, 10%. Yeah, but at least you can find a renter. You could find a renter that's true, but only at a certain price. And let's see you under wrote that property to, I don't know, like a 5 cap, like a certain yield. Yeah. But now your financing costs are much higher than you thought. You might be under water.

Yeah. But that situation isn't as bad as what's happening in. Why? I think it's worse in some ways. If you're fully rented and your building is under water because now your debt payments are much higher than you expected, then there's no business model. Yeah, but at least seeing that, are we seeing tons of multi-family under? Can I make two points? One, I think David is right, which is that I don't know this market very well, but just as a, as a buy standard, here's what I observe.

It seems that the residential market has a feature. And I don't know whether it's good or bad, but that feature is that you reprice to market demand every year. So to the extent that supply demand is changing and default rates are up or whatever, that's reflected in rents. And you see that because rents change very quickly and most human beings are signing six months to one year leases. So that reset happens very quickly so it can more dynamically adapt.

So to the extent that a market segment is impaired, you see the impairment quickly on the, on the office side, what I see is that there's been a structural behavior change in COVID that has re-reached. And that has reset in every other part of the world, except for the United States, where there are these, frankly, typically younger, typically more junior employees that have held many of these companies hostage in a bid to return back to office space.

And so we know that there is this vacancy cliff that's going to hit commercial real estate. We just don't know when because there are there in long term leases, they're canceling these leases over long periods of time.

So the reset cycle was longer. That's just my observation as an outsider. I don't know what that means for prices or anything else, but it just seems at least the residential market can find a bottoming sooner because you can reset prices every year, but commercial just seems like a smelting ice direction to correct to you, Sachs. That assessment commercial has both the demand problem and a financing problem multifamily just says a financing problem, but it's important.

Because it's retail and then there's office and then there's other industrial. Do you guys see China? China has 50 million homes ahead of schedule, 50 million additional supply that can house 150 million people. So as acute as our issues are, the China issue might be much, much, yeah, seismic. Can we just give you an example on the multi-family side? Okay, let's say that you buy a building.

Let's say you bought a building in 2021, the absolute peak of the market and you could get debt at say 4% okay and you penciled out. Let's call it a 6% yield that with the debt you're getting. So let's say you did 2 thirds debt at 4%. You could now lever up that 6% yield to 10%. Okay, that's like sort of the math right now all of a sudden and to get there, you'd have to do some value added work on the property.

You have to spruce it up. Okay, now it's a few years later and your short term financing is running out and you need to refile and you've done your value added work. But here's the problem. The overall valuations in the market have come way down. So before the bank was willing to give you 2 thirds loan to value, now the values come way down. So your going to have to do was called an equity in refinancing. You're going to have to produce more equity.

You're going to have to pony up more money. So instead of taking equity out like when the deal goes well, you're going to have to put equity in. You may not have that equity if you're the developer. The other thing is that your financing cost now might be 10%. So now you've got negative leverage. You're generating a 6% yield but you're borrowing at 10% to generate that 6% yield. So the debt no longer makes sense. Again, you're not positively leveraged. You're negatively leveraged.

So you're not going to want to take out that debt. And if you do take out that debt, the buildings can be under water. It's not going to be generating not operating income is to be generating losses. So that's why even categories like multifamily where you don't have a vacancy problem. They're strong demand. Those properties still don't make sense. If you had long term debt on your multifamily, if you were able to lock in that 4% loan for 10 years, you're fine.

But for all the people who are refinancing now who are coming up this year, last year, next year, they're in deep trouble. And that's why there's a rolling crisis in real estate is because the debt rolls over time. It's not like everybody hits the wall. It has to refinance at the same time. Well, that God, right? I mean, this would be cataclysmic if it was. If ever. And can you imagine a Silicon Valley and San Francisco had to say here's actually the reality.

Anybody want to actually pay for this office all in the same year? Right. That would be insane. But the crisis is growing as the leases roll and those old reds that were higher than market roll off. And now you have to take on new leases. If you can even get them. It's going to be bad. And a much lower rate. And as the old loans roll that were at a much lower interest rate, you have to get

financing, even if you get it at a much higher interest rate. That's when all of the sudden these buildings go from being basically solvent to insolvent. Yeah. I mean, Janet Yellen's just going to bail these folks out. I mean, she won't bail out the banks themselves, but she'll bail out the creditors. Obviously, the people holding the bag. They'll get bailed. Yeah. That's everybody agrees.

Janet Yellen. Yellen. Our treasury secretary. I don't know if she's going to be the one to do. I think there's going to be congressional action on this stuff. Yeah. I mean, they tend to lead it. So. All right. For the Sultan of science, David Preberg and David Sacks and Shema Paul Haapatia, the Chairman, Dick Tender. I am the world's greatest moderator. We'll see you next time. I'm going to be all in pond. Bye bye. Bye bye. We'll let your winners ride. Brain man David Sacks. I'm going all in.

And it said we open source it to the fans and they've just gone crazy with it. I'm the US. I speak up. I'm going all in. What? What? What? Your winner's right. Besties are gone. Go for it. That's my dog taking it. I wish you drive away. Sit next. Oh, man. I'm going to be ashore. We'll meet me at the end. We should all just get a room and just have one big hug or two because they're all just like this. It's like this like sexual tension that we just need to release some of them.

What? Your, that beat. What? Your, your, your beat. Beat it. What? We need to get my besties aren't there. I'm going all in. I'm going all in.