Keith Rabois on 2023 macro outlook, startup valuations, founder advice, ChatGPT vs Google | E1650

Keith Urban on the Macro Outlook for 2023

In this section, Jason Calacanis interviews Keith Urban about his thoughts on the macro environment heading into 2023.

Inflation and Consumer Spending

• The only thing that matters is whether inflation is going up or down as it drives everything else.

• If we stabilize inflation, we have to worry about a consumer recession which could be severe.

• Consumers are still spending, but they're spending more with debt than with savings, especially in some categories like travel.

Planning for Different Scenarios

• Nobody has a crystal ball in 2023 that's super accurate. Therefore, Founders should plan for different scenarios and have a burn rate, fixed cost structure, and hiring plans that can be edited quarterly at a minimum.

• Founders need to be more dynamic now and plan for two to four different environments.

Advice for Boards of Companies

• When on the board of a company, scenario planning should manifest itself in the number of employees and amount of revenue. Have conversations about multiple scenarios such as funding environment getting worse or continuing to slog sideways.

The Future of Capital Markets

In this section, the speaker discusses the state of capital markets and how it will affect companies in the future.

Equity Markets

• The equity markets are not expected to improve in the foreseeable future.

• Many companies need to raise money, but investors will demand terms that reflect reality.

• Investors are going to be much more selective and demand terms that reflect reality.

Raising Capital

• Companies that were smart raised money in 2021 when terms were attractive for founders.

• Most companies cannot skip two years without raising capital and making radical changes in their cost structure or business model.

• Companies that go back to the capital markets will be in for a rude awakening on pricing and terms.

Normalized World of Tech Investing

• CDL should be done at $10 million, Series A at $20 million, and a good B at $40 to $50 million.

• Founders need to understand that these are normalized world tech investing numbers.

• Valuations have returned to historical averages after being irrational for some time.

Valuation Trends in Tech Startups

In this section, the speaker talks about valuation trends in tech startups over time.

Historical Valuation Trends

• In 2008 - 2010 seed rounds were around $5 - $15 million. Series A was around $30 - $50 million.

• Over time seed rounds increased from 3 - 3.5 million post-money valuations up to 5 or 10 million dollars at a 40 or 50 million dollar valuation.

• This made no sense historically as it was completely irrational compared with historical averages.

Current Valuation Trends

• Currently, if you're raising a seed round, you get an $8 - $10 million cap on your safer note.

• Companies that don't have product-market fit and their last round was at $40 million will have difficulty raising money in the future.

• Investors are willing to pass on companies that don't have positive signals.

The Importance of Compliance for Tech Startups

In this section, the speaker discusses the importance of compliance for tech startups.

Compliance Requirements

• SAS or services companies that store customer data in the cloud need to be SOC 2 compliant from a third party to close big deals.

• Vanta makes it easy to get and renew your SOC 2 compliance.

• On average, Vanta customers are SOC 2 compliant in just two to four weeks.

Vanta.com is offering a $1000 credit

This section discusses how Vanta.com is offering a $1000 credit to startups.

Vanta.com's offer

• Vanta.com is offering a $1000 credit to startups.

• The credit can make a difference between a startup thriving or going away.

Impact of major companies' behaviors on the startup market

This section discusses the impact of major companies' behaviors on the startup market.

Hiring freezes and cuts

• Google, Facebook, Microsoft, Apple, Salesforce, and Twitter have implemented hiring freezes or cuts.

• These actions are driving down the entitlement factor in startups.

• People who were looking for jobs in startups with expectations based on offers from big tech companies may not be the best fit for startup culture.

• Startups are using these offers as benchmarks for their own terms and offers.

Negotiating strategy

• A hiring freeze or cut at a big tech company is not a successful negotiating strategy for startups.

• It's better to join a company where you will learn the most, challenge yourself the most, and have the highest economic upside.

Building a startup with people who won't get offers from big tech companies

This section discusses building a startup with people who won't get offers from big tech companies.

Economic competition

• The economic advantage of building a startup with people who won't get offers from big tech companies is that there is no competition over salaries.

Personality traits and skill sets

• The personality traits, character, ambition, and skill set of people who won't get offers from big tech companies are different than those who would consider being the 7234th developer at Facebook versus being the third developer at a startup and making that decision based on salary alone.

Entitlement

• If it takes more than 30 seconds to figure out that you don't want to be the 700th developer at Facebook, then you're not the right fit for any successful startup.

• Entitlement up and down the stack is a problem in startups.

The Challenges of Venture Capital

In this section, the speaker discusses the challenges of venture capital and why many new venture firms are likely to fail.

Creating a College-Like Environment

• Google has a money printing machine that allows them to over-hire without worrying about salaries.

• Many new venture firms were started in the last two or three years with little discipline.

• Almost every one of those venture firms started in the last five years is going to fail.

Three Fundamental Factors for Failure

• If you can't return capital, you should not be raising future adventure runs.

• A lot of LPS have lost money in public markets and need to rebalance their portfolio, which means they have to be more selective about which species they fund.

• Many people just don't have the right skills to be a good VC.

The Hard Job of an Investor

• Placing the bet is only 5% of the job; helping founders stay on track is much harder.

• Being able to communicate with clarity based upon perspectives so that founders can make the best possible decisions and therefore maximize potential company success is key.

• Picking strong founders with strong opinions and perspective is important.

Providing Founders with Feedback

In this section, Keith Rabois talks about how to provide feedback to founders. He discusses how to deal with a distracted founder and a founder who creates interpersonal chaos.

Dealing with a Distracted Founder

• A distracted founder can be detrimental to the success of the company.

• Simplification is key when dealing with a distracted founder. All ideas are not equal, and typically only one of them is exceptional.

• By trying to fund multiple ideas instead of focusing on one or two initiatives, you're sub-optimally going to perform.

• Founders have limited resources, so they need to channel their energy into the most important things.

Dealing with a Founder Who Creates Interpersonal Chaos

• A founder who creates interpersonal chaos can be successful because people know what they're getting into when working with them.

• This personality trait is not ideal for an executive joining a company but can work for a founder.

• It's essential to get these types of founders focused on not self-sabotaging by creating chaos in the workplace.

Applying Force Intentionally

In this section, the speaker talks about how to apply force intentionally and not cause collateral damage.

Relentless Application of Force

• The most important trait for a successful founder is that they relentlessly apply force.

• Founders need to ensure that the friction they are causing is intentional and not collateral damage.

• Being conscious about when you're causing friction is critical to isolating how important something is.

Channeling Disruptive Personalities

• Highly energetic, highly opinionated, disruptive people are almost always the best founders.

• You can't talk them out of their personality traits but you can channel it to make sure you're using that skill wisely and carefully.

• Pick your battles. Apply pressure in the right place at the right time.

Competing on Design and Elegance

In this section, the speaker talks about competing on design and elegance.

Importance of Being Right More Often Than Not

• Companies that compete on design and elegance need to be right more often than not.

• It's critical to make sure that your designs are highly impactful.

Micro Acquire Rebranding as Acquire.com

In this section, the speaker talks about Micro Acquire rebranding as Acquire.com.

Achieving Acquisition Goals with Acquire.com

• Micro Acquire is rebranding themselves as acquire.com in 2023.

• Acquire.com helps any startup of any size get acquired and achieve life-changing outcomes.

• The platform has the tools, experience, and engaged buyers to help you achieve your acquisition goals.

Inheriting a Team

In this section, the speaker talks about inheriting a team.

Problem with Taking Over a Company

• When a founder leaves the company, other people inherit that team that bought into a certain leader or cult.

• This is part of the problem with taking over a company or putting in a professional CEO.

Disadvantages of Apple's Execution

In this section, the speaker discusses the disadvantages of Apple's execution and how they have not shipped a brand new product yet.

Apple's Product Release Cycle

• Typically, Apple releases a new product every 5 to 7 years.

• The company needs to release a new product that inspires consumers to buy something new.

• Consumers are not demanding a new product from Apple.

Facebook's VR Bet

In this section, the speaker talks about Facebook's VR bet and why it may not be successful.

Facebook's Innovation Culture

• Facebook is not an innovative culture.

• They are good at executing and compounding advantages quantitatively.

• Disrupting through a new product is not in their DNA.

Zuckerberg's Acquisitions

• Mark Zuckerberg is a brilliant strategist when it comes to acquisitions.

• However, he cannot acquire creativity or innovation at scale right now due to things he cannot control.

• It is impossible for Facebook to acquire the right DNA for innovation due to regulatory regimes.

Short on Facebook

• The speaker suggests shorting Facebook if you want trading advice.

• The fundamental problem with Facebook is that they lack innovation DNA.

AR vs. VR Applications

In this section, the speaker discusses the differences between AR and VR applications and their potential uses in both consumer and corporate settings.

Industrial Applications of AR

• There are many industrial applications for AR such as surgical procedures, law enforcement, technicians in auto repair or aviation industries.

Consumer Applications of AR

• There are many consumer applications for AR that will resonate with users.

• AR is distinctly different from VR and has more potential for real companies.

VR and AR Limitations

In this section, the speaker discusses the limitations of virtual reality (VR) and augmented reality (AR) as gaming platforms. The speaker also talks about the challenges associated with creating a form factor that is non-invasive for AR.

VR has limits as a gaming platform

• People are only willing to spend so many hours in isolation.

• The best you can build in VR is about a 100 billion dollar company.

• There's a natural limit to the implied TAM of a VR Monopoly.

Challenges with AR

• Getting people to put something on their face that's heavier than sunglasses is challenging.

• Form factor matters, and it needs to be small enough to feel like sunglasses.

• There are significant breakthrough challenges to a breakthrough in AR on the consumer side.

Value proposition vs. friction

• The value proposition has to be significant enough to change people's behavior.

• Use cases need careful consideration when there is friction involved.

• People travel not just for learning but also for social reasons, which cannot be replicated in VR or AR.

Virtual Travel vs. Real Travel

In this section, the speaker talks about how virtual travel cannot replace real travel due to social reasons.

Virtual transportation of Paris is intriguing but limited

• Most people travel because they want to spend time with other people or meet new people, which cannot be done virtually.

• Television was supposed to eliminate the need for travel, but people have only traveled more since then.

• Virtual transportation can satisfy intellectual curiosity but not social needs.

Launch Accelerator Program

Jason Calacanis describes the Launch Accelerator program, a 15-week program that focuses on fundraising, growth, and networking. The program is tailored to the needs of seven companies per cohort.

Key Points:

• Founders receive coaching from Jason and present to 150 or more professional investors plus about a thousand investors in Jason's Syndicate.

• Bi-weekly Jam sessions focus on different aspects of growth including customer acquisition, marketing SEO, operations legal accounting.

• Founders are dialed into the launch Network which facilitates scores of introductions to targeted investors.

• Looking for Scrappy resourceful Founders who can execute at a high level in big markets. Alums include fitbod steezy lead IQ and grin.

Chat GPT Technology

Jason Calacanis discusses people's reactions to chat GPT technology and its potential for productization.

Key Points:

• People tend to share socially only the top one to ten percent of outcomes that blow people away but don't consistently blow people away.

• Cost is a fundamental constraint in the short term for productizing chat GPT technology. The cost of a query is too expensive for any normal product by at least one order of magnitude.

• Historically, technology has been good at innovating its way out of cost structure problems by driving down costs while increasing performance. However, an order magnitude improvement in cost would be needed before productizing anything seen with chat GPT technology.

• The AI version must know when it's got something right and wrong. You can be right with a brilliant recipe one percent or ten percent or twenty percent of the time, but the AI version has to know when it's got something right and wrong.

Legal Issues with AI Data

In this section, the speakers discuss the legal issues surrounding the use of AI to collect and analyze data. They explore concepts such as fair use and derivative works, and how they apply to different types of intellectual property.

Fair Use and Derivative Works

• The concept of fair use applies to the use of copyrighted material for certain purposes, such as criticism, commentary, news reporting, teaching, scholarship or research.

• The percentage of original work used is a factor in determining whether something qualifies as fair use.

• Impeding on someone's ability to make money from their work can also be a factor in determining whether something qualifies as fair use.

• Creators have more rights over derivative works in Europe than in the US historically. However, IP law has been moving towards giving creators more control over derivative works.

Impact on Original Authors

• Services like Dolly that create images using AI can have a dramatic impact on the original author's ability to make money. This is where people tend to get upset about derivative works.

OpenAI and the Impact on the Creative Industry

In this section, the speakers discuss the impact of OpenAI's technology on the creative industry and potential legal issues that may arise.

Commercialization and Legal Issues

• The commercialization of OpenAI's technology could have a significant impact on the creative industry.

• The availability of OpenAI's technology for free puts stress on legal regimes, but as long as it is not monetized, it won't be a severe legal problem.

• However, once someone starts selling products using OpenAI's technology, there will likely be significant litigation about it.

• Entrepreneurs should be careful not to interfere with creators' ability to earn money or face potential legal action.

Chat GPT vs. Google Search

In this section, the speakers discuss whether chat GPT and similar technologies are a threat to Google Search.

Incorporating Chat GPT into Bing

• Microsoft is reportedly working on incorporating chat GPT into Bing search results.

• Chat GPT produces results that are indistinguishable from Google in 80% of queries.

• While chat GPT may not solve super long-tail queries like Google can, it could still pose a marketing threat to Google's perceived superiority in search results.

Microsoft's AI and Bing

In this section, the speakers discuss Microsoft's AI and Bing.

Bing's Future

• One speaker suggests that Bing might start putting the chat gbt answer at the top of search results.

• They explain that Bing could do this because they don't need to make money from it, unlike Google.

• The other speaker notes that Google has been doing this for popular queries for years.

Microsoft's Strategy

• One speaker thinks that framing AI around something like retraining consumers could be a good strategy for Microsoft.

• They also discuss how Google Docs was designed to compete with Microsoft Office, and now Bing is trying to compete with Google.

Investing in Startups

In this section, the speakers talk about investing in startups.

Evaluating Deals

• The speakers discuss what they look for when evaluating deals.

• One speaker breaks it down into components: people who raise their valuation too high but have product-market fit and are willing to take the necessary steps to fix their cap table or terms.

Founder Responsibility

• The other speaker emphasizes that founders need to take ownership of any problems and be clear about how they plan on solving them.

• They note that if a founder hasn't taken steps to solve a problem or isn't taking ownership of it, then they're not worth investing in.

Importance of Being Grounded and Paranoid

In this section, the speaker emphasizes the importance of being grounded and paranoid in addition to taking people on a journey. He shares his experience with founders who failed to accept reality earlier, leading to a debt spiral.

Traits for Success

• It is important to be both grounded and paranoid.

• Founders need to accept reality earlier and calibrate their decisions appropriately.

• Being able to see the world with reality is an important trait for success.

• Companies should be first in line when asking for a corrected valuation.

Navigating Challenges in Real Estate Business

In this section, the speaker discusses how Open Door has been affected by interest rate hikes in Q2. He also talks about communication challenges within the company.

Challenges Faced by Open Door

• Interest rate hikes in Q2 have affected many things in real estate, including mortgages and house prices.

• The company has faced communication challenges that have led to mismanagement of information.

• Accurate communication is crucial for framing what's going on with Open Door.

Open Door's Performance and Real Estate Transactions

In this section, the speaker discusses Open Door's performance and how it is affected by real estate transactions.

Open Door's Performance

• Boulevard did not try to hide or mask its inventory issues, which allowed the company to perform well.

• Open Door is making money in all but four of its 52 markets.

• The company needs to communicate its success more clearly.

Real Estate Transactions

• Open Door's cost structure is based on a certain number of real estate transactions occurring each year.

• The global financial crisis caused a decrease in real estate transactions from 5 million to 4 million per year in the United States.

• People will eventually start transacting again due to life events such as marriage, divorce, death, and needing more space for children.

• In 2023, there will be predictability or visibility into real estate interest rates and mortgages that will lead to an increase in real estate transactions.

Communications Strategy for Founders

In this section, the speaker discusses how founders should approach communications in today's media landscape.

Approach to Comms

• Journalism post-Trump became advocacy over accuracy resulting in adversarial attacks on tech companies for ideological reasons.

• Going direct is a complimentary part of any coherent strategy in the tech world because mainstream media in the United States is adversarial attack for ideological reasons.

• Companies need to own responsibility for framing their message and marshaling proof points that can't be denied.

Best Practices

• Earned media is important but not a complete substitute for direct communication with customers and stakeholders.

• Cut through clutter with your message even if it gets distorted through the lens of adversarial journalists.

• Think through how to cut through the clutter with your message in paid media.

The Importance of Engaging in Debate

In this section, the speaker discusses the importance of engaging in debate and exposing people to new arguments and data.

Exposing People to New Arguments

• The speaker believes that it is important to engage in debate with people who have not heard certain arguments before.

• He cites Pete Buttigieg's appearances on Fox News as an example of how exposure to new arguments can change opinions.

• The obligation of people in tech is to frame arguments and go into places that have non-converts. Preaching to the choir does not do much good.

Love for Debate

• The speaker notes that he and his colleagues at Sacks T.O. love debating.

• They are competitive and want to win debates, which is similar to playing chess.

• However, the speaker does not play chess because he would become too obsessed with it.

Political Predictions

In this section, the speaker shares his thoughts on whether Trump will be indicted or win the primary election.

Indictment of Trump

• The speaker does not know if Trump will be indicted but believes it would be bad for the country if he were.

• He cites Gerald Ford's pardon of Nixon as an example of how pardoning a former president can prevent disruption and distraction for the country.

• Criminalizing prior presidents could lead to a Latin Americanization of politics, which has been seen in Israel where criminal law was used to undermine politicians.

Trump's Nomination

• The speaker does not think Trump will be the nominee because the level of enthusiasm for him is declining every day and he is not helping himself.

• He believes that Trump is a paper tiger and that his support will collapse quickly.