Unicorns are Dying

Speaker

I've got sunshine on a cloudy day When it's cold outside, I've got the month of May Everybody say, I guess you say What can make me feel this way? It's my girl, my girl, I'm talking about my girl My girl, I've got sunshine on a cloudy day And if it's a Friday, that was the week I'm back with Keith Tyr And that music just brings a smile to my face I know, that music is good, and the people in it are good too I think at some point, Keith, you're going to get sued Probably, yeah But until then, we'll use it Finally, we're getting some truth from That Was The Week We've been hearing for years, Keith, particularly from your wife that unicorns are all the rage, they're breeding everywhere Everywhere you look, unicorns are dropping off the trees of Silicon Valley, of San Francisco and down in Palo Alto Now we're getting to the truth Unicorns are dying I'm not sure they were ever really alive But what's happening with unicorns this week? Well, the truth, of course, is a moving ball Spoken as a true Man United supporter And as a dialectician Things change And the change is super dramatic I mean, huge In venture and in private Sorry to jump in, Keith, but hardly surprising I mean, I've been waiting for this shoot to drop for months Well, that's the thing You're like a clock that is right once a day And it will eventually be true And it is true So basically... Now you know I'm a schmuck I don't know what I'm talking about No, you're not a schmuck A schmuck, to be specific, is not somebody I would have with me on the show You are a curmudgeon, I would say, with a fixed point of view that gets challenged And every now and then, the world comes closer to your curmudgeon view Which is, it all sucks

Speaker

Yeah, well... I mean, it's not hard to be sceptical of the mania for unicorns These billion-dollar companies These billion-dollar startups Which often, as you suggest, don't even have... Let alone revenue Some of them don't even have business models I mean, it's back to the dot-com It's back to tulips, digital tulips Yeah, well, it's asset buying And when you're buying assets there's always a risk that the price you pay is more than the price will be in the future To put it mildly It's true with houses, although less dramatic Yeah, it's not true with houses Because when was the last time you paid a billion dollars for a house that was actually worth $500? Not me, but if you go to LA now, in Beverly Hills there are such stories You know, people in exuberant times overpay And, you know, usually the owners can afford to lose the money which is also true with unicorns because the owners are very large venture funds, typically or even late-stage private equity funds So they can afford to lose the paper money that was previously there But it does have consequences because the whole venture ecosystem is a bit like a well-oiled machine You know, things go in It drives an engine If things stop coming out that's actually a major problem It stalls the whole system for quite a long period of time And to extend that metaphor there's a time period before stuff going in and stuff not coming out Yeah, there is We're now in the beginning I hesitate a little bit just to emphasize that point The beginning of nothing's coming out And what was set up to come out is now shrinking That's the unicorn valuation story that my wife wrote for Crunchbase which is very well researched And also the... Even you say that, even as an unbiased observer It's interesting that you rely on Jeanne You used to throw Jeanne under the bus a little bit because she was always the one behind the unicorn mania But my guess is that you were the one Jeanne is much more hard-headed than you Did she actually ever believe in this stuff? I never asked her that question But, I mean, she... You never asked her whether... One of her jobs is the unicorn leaderboard at Crunchbase And, of course, the unicorn leaderboard is a bit of a trailing indicator It's what... It looks back at what has happened And all it really means is that company... Somebody put money into that company valuing it at a billion dollars or more And so it's just a factual leaderboard It's not meant to be proselytizing I mean, looking back, Keith, do you think... And this isn't a criticism of Jeanne or of Crunchbase or any of this other thing But this mania with unicorns was a little childish, wasn't it? You could say that the language is childish But, obviously, in any domain, you try to capture in ways normal people can understand capture important things And what actually happened mainly after Steve Jobs invented the iPhone with his team is the number of people on the earth that could engage with software and hardware grew massively into the billions And the valuation of companies started to reflect the market opportunity which was huge And so people were saying, look, this thing could be worth 10 billion 10 years from now So I'm totally happy to put in 100 million today at a tenth of that which is a unicorn And so money began to speculate on future outcomes Now, fundamentally, the technology infrastructure is in a better place than ever before The number of people that use it the number of devices they buy the number of software services they interact with is all growing So what's changed isn't value or growth What's changed is how much you're prepared to pay for it And that's an investor decision And it starts in Wall Street and trickles down This is the trickle down effect but it's negative So how is this You do a good job in your firm in breaking stuff down and not speaking in generalities How does the crisis in the unicorn market break down from sector to sector? I assume that crypto is pretty much dead Every crypto unicorn now is is being chopped up for canned cat food or something But there are other sectors which I assume especially AI, which is still very much alive Yeah, that's the interesting complexity of the whole thing So crypto has got a double problem It's got the general realignment of valuations And on top of that, it's got the bankman fried effect of assuming everybody's a scammer So it's super hard Which isn't entirely untrue It's not entirely untrue, but it's largely untrue because not everyone in crypto is a scammer Some people are evangelizing Some people are scammed Some people are scammed And then there's the real people There are real people, but sadly for them it's pretty hard for them to appear real in this context So crypto, in a way, is our narrative Then you've got AI, as you say, is flavor of the month So the fact that, we'll talk about this later but Microsoft's what appears to be a $10 billion investment into open AI will not be the last large investment into nascent technology in the AI space Or the first, yeah, I mean, clearly Yeah, so there's going to be... And what about other areas which seem a little bit more substantial, like biotech? I'm not sure how much Jeanne and the Crunchbase cover that Well, a lot of the venture ecosystem is biotech If you look at the names, biotech is its own problem because biotech requires government authorization through the FDA, almost always And so the amount of money needed It's a bit like semiconductors You need a very large amount of money before you even know if there's a value going to be produced So... It's all great news I mean, you're always the sunniest of people always seeing things in terms of the glass being half full But even I would acknowledge that this is good news for entrepreneurs because there's no better time to raise seed funding You even have an article on this than now in the midst of all the doom and gloom Yeah, because only really good entrepreneurs with really strong ideas and teams will get funded But they'll get funded in the context of less competition less noise, if you like But isn't it also more true that it's in these periods that people... You don't have a lot of me-too startups I mean, entrepreneurs like yourself who just do it, whatever the environment will do it But everybody else gets a real job Yeah, everybody else gets a real job I think that's true Unless they're in the midst of massive layoffs in tech In which case they probably... I've always said to myself Keith, you better have at least a 12-month buffer where you can survive if you're not getting any income Because the value is like that It goes through these periods where it's super hard Do you think... I did a show with Brad Feld who compared what we're going through now to the early 2000s Is it comparable? My sense is it was a lot more dramatic with the crash, the dot-com crash I don't think so, actually I think this is as bad as I've seen it Worse than when you had a company back then I lived through and survived the dot-com crisis and came out the other end But it was... If I tell you the story of how I survived this That's another show So you really think this is worse? Why? It's worse because the scale is much bigger More people are affected More companies will go out of business or be acqui-hired if they have good teams The total amount of venture capital at risk is 10 to 20 times bigger than then If you look at the paper value of the dying unicorns So it's a big... It's almost like if the housing market crashed by 10x And what shoe hasn't dropped yet, Keith? I still assume at some point that venture firms will start collapsing Even banks At what point do we get to the end of this crisis? What hasn't happened? So, interesting Silicon Valley Bank is thriving because its debt business is growing And you can listen to its earnings reports and see its share price has been going up because its revenues have been going up So banks actually do well in periods like this as long as there is an end to the period The biggest shoe to drop probably is the number of seed funds At SignalRank we track about 1,200 companies that have done an A round where that company has a very good prospect of becoming a unicorn Maybe you should rename SignalRank Do you remember back in the dot-com crash there was the fucked company which did quite well Maybe you should rename SignalRank fucked VCs Well, no, because... Well, I know you're making a joke so I'm going to ignore it But let me come back to my main theme I wasn't a joke That shows my skills as an entrepreneur So there's 6,500 investors in this 1,200 company list that we track It's our pre-index if you like It's the feeder into the SignalRank index which are the B rounds that are really good 6,500 investors The top 200 are super strong It's people like Dylan Field the CEO of Figma is one of them And he's just obviously made a lot of money by selling to Adobe So he's going nowhere But below that top 200 there's well over 6,000 funds that you wonder how they're going to do the next fund And that's where you'll see it And it's the same theme that you and I have talked about endlessly on many different areas of the economy The disappearance of the middle There's always going to be a strong high-end There's always individual investors But everything in between gets decimated It's like retail, it's like media Yeah, except now there's a new part to that story The middle was already getting decimated but it was getting decimated due to a lot of very large check writers coming in later and then going earlier Those check writers have disappeared now They're not there So actually venture capital has to go back to its core which is investing smallish amounts in good companies step by step as the companies grow So it's true venture capital has to reemerge because the silly money is gone Yeah, so in a way we're all coming to our senses You referenced earlier Microsoft's investment in open AI I think a $10 billion investment at a $20 billion valuation has implications for the venture community, for AI and also for Google You have a couple of articles in the newsletter this week linking to this What's your overall sense? What does it mean for Microsoft? What does it mean for Google? What does it mean for this sector of the economy? Yeah, that's this story that's coming from Recode

Speaker

Vox is the place she published it which is part of that whole empire with Recode Sarah Morrison makes the point that Microsoft is making this investment not as a pure financial investment but for what Microsoft gets out of it and they're already starting to implement APIs on their Azure platform that allow any developer to build ChatGPT or any other open AI service into their software So basically open AI and its various products like ChatGPT is becoming a component of any application So you can imagine things like a diagnostic doctor where you tell it your symptoms and it gives a guess as to what your problem is showing up inside software that is about before your visit to the doctor So this seems a very, very smart move very well thought out and if any company can pull this off it's Microsoft Is that fair? I think it is fair Microsoft has found its new core and its new core is being the platform of choice for developers especially in AI It's been doing a lot of work in AI for about five years now specifically for developers to access tools and that means that Google Cloud which is currently losing money and even AWS are less attractive to product developers than Microsoft is Now that's a major shift I remember if you went in to pitch a startup and you were using Microsoft as your infrastructure there would be almost zero chance of you getting an investment So it's one of the conditions of the deal that Altman and his open AI people don't go to Google and Amazon and offer this also on their platforms Apparently not Apparently that is not a requirement but Google is super competitive so I doubt they're going to want open AI now They're going to try and build their own version of it Amazon is a bit different so we'll see I think the biggest part of the deal is that 75% of open AI's revenue goes to Microsoft until a threshold is made of payback and so Microsoft is not owning open AI but it is easily it's behaving as if it did Yeah and it seems like whenever Microsoft buys a company you think of Skype or even LinkedIn it doesn't seem particularly impressive but this seems a much smarter much more modern much more innovative approach to acquisition or working with startup technologies and companies Yeah I mean Microsoft needs to get a billion dollars of revenue from this partnership in order to justify the 10 billion It doesn't even matter I mean how many billions has Microsoft spent wasted on Bing I mean at the very minimum won't this reinvent Bing? I think there what will happen there and this is more the dark side of Microsoft is I think I think there'll be a lot of friction because I think there's a belief a dogmatic belief that Bing can eventually succeed in competing with Google and I think that's a mistaken belief so it goes back to my old Real Names days the reason that they discontinued Real Names is because they wanted to be a search engine and they still want to be a search engine Real Names was a way not to be ChatGPT is another way not to be a search engine it's a way to be better than a search engine So how would it work for a developer wanting to build on Azure they will have access to the ChatGPT I mean the current version is 3 the new one out this year will be 4 and with that again what benefits will that give them? I mean they could go straight to they could go straight to OpenAI I did a show for example with Josh Browder the Do Not Pay CEO who's already working with them Well it's more of a practical thing when you write software you use something called an IDE which is a user interface for software development and that IDE has access to libraries of code that do things and you can pull in the libraries and write your code and run the code and see if it works so business relationship with OpenAI or even having access to their APIs which everyone can have is one step less than having it built into your development interface and available in your natural programming environment so I think it's just the last mile if you like of delivering OpenAI to developers is Microsoft whereas OpenAI is the previous hundred miles that's where the sweet spot is You also have an essay of the week Google versus chat GPT what impact do you think this is going to have on Google? The alarm bells are going off in Google but like Microsoft in the 90s they're facing two challenges one is this technological innovation the other is suddenly the government's focusing on Google they've got a section 230 Supreme Court hearing in a couple of weeks now they're being sued by the government to split them up so it seems as if history really is repeating itself in a very eerie way with Google Yeah so this is a story really nicely written it's by a guy who cooks pasta while he tells you a story and it feeds off this Google is done meme that's going around that's been around for quite a long time and it makes the point that this is the first time when people said Google has a competitor where it's real it's coming from margins which is like a substack and it's a great read and it basically just says this time it's real