all right freeberg is back welcome back to the Allin podcast episode 160 something your favorite podcast in the world yada yada yada with me again the chairman dictator moth po hoaa the Rainman yeah definitely David Sachs 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 sultant of science David fredberg is back from the metaverse I miss you guys come home thanks for having me what what did you discover when you went to Uranus in Google class sorry Apple you actually use the Apple Vision Pro jcal 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 use you actually used them what 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 that stole everything so the Oakland one let your winners [Music] ride and instead we open source it to the fans and they've just gone crazy with [Music] it that was crazy that was crazy we'll put the video in here to the idiots who are robbing apples SCE all the devices get bricked when you steal them and they
all have GPS in them have you tried it your mouth no I was too busy working out making love and winning oh okay got it 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 freeberg 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 sound like one of these like Tech journalists that are actually anti-tech people you guys are actually Tech journalists like it tech journalist seem gen Computing platform I remember when the iPad came out and everyone poo pooed 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 and we gave every sales guy an 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
you usually had to get a farmer to come into an office how many IP to sell the product Oh so we we had like they were selling cl.com software we had 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 GameChanger in how sales was done in agriculture and
I had never even contemplated that when I first used the iPad let's let's get to Brass tax 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 gamechanging okay if you've used like The Meta yeah the Oculus Quest it like makes me super dizzy makes my head hurt makes my eyes hurt like you're super disoriented 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 V1 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 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 meetings with farmers and stuff I go to the greenhouse facility and there's so much work that the greenhouse text and lab teexs 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 apple Vision Pro on and I was like man all the 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 could have a report yeah yeah you have a task on 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 can listen to music while they're working and I realized for that job and I met with all the the team out there and spent 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 it 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 to increase our productivity to do automated data
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 yeah Enterprise applications unbelievable makes total sense and also training training right assembly line Workforce warehouse workers where you're real time kind of task updates data's being ingested all in real time and and by the way the other thing I'll say is training is incredible there's 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 a two-dimensional video today so I don't know I'm I'm I'm pretty optimistic very strange days right I
don't know you're you're a fan of SciFi but remember Strange Days tot trath what's going to happen first here are humans going to become more like robots by putting these on and do this fact reer work or is Elon with Optimus and some of Humane I think is the other one there's a couple of other people building General use robots figure is
the other one figure yeah 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 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 way a correlated byproduct let's not say it's causal right let's just say it's a correlated byproduct 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 ladder 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 Xing of
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 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 uh with depression not just social media I'm 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 isolated yeah yeah I mean it it correlates all of these things that we're seeing in this younger generation correlates with the introduction could it be a good productivity device yes do
I hope it's a good productivity 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 the types
of things that humans have been bred over billions of years to actually optimize for okay saak I remember when you were starting craft you fir it up like a group for VR and you got pretty heavy into it you made a couple of small bets I remember I don't think it any of it worked out really you could tell me if I'm wrong here but you got in a
little bit early there maybe you could talk about the business case for this and has that changed because you you believed I've believed a lot of folks thought hey maybe this is the time when Zuck really start you know had bought Oculus and and they started putting out some good product seemed like it was a false 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 device is has a lot of
capability but it's still a pretty huge device to wear on your forehead it's just not really going to be comfortable enough to be something that people want to use all the time h i mean there's also a question of use cases but they're getting there with the use cases in any event I 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'll feel like sunglasses and so that is I guess if they become like regular glasses I think we all agree it becomes the next I got to tell you 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 the surprising online saying it's unlike any
other headset I've ever worn they did an incredible job designing like does it feel like ski goggles it doesn't feel heavy it doesn't feel pre pressure compared to ski goggles how 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' I've heard the same thing from everybody
you you have to try it it feels like different than Oculus and some of those version that came out previously and they have the app ecosystem and I I would not discount that when you know the ability to monitize 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 YouTube and then poured it over here fortnite 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 meta sells more they do yeah but you know this is $4,000 this isn't 500 so to sell that many of a $4,000 device is incredible it's a proof of concept it's not like a regular Apple product that is a mass Market device that tens or hundreds of millions of people are going to buy but
it puts them on a path yeah to where they can iterate and keep making it better see I think and this is I guess what I'd ask freeberg do you compare this to buying a MacBook Pro buying an iPhone or buying the Oculus you know whatever the you know $500 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 where do where do you put this is it buying a TV is it buying a laptop is it buying a smartphone what would you have to have a keyboard to be really productive on it uhhuh if you're going to use it for writing purposes or coding purposes so it doesn't really work with
just the 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 go back to 2010 when the iPad came out and everyone was like who's it for it's a whole new computer who's it for you already have a phone you already have a computer why do you need an iPad and then they sell tens
of millions a quarter now yeah so I really I as I do the math on this I was just kind of doing some back of the envelope stuff I think they're going to sell 100 bill 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 100 billion in sales it'll take them
less than five years I think they're going to run the table on everybody I think they're going to own the entire space I think 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 my kids cannot stop asking me to use the goggles to watch instead of an iPad or TV 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 the kids are blown away so I think we're all going to be surprised by how this Go
Disney's all in on it remember when our parents told us not to sit too close to the TV now we're just strapping the thing to our face yeah I I had the most Silicon Valley moment ever I go to buy a cup of coffee I was going for my little walk I see blue Bott I'm like oh you know I get myself a mocha you know I lost a little bit of weight I'm going to
treat myself $9 for a mocha number one that in the C tilted me $9 for a it was $8 and then I gave a dollar tip and then I felt cheap giving a dollar tip you know it's $88.99 for a carton of clover milk all organic I mean you can make infinite lattes at home anyway where did you go for your $9 mocha I was I'm in Palo Alto right now because we lost like the blue
bottle yeah said this I'm like $9 what am I doing you know I just I felt like buying a chocolate bar the stain dirty lips left on the cup oh my God look at so you know what you're a little obsessed with my lips take it easy there so anyway then there's a kid in the place wearing the goggles with the keyboard he's pounding he's getting work
done this kid was doing work and I tell you the trth put in the hours he was putting in the hours no one looks at your laptop no one looks at your screen that's what work without anyone seeing what you're doing this kid had four desktops up this guy was probably on PornHub Spotify writing code how many words did this person say to another
human being while you were there no zero and you know what when they're on a laptop they're the same what's the difference he's he's coding nobody B it and I I think this is gonna they're gonna run the table on this I think it's 100 billion 100 billion sales under five years yeah I take the over I take the over what do you you got the over or the
under cuz even if they keep it at three grand they got to sell 30 million UNS to get to 100 bil they're going to make up a lot of money on this app store too by way I 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
this all day no and I can see this becoming super predicting hey freeberg I I can I buy three for your kids just have them walk around with them I have a no iPad in the house rule as well but wait a minute hold on what about productivity freeer my kids aren't trying to be productive they're using it to burn it's called childhood you don't
have a productive childhood it's 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 this stupid thing to put on their face no this is going to be Tim restricted I have a no iPad no phone no like I let them use the headset good for them it's so good no no it burns
their Burns their brain away Burns their brain away it's terrible man I totally agree with you social interaction the loss of our ability to communicate as hum it's critical and it's a fail point I do think that there where these things create great unlocks I think this is an Enterprise device can you imagine giving
a field sales team on the farms to go there they can take off their swey headset when the sun is shining and then give it to the farmer to put on and then he can put it on and feel the sweat and the the headband will be wet that's not the use case it doesn't by the way it's it's a very personal device in order to log in you know it does like a I scan um
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 put on someone else's headset you got to reset the IP 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 yet I don't know I I say next week we do the show inside of these or at least me and you freeberg will be will be does is is there a zoom very funny there's um there's an a there's an avatar thing and
so what it does it scans your face while you're talking all four of us can see each other as the Avatar yeah all right let's do it it'll 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 wellth 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 oh okay so you don't want them on their phones but they have to respond right away well they have very strict rules on what they can use they're there for literally all they can do is communicate like they can use iMessage 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 than frankly I was able to when I was their age and so yeah I can just imagine what happens when you become even more ins sconed in something that you can cocon yourself with and not have to
interact with the rest 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's revenues you can probably go along the makers of ssris pot here comes the spread trade pot Bumble and Tinder and you'll get to the
same place economically all right all right here we go we got a lot on the what a Great Leap Forward for Humanity I can't wait s i I just see this as the laptop replacement okay I wanted to talk a little bit about what apparently is going to be the the spread trade of the last year meta is continued their unbelievable run and snap dropped like
30% here's a chart for yall of snap versus meta you can take a quick look at it here and just for context both companies did great during Co and Zer hit all-time highs in 2021 but they both got crushed due to the ad spend pullback obviously but then meta started to get less focused on their headsets and more focused on AI started doing their
reduction in headcount 22% year-over-year from 86,000 to 67,000 the last quarter for meta and they're quarterly profits have increased to an all-time high of $14 billion that's profits folks in Q4 for meta all-time high for the stock price $470 a share $1.2 trillion market cap sna down 60% from its closing price on its IPO Day in
2017 let me just jump to chth before I get into more charts and everything you pointed out chth and maybe you could explain to the audience just how ridiculous the voting rights were and the mass massive dependence that the snap team and the executives had on stock based comp two issues for youth well I mean I think I said it before I think that case studies have
been written about how tilted the governances in snap I think the point is that they basically have infinite to zero voting power over common shareholders 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 to shine a light on inefficiency and in the short seller case sometimes impropriety but it should all lead to companies being better run right I think meta had 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 spaceship 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 number 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's just zero ability for me to have any useful say so I've never honestly looked at its performance I've never studied 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 reasoned opinion on how to make it better land and part of the reason is because there is no feedback loop that matters yeah and when you know that why would you waste your time at least in other options right there are other options and and meta was
another one you know you can write a letter it gets picked up on CNBC and Bloomberg and whatever and all of a sudden they kind of pay attention and I think and you look at Disney Nelson pelts goes and gets Ike pearlmutter shares buys some more takes a Lars yeah we'll see whether that fixes itself the point is that and 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 snaap it poorly and
again I'm not going to really take the time because it's like why bother taking the time sack should 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 Zuckerberg has 60% voting control
whereas Evans spel has 99% so snap is more egregious the difference is that Zuckerberg is listening and Spiegel is not the the reason why snap is doing poorly is not because its Revenue has erated so I looked up or let's put it this way I asked chat GPT for their key metrics so assuming GPT is not hallucinating if you compare 2021 to
2023 their 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 or operating loss went from a $700 million loss to$
1.4 billion loss in two 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 it's pretty simp they seem like they're the last ones to get the memo yeah they they were the last ones to 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 Le saying they're going to cut their head count 10% it's too little it's too little too late yeah they knew right they knew they had a problem so they released the the Press Le 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 Market's going to crush them they put out this lame 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 but it's more than that if you look at the numbers let's use operating cash flow was 165 million for SNAP for the quarter so their operations generated 165 million of profit but for the entire year because they lost money in the quarters prior they generated free cash flow of only $35 million so the business net in
produced $35 million 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 of stock-based comp so that means new shares or options were issued that on an accounting basis the options are valued using black schs 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 to compensate employees beyond their Opex so that means that they paid 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 of the company is $15 billion 10% of that was issued to employees to compensate them now let me give you the the the story of another city meta and by the way snap's 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 a percent because they used cash to go and buy back stocks so they were able to reduce the shares outstanding now as you guys talked about meta cut employee count by 22% and snap cut employee head counts 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 invested that year that company generated 71 billion of operating cash flow so while while snap gave employees 40 times the free cash flow meta gave employees you know about a 20% of the uh of the free cash flow and then and then
meow went around and they used some of that extra cash to buy back $20 billion of stock so they bought back more shares than what the employees were issued that that year were so it shows such a differ in looking out for shareholders so if I'm an investor and by the way meta is trading at like 25 times free cash flow which is not a crazy multiple given all
the new businesses that they have in llu 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 controls the whole stock he's giving employees a billion three of shares a year when he's only making $30 million of free cash flow a year and then the other guy is issuing
$4 billion of shares buying them all back and he's making 70 billion of free cash flow a year I don't know it's very hard to decide which one to go after Spiel brought it up in an interview I saw and a lot of the layoffs were topheavy so he got rid of a lot of the top people who had these huge comp packages and then what I'm hearing from
a lot of Executives is cutting these highly stock comped Executives who are you know also have big cash comp cutting them putting lieutenants 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 or you're in South America whatever you know stock-based comp is
not like the obsession it is here so as everybody optimizes these businesses I mean Facebook even why do they need 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 it's good question cut the number of Twitter employees from 8,000
to 1500 when you look at the number of apps that they're running and 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 I think you're exactly right yeah the other advantage that it has is because they're so profitable they have the resources to go big in 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 at snap there's all
this infrastructure that they can leverage much like Amazon did with AWS into things like Cloud AI tools for thirdparty 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 to extend further into
the the they get they did get an awesome save 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 it was all those headwinds they were like okay we're just going to use AI to optimize ads and supposedly the AI optimization of ads I was talking to somebody on the inside they said like
yeah we got it all back we gained it back we've got massive AI advertising optimization going on so totally yeah that's great that Tim Cook you know kicked us in the nuts but we don't care by the way that's a great point jcal 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 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 yeah I think it's a great Point yeah saaks you tweeted that you're seeing a
little SAS bounce back all of a sudden that's interesting I am seeing something similar last year last two years you had a ton of people cutting their SAS Bend maybe removing the number of SAS vendors they had consolidating vendors uh you tweeted many public and private software companies are experiencing accelerating growth after six to 7 quars of
deceleration SAS recession appears to be over according to the SAS Master David saxs you want to unpack this for us what do you seeing well it's still pretty early because not everyone's reported but if 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 ARR added for AWS Azure and
Google Cloud so you see here in Q4 that there's a huge increase in net and U AR for the the big cloud computing platforms and then I think another Bell weather is at lassan so we're still waiting to hear from HubSpot Salesforce Zoom Adobe companies like that they haven't reported yet but if you look at makes jira amongst other products
they're based in Australia yeah the major yeah exactly collection of SAS companies right it's a collection of SAS products yeah so net new ARR would be the amount of growth in that quarter and this is on a year-over-year basis so you can kind of see Q4 of 21 was the absolute Peak and then it plummeted and then it actually went negative for about
a year that's that's tough to be in a company with new AR going negative yeah yeah that doesn't mean by the way the company's shrinking it just means that the amount of net new ARR which is the amount of growth is actually smaller than that same quarter a year before yeah and then in Q4 you could see there's some acceleration here that
they're starting to add more they added more net new ARR I guess 33% more in Q4 than they did over the previous year and part of that sacks is because the comps are lower and they kind of bottomed out yeah they bottomed out now they're re accelerating so 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 reforecasting down and then they would miss the reforecast yeah so by 2023 the forecasts were very very conservative and I would say and now I'm seeing companies beat the the sort of the lower forecast in Q4 this wasn't happening earlier in the year but finally I think people are starting to beat their 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 Reb baselined these businesses so now what would have looked like just a massive Miss over the last two years now looks like a beat because we've just completely reset expectations is it that or is it that the economy is actually
expanding and we can count on some reasonable growth rates is it a combo of the two what do you think it actually is yeah I mean it's definitely a new Baseline in the sense that and if you go back to 2020 or 2021 we considered good growth to be you know 2 to 3x year-over year and now if it's going from 60 to 80% growth year-over year 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 atlassian here we are seeing an increase in spend basically in in growth right so the way a recession is typically defined
is uh two quarters of negative growth right we had six to seven quarters of decelerating or negative growth in SAS in Tech in SAS which is why called it the session or be the yeah it was actually kind of a depression you're right but now we're seeing quarter over quarter growth so growth is reaccelerating growth is higher than it
was so is it 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 on a couple of SAS boards as well and psychologically it felt like you tell me if I'm right SAS saak if you saw the
same thing there were two years of calling up customers and they were like we're we're consolidating vendors and by the way we did a riff and so we need 20% less seats so we're going to have 20% less SAS companies that we're buying from and we're going to have 20% less seeds 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 have more Cuts so you're like well I can cut some software costs do I get points for that and the points you would score for the last two years was cutting costs with
the market RI in and you you know now got a really you know efficient company you're like hey can we spend a little bit on SAS 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 are like we we'll 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 $200,000 like yeah take the money take the money let's let's be hug that customer the market is generally an escalator on the way up an elevator on
the way down so the recovery is going to take a long time but at least we've 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 I'll make my own software you said uh you know some softare 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 I 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 SAS so great is they could value share rather than charge the cost of an engineer plus some margin the business model the equity value that comes in software if you can build something once
that creates $100 of value you could probably charge your customer $30 $40 for that product because it's saving them 60 bucks 70 bucks and they'll make that switch to software so you know the ROI driven value share model in SAS 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 SAS 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 and instead of spending 60 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 re accelerating which is great 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 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 that write code they're all going to be asking the question should we be buying the software or should we be building something internal yep 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 there seems to be three camps shaping up here chamath you know one group is like and the incumbents are 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 it out because they're like hey open sour is going to win meta committed to open source and collaborative platforms I've been playing with hugging face with suep as well as you Chim moth 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 inre and Hartz two notable firms are approaching it differently Founders fund bought into open AI at a $29 billion valuation but aside from that investment they're generally avoiding the AI deals on the other hand andreon is is betting heavily character AI repet 11 Labs mistel you're also in repet Sachs so what do you think
is open source going to win the day you've been picks and shovels the whole way you've been talking about compression maybe this isn't actually a good Market what's you're thinking as a capital allocator J 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 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 that trains on the open internet will make that so so in that world things like mistol 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 opened model from hugging face that's just kick out where do you spend money well you're going to have to spend money to actually train it to finetune 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 provisioned to the apps that sit on top of the model what that means is you need to go back to 2006 and7 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 7 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 tokens 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 cerebrus 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 Gro 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 Nvidia 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 chim's
interview with Jonathan Ross NOP not yet you put it out right Cham you made it public you know I did it just for my subscribers but Jonathan is the founder and CEO of grock the company that I just mentioned and the quick version of that story is I was I would I would pour over the Google earnings results in the mid teens of
2000 cuz 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 Jonathan was a founder of TPU at Google and then he started grock which I was able to lead that funding round in in 2016 so eight years ago anyways I did a a spaces with
Jonathan talking about the entire AI landscape and AI acceleration to my subscribers but it was so good I got to say he is 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 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 listened to it so I kept me alive but I thought it was really great what you think he is great no he's great 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 be 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 I was sitting in the car browsing Twitter and I saw your
thing and I clicked on it and then I just ended up listening it was a little it's 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 saak your thoughts on just how you're approaching investing in AI if you're specifically investing in the underpinnings of AI pix and shovels yada yada or if you're just looking on the application Level and it's you know you
know that kind of approach well we we divided the space into three categories uh one is the the models themselves the foundation models which can be either open source or closed Source there's infrastructure so like jam 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 pre AI app that's using AI to kind of turbocharge its capabilities yeah most SAS 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 the question of commoditization well like all the model companies just get totally commoditized we really we're talking about open AI right because they'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 Ex it's just like search right if Google is a little better or the perception is it's a little better than Bing 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 call it 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 basically win the vast vast majority of the call it consumer search or consumer GPT market so that's Point number one point number two is now that open aai 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 are called custom gpts so most developers don't want to go through the hassle of training a Model fine-tuning A model doing all of that work that you would 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 funing their own models in open source and so I think what you're seeing now is I mean how many custom gpts have already been created on the platform it might be tens of thousands I mean there's so Millions
yeah so easy to create them yeah 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 gpts 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 actually just finish the point so yeah so it is a flywheel where you know 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 released
this week their own version of gpts which is really interesting and you can pick Sachs which open source project you want to use to make it so unlike gpts 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 saaks 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 cache
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 strip down version of Facebook to compete with Facebook if
there's a Nick you can probably find this article on Tech runch and we did it without telling everybody 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 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 to 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 bare facts and they start to allow you as a third party to understand what you can do yeah speed is just such a 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 Marissa Mayer ran all the consumer facing products at Google during this you know earlier era she was like beat it into the team I mean if you guys remember one of the first the the the first kind of early feature of the
Google results page was the amount of time it took to load the results they'd show you how many milliseconds yeah they show you that yeah they they literally put your Northstar metric exposed to the consumer which totally that must have lit a fire under the asses of all the developers and server people yeah 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 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 delay learned 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 tth 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 llama Mist will get to at the same time as well as X's Gro 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 parody no did you guys okay Nick did you so I I published this primer on a primer yeah 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 llama mistl open aai they're all getting to the same quality code point and they will be there within the next 6 to n 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 day 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 SAS 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 a really interesting chart this is not mine this is theirs if you look at quality versus price saxs it starts to starts to show
you like where do you want to be you want to be in the upper left quadr in their analysis right and so the point is what you can see is that a ton of different models are getting to the 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 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 open AI is on so step one get hundreds of millions of consumers using it and getting them to view open AI or chat GPT as the Google in this area right strong presumption this is just the one you go to when you have a a
question step two these same people these same consumers now want to use chat GPT at work because there's some research they want to do so openai has just rolled out um both Enterprise licenses and team work spaces so you can work collaboratively on the same queries in a team work space step three is the rolling out a very easy to use Dev
platform that allows devel Vel opers to again create custom gpts by just pointing open AI at repositories okay and so let's say that you're the customer support team and you want to create a a GPT to help customer support answer cases you could basically then train chat GPT on let's say every customer support ticket and email that the company has 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 open AI has given you the Enterprise license that you need to pacify 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 and doing it doing it 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 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 train the model 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 open a does an excellent job of getting off the ground but what I'm also saying is that when you actually translate that into a Mainline 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 it's integrated to how you pipe out data into Salesforce 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 there yet and one of the Rays 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 built myself yeah and you can do them on hugging face now it's going to be a lot of options in terms of integrating into your workflows I think it's a really interesting point because I saw a demo
somewhere where now actually I think openai announced this that you can at mention a custom GPT yeah yeah Sunny showed me that this week on the Pod yeah in in chat GPT you can now mention a custom GPT to kind of invoke it yeah so how it works is you would 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 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 YouTube
YouTube Say it is so here's here's the numbers I I pulled this up you guys know like gpt3 and three and a half were trained with a heavy waiting on common crawl which is this open sourc we talked about this before Gil elbaz runs it open source crawling of the web the total amount of data in common crawl which I think it
counted and I could be off on this something like 40 to 60% of the waiting in GPT 3 or 35 I'm off on this probably so the total amount of data in that common crawl data set is about 10 pedabytes 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 pedabytes of data being uploaded to YouTube per day so if you assume like over time the definition of the videoos gone 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 2,000 and 3,000 pedabytes of data in YouTube growing by 1 to two pedabytes per day which makes YouTube's 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 multi and it is
growing so if you were to take a 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 effects continue to accumulate for them so I think it's the most valuable asset in the world today based on the thesis that AI value is going to ACR 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 freeberg in all of these third party benchmarks of these models using the same data set 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 you don't have to underwrite it being a
differentiator in five years but if you have a if you have a startup 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 has 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 that data that's being generated YouTube's got this free data vacuum and they just out in the world and most of it's getting upload you well it is public facing though so it's not just true for text it's also true for you know all of the image generation so like if you look 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 so then the question that just accentuates their data Advantage it does and 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 big table 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
realize 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 of anything else that's just operating on the open
internet right and 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 say privately so they have another data resource there that they can tap you know and and there'll be regulations of privacy around that but
maybe there's a difference there but I I honestly can't think of the quantum coming close to YouTube not even close well the 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 substate of of documents to
improve it's like a it's like a hacked version of a fine tune but the Beautiful about that is like if you have a Google workspace my entire company runs on 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 in 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 spreadsheet every document that's a huge Edge totally 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 had that right as a CEO and so like that's the CEO pitch it's 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 uh yeah you can just and as a CEO you can see across everything chth because as you know with Google Docs if you're in a compliance-based industry like Finance you can see everything every message every email every document and you can search the security model and the data model becomes very complicated in all of that
stuff like for example like 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 of answers right all all of a sudden like salaries the information gets put into the training model very dangerous or subset a of a companies working on a proprietary chip design that 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 and data model and usage questions there but yeah BR new world so there's been a lot of discussion real estate you you shared a video with us why don't you kick it off for us here preber what's going on
in commercial real estate and saxs you've got Holdings and a lot of 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 and 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 if you'll pull up this chart the total estimated market value of commercial real estate in the US across different categories is about
$2 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 multif Family 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 healthare you know those those real estate sectors are probably pretty strong data Cent is obviously
growing like crazy Self Storage is a great Market if you pull up the next image so it turns out that of the 20 trillion do 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 when 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 Barry's 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 he thinks it's probably worth closer to 1.8 trillion so there's $1.2 trillion 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 of office debt a reduction 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 2third of their value two-thirds of their investment and who
owns all of that most of that 60 plus perent call it 2third of that is likely owned by private Equity Funds and other institutions where the end benefici is actually Pension funds and retirement funds and so if 2third 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 where going back to my speculation a couple months ago kind of gets Revisited if you're actually talking about a two-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 yeah it's there's going to be some action at
some point and it's unlikely the office Market is going to m 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 write 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 SX 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 onethird equity and twoth thirds debt there's just a lot
more leverage right so that' 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 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 their stock cratered when they reported higher than expected losses in their commercial real estate portfolio so freeberg I think the point is just the 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 it's not evenly
distributed yeah right yeah right and we saw this in San Francisco where some of these buildings have 70% debt to equity ratios and you know the the value puts them in the hole and equities wiped out completely and the debt holders have to take a hit and normally you know that debt is not really written off very often it's 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 low 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 Can down the road is the best
strategy for them so it's it's called Uh pretend and extend so what they'll do is they'll work out a deal with the the landlord the equity holder that the equity holder would say listen I can't pay the interest so they'll just tack on the interest basically as principle 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 well what it does it allows the equity holder to stay in control own 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 till the end of the of the loan and again in the meantime just kind of hope that the
market could that debt at some point since they have so little equity in these buildings typically just exceed the value of the of the property and it's like I'm just working for the bank now and yeah why am I even putting this working 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 yeah so if you're the equity if you're the equity holder you'd rather hold on and have a chance of your Equity being worth something in recovery then definitely lose the building and if you're a Regional Bank you'd rather blend an extend or pretend an 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 they had these huge held to maturity port bond portfolios y these are main mostly just uh t- bills that were worth I don't know 60 cents on the dollar when interest
rates spiked 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 left because they needed their money or because there was a run or because they could get higher rates in a money market
fund all of a sudden these Banks had to sell their heal to maturity portfolios they had to recognize that loss and that's when everyone realized oh wait a second they're not actually solving okay so jamat Supply demand matters in real estate we have a Tail of Two Cities here on one side in real estate for commercial real estate no demand for
office space which uh is and 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 multif family developers are still able to lease the units they're still a 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 multif 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 nine 10% yeah but at least you can find a renter you can find a renter that's true but only at a certain price
and let's say you underwrote that property to I don't know like a five cap like a certain yield yeah but now your fin costs are much higher than you thought you might be underwater yeah meing that situation isn't as bad as what's happening in why I think it's I think it's worse in some ways if you're fully if you're fully rented and your building is underwater
because now your debt payments are much higher than you expected then there's no business model yeah but are we seeing that are we seeing tons of multi family go under can I make two points one I think I think David is is Right which is that I don't know this Market very well but just just as a as a bystander 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 repic 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-month to oneyear 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 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 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 they're in long-term
leases they're canceling these leases over long periods of time so the reset cycle is longer that's just my observation as an outsider I don't know what that me for for prices or anything else but it just seems that at least the residential Market can find a bottoming sooner because you can reset prices every year but commercial just seems
like a melting ice Direction correct to you SX that assessment commercial has both a demand problem and a financing problem multif family just has a financing problem but it's important office we're talking about office there's retail and then there's office and then there's other industrial you see in 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 let me just give you an example on the multif family side okay let's say that you buy a building okay 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 getting so let's say you did 2/3 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 and to get there you'd have to do some 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 refy 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 2third loan to value now the values come way down you may not even be able to get two-thirds
loan value so you're going to have to do what's called an equity in refinancing you're going to have to produce more Equity you're going have to Pony up more money so instead of taking Equity out like when the deal goes well you're going 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 you're 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 the building's going to be underwater it's not going to be generating net operating income it's going to be generating losses so that's why even categories like multif family where you don't have a vacancy problem there's strong demand yeah those properties still don't make sense if you had long-term debt on your multif family
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 and has to refinance at the same time well that
God right I mean this would be cataclysmic if if it was if everybody can you imagine if 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 is as the leases roll and those old rents that were higher the
market roll off and now you have to take on new leases if you can even get them it's going to be Bal at 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 you won't bail out the banks themselves but you'll bail out the creditors obviously the people holding the bag they'll get bailed yeah that's everybody agrees Janet yelling yelling our treasury secretary I don't know if she's going to be the one to do it I
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 freeberg and David saaks and chamar poaa the chairman dictator I am the world's greatest moderator we'll see you next time on the Allin pod bye-bye bye-bye will let your winners ride we open source it to the fans and
they've just gone crazy with it love queen [Music] of [Music] Besties my dog taking your driveways man oh man my habiter will meet we should all just get a room and just have one big huge orgy cuz they're all this useless it's like this like sexual tension but they just need to release [Music] somehow we need to get merch are [Music] all I'm [Music] going