366. 2023 Predictions P1: Web 3.0's Demise, The AI Hype Cycle, Will Elon get the Last Laugh at Twitter, and Should Anti-Trust Take a Bite out of Apple (Ramy Adeeb)

Ramy Adeeb of 1984 joins Nick to discuss 2023 Predictions Part 1: 2023 Predictions P1: Web 3.0’s Demise, The AI Hype Cycle, Will Elon get the Last Laugh at Twitter, and Should Anti-Trust Take a Bite out of Apple. In this episode we cover:

Crypto’s and Web 3.0’s Correction
The Down Round Reckoning
Elon Musk and Twitter’s Shakeup
Apple’s Response to Anti-Trust

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Transcribed with AI:

0:02
welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran. And this is the full ratchet
0:17
Welcome back to TFR friend of the show in GP in 1984 Ramy adeeb is back to talk predictions. 2023 Rami joined us last year in one of the most popular episodes where he expressed his skepticism of SPACs crypto in the metaverse while predicting that rising inflation would be one of the primary challenges of 2022. At the time, many in the audience took strong opposition to our comments hindsight, maybe 2020. But as I quickly scanned last year’s episode, I can’t imagine a set of predictions that could be more accurate. Personally, I love a good contrarian, especially one that I’m privileged to call a co investor. With that said, Mr. D. Welcome back. Thank you, Nick. It’s a pleasure to have you. So man, you missed the war in Ukraine, something wrong with that crystal ball.
1:03
I’ve never said you know, I’ve missed it every single year. And that’s why we try it. Let me tell you the list of everything I’ve missed. Okay, in 20, I miss COVID, we all miss COVID. Even though it was happening in China, it was on the front page of The New York Times, this last few days in a row the pandemic and in China, or whatever, it’s,
1:23
it’s my fault for having you background, me, I should have found somebody. And then 2022,
1:26
we entered word about inflation. And of course, at the time, what was happening, you know, Russian troops were investing at the border of the Ukraine. We knew that was happening there was the State Department with Biden was thinking about it, but it was just a small spark. And within six weeks, it became the largest land war in the history of, you know, in Europe since World War Two. And it has had I mean, the woman Ukraine has had ridiculous ramifications on commodities on the developing world. We’re not really feeling it in the US. People in the rest of the world are hurting because of this. They’re hurting because of lack of complete lack of flour. They’re hurting because of increased inflation. They’re hurting because they’re unable to get the food. And so we always get it wrong. And that’s why actually, Nick, I tried to not predict at all. I tried to just explain what’s happening today. I have no idea. What will happen tomorrow.
2:17
Well, I think we’re paid in a certain respect. We’re paid to be optimists. And sometimes we we can see the writing on the wall, but we choose to not acknowledge it. That’s correct. Well, good. So okay, you Mr. Warren, Ukraine, you hit on some other areas. Quick update on 1984. So you run a fund based in San Francisco. Last year, you had closed your $75 million. What was fun to give us an update on the firm? You know, where are you at with deployment? What what are the notable updates at 1984? Look, we’re
2:47
halfway through deploying our second fund. We’re also fortunate in sticking to a three and investment period. So we don’t need to go out to market until next year. And we’re very fortunate that we’ve stuck to just enterprise software real applications and have avoided what I’ve called speculative tech, and I really can’t stress this enough speculative tech makes for great stories with LPS very rarely ever that makes for green investment. And so our story was unsexy. But this year, it’s, it’s looking a lot sexier than before. So we need to evolve with the times.
3:19
Congratulations there any other developments at the firm worth mentioning?
3:22
Yes, we just promoted the Samet, who is a principal industrial partner. So we’re now looking for partners, we’re really excited.
3:28
Wonderful. Salmon is one of the best we actually recently promoted one of our own Zeke Trezise. Eyes to associate. Hey, Rami, you know, both you in new stack closed our funds in late 21. We are the beneficiaries of pretty abundant fundraising environment. What happens to the VC funds that are going out to raise this year? That’d be tough.
3:48
It’s gonna be it’s very tough, right? I mean, the family offices have been burned spectacularly, because the family offices that were excited about venture, generally were also excited about crypto, they’re the ones that were more adventurous. And it’s very hard to be like, Oh, I’m really into venture but really love into crypto. So part of the portfolio is down 90%. And then institutions are obviously going to have to rejig their existing commitments. But a lot of institutions are looking at their VCR realizing they’re not going to get liquidity back for a while. And ideally, institutions are able to look through their existing managers and cycle through and part ways was the one that was performing and embrace a new of the younger ones, emerging managers that are that obviously that’s very hard to do. That’s the beauty of this industry is you get these institutions in for three, five funds in a row before they pull back. So it’s gonna be interesting for a lot of institutions to accept new managers. But my advice to folks starting a VC fund really is try to find, spend your time where there’s product market fit, to first find pools of capital, that are excited about your strategy. You’re investing in the US people in the developing world, actually, the economy is might be struggling. A lot of folks are trying to get their money out. Maybe focus on family offices and maybe in Asia or in Latin. or find parts of the world that has abundance of capital, like the Middle East right now is, you know, they are awash in cash because of oil prices. Yes. And they have been very aggressive about venture. So you know, don’t go, just, you know, they can meeting with the 102 meetings with Cendana trying to beg them to to add you to the list 10 funds, it’s gonna be a
5:21
waste of your time. There you have it, the heartache of the day. And Rami Adeeb says go to Saudi to raise your next venture fund.
5:27
That’s That’s right. That’s right. Not Russia,
5:30
surrounding my friend. Last year, we discussed how a rising tide raises all ships. And how when the tide goes out, you see who’s swimming without shorts, the tide is now out.
5:41
That’s right. A lot of folks have are swimming without, without shorts right now. And I think over the next year, we’re gonna cover a lot more, we’re gonna see who really had the tide is gonna go down further. And we will get more visibility into all the things but who was really doing without shorts were crypto, right? Yeah, no use case. That’s really the fundamental problem. Very subtle use cases that were very minor relative to the primary use case of quick riches or private schemes. Speculative texts, also really struggled. Let’s go to moon, let’s go to Mars. It’s just pace tech, capital intensive industries are going to struggle. And then last thing, every business without is ProGear. Economics. Nobody has a great quote from a few years back, right? That if you’re standing in the street corner, telling dollar bills for 75 cents, you’re going to be in business for as long as you have dollar bills. And I think that’s what we’re coming to capitals, dear. And a lot of companies are asking themselves a very hard question, do I have a business? Or was my business so far truly a function of bending venture capital to create revenue? That is not sustainable?
6:45
Yeah, I think there’s a lot of VCs out there that have to update their LTV algorithms to base it on margin dollars instead of revenue.
6:52
What are we looking at right now, a lot of the of the V’s have not proactively changed. They’re changing valuations. I think you’re about to witness the Financial Times just had a great update a great article, actually exactly what that effect. We’re not marketing to market. But as long as no down Route took place, most VCs are not changing the valuation of the companies. But a lot of the companies in reality, if they go out and try to raise money, they’re gonna get a lower valuation. Right. And so a lot of you’re going to continue to see a big compression in valuations this year. I think a lot of these companies raised and 21 was able to survive 2022 without raising but it will be hard for them to survive another year. So we’ll be back to market and you will either be down rounds, you will see classrooms restructure, you will see that we are up rounds, and you will see that out, you know, bankruptcies.
7:38
You think the majority of the reckoning happens in in 23. I mean, some of these companies have massive war chests where we’re starting to see the effects like you know, Klarna is 85% reduction in valuation and some of these companies that are running out of runway, but there’s still a lot companies like clubhouse that are I mean, they’re their last valuation is pretty suspect based on people, where people have them valued today, but founder of clubhouse just said he’s got two and a half years of runway. So there’s a lot of tech companies that can kind of ride this out after austerity measures.
8:08
Why didn’t get out is is one thing, but catching up to your previous valuation is enough. Yeah, yeah. That’s really the question that does clubhouse have the world whether first clubhouse is a consumer company, so it’s almost impossible for me to I can’t fathom them growing back to the previous valuation. I’ll tell you a story. I finished college in 2000, at the height of the first tech bubble, and I joined the hottest company at the time. It’s called tell me that works. Nobody’s heard of it today. But literally in 1999 2000, that company raised $230 million. Wow. At an 800 or $900 million valuation. And then the stock market crashed. We priced our shares for a buck 95 to a penny. But we I had, I had taken a credit card loan to early exercise my options to save on taxes in June of 2000. Right after college, your first lesson, led by barista, and then six months later, six months later, really, really priced the option but $95,000 of credit card debt.
9:07
I’m sorry, I don’t mean to laugh. I’m sure it was very painful. But then
9:10
it was an amazing team that just decided, you know, we’re gonna make it work. And there weren’t that many other options. It was people like, you know, Alfred Lin and Sequoia Charles modell foundation will make all of these we’ll do it with the executives at the company. And we pivoted to enterprise grew revenue, 1,000,002 million, 5 million, 10 million 50 million. And then after seven years, we got to 120 million in revenue. And then Microsoft acquired the business for 800 million bucks. It took seven years of hard work to finally get to that valuation. Wow. And I was there for that entire journey. And it was a different time. I’m not a Gen Z or I was an international student and h1 B visa. I was gonna do whatever it takes. That’s really the question to founders do you have the word whether you have the stamina to go out today and spend the next seven years working your butt off in order to get to that same valuation you raise your last round? And if you don’t, you know, you might as well just pass But
10:00
Well, I guess the cautionary namesake for the podcast that I chose full ratchet people will finally know what that means. And it’s it’s sad reality, but
10:10
100% everything and I can’t stress this enough, Nick founders must master their understanding of their terms and have their cap table today. True. Yeah, down rounds are going to become part of our life. And the terms like broad based weighted average versus narrow based weighted average versus a full ratchet. If you don’t know what these are, you’ve got to know them. Google them, it’s really hard to actually understand the difference a little complicated, and it’s not a good description, they at least understand what is what kind of anti dilution measures do you have in your, in your in your phone? Right, in documents and what your investors are willing to do?
10:44
The technology crisis of 2008, we had an environment where real estate was assumed to always go up into the right, it was not prepared for a correction in many folks in the industry, I’ve never seen one. And on top of that you had the subprime crisis, which kind of feels like the crypto underlying we’ve got this ethical sort of sub asset class within tech that largely is based on these pyramid schemes. There’s some reality there, but there’s a lot of ethical issues, and then businesses that are Ponzi schemes. And so in a weird sort of way, you know, you’ve got this environment of Optimists that have never seen a correction and don’t even know what what some of the terms and don’t even know the implications of some of the terms that will cause a reckoning in the case that they do it down.
11:30
Look, I think I couldn’t agree more. I mean, History doesn’t repeat itself. But it rhymes a little bit. This is closer to 2007, eight, protect the southern eight for crypto. And the difference is the financial crisis through financial crisis in the world, to me is a function of speculation paired with leverage. When you have speculation and leverage that’s when shit truly, truly crash, right? And that’s what happened in crypto. This happened in SBI. In ITX case, right? It was speculation but then there was leverage, right? They were borrowing the money when they were not supposed to. That’s exactly what happened in 2008 ton of leverage. People were borrowing you borrow against your house, but then your house drops in value, exactly what you said, right? We when things are going up, it’s fine when they start dropping, what if there was less rich, you’re really screwed. But generally for tech right now, there’s not much leverage at assist, there’s just a massive re correction in valuation. Right. And that’s much more similar to 2000. And that’s great. It means those who ought to survive will survive, you know, at a fraction of what they were before, and those that do not have a business will just die
12:30
100%. On top of the the leverage and speculation. It’s all compounded by regulatory issues, right? In 2008, subprime assets were being rated as triple A right, and now in this environment, crypto assets had a lack of regulation, when you have these three factors, compounding, it exacerbates everything, and now the reckoning has arrived.
12:51
And the Congress is united. Do you know what the conservatives and liberals have in common? They’re both anti tech.
12:57
Yes, yes. So So Robbie, give us some of your predictions, macro predictions, then we’re gonna jump into tech, but give us some macro predictions for 2023.
13:05
I intentionally tried to avoid predicting what will happen next year exactly for the same reason that I shared with you. At the beginning of this episode. Our predictions are always based on a linear extrapolation of what’s happening around us. But in reality, some stuff will die and something is going to come out of left field, a good old, black swan. But what is happening around us in the world right now? It’s not looking great. Right. There is a massive debt crisis in the developing world. There’s a massive energy crisis in Europe. We could see anything from a gas rationing, Germany’s stifling production to possibility of a small nuclear war with the possibility of China taking over Taiwan or even a milder version, right, blockading Taiwan and disrupting TSMC. Yeah, I don’t think there has ever been a bad dependency on a single product as there is dependency today on chips coming out of TSMC 90% of that dependency is not just it’s both for the West and for China, like percent of Chinese chips are imported from TSMC. Those chips are going into everything we use. TSMC to me is the scariest theory is single points of failure that I can think of today, because it’s not it’s not replaceable, not like gas disrupting, from, you know, Russia, and we’re just going to build it up in Qatar, along with the World Cup. The challenge here is we’re trying to build factories in the US it’s going to take us forever and they’re going to be not as great as what Taiwan can do. That definitely scares me more than anything, but you never know which of these will hit which of these will not hit. I can’t tell we’re gonna
14:39
have to rebrand this the doomsday episode around me. No, but I mean, fair point. If we can’t refresh our iPhones every two years that’s gonna be scary outcome here rally. Yep. Okay, on the tech Let’s start out with something fun. Our friend Elon at Twitter Rami, what do you think? Is Elon the scapegoat? Here the Savior or He ultimately liable for a platform that is flailing
15:03
Oh, liable. But people love Elon, aside from the media, if you think every year is poor, but most people really, you should see the memes about him on Tik Tok. You know, people love Tesla. I think talking about Elon, just in the context of Twitter is pretty unfair. But let’s take a step back. This guy’s build the first successful us automobile company since Chrysler, which was built in 1925. Right, SpaceX is launching a rocket a week, like he has done more than anyone to combat climate change, and also to save democracy in Ukraine by providing them with internet. Great, right. And people recognize that and people like Elon for them. Now, everybody wakes up every once in a while. And he really not. Twitter is a lousy medium. Twitter was never top three social media platform. And as much as tech people, tech folks love it, and journalists love it. It’s a place with so much nuance. It amplifies misinformation. It rewards conflict, how do you become a successful person winner today pick up a fight, right. And so the platform has been dominated by those traits well, before he joined. Now, he did try to I don’t know what exactly he was thinking. He did his drone and stuff, he kicked drones of the classroom, it is wrong of journalists. And so the media’s coverage has been very negative as one would expect it. Whenever you look at Elon and Twitter, having worked at my previous startup was acquired by Yahoo. I will remember some years it’s very first acquisitions. I really spend a lot of time seeing her trying to fix what was a feeling media company, I’m very negative on on the media industry, or any website that is trying to make money from ads. And Twitter, I think is just a waste of people’s time. And unfortunately, Elon is demonstrating how much it’s a waste of his own time as well. And that’s really unfortunate. But this guy should be spending his time. There’s you know, he always talks about extending life’s possibilities and whatnot, did better is not the place to extend lives possibility.
16:59
Well, I mean, clearly, it’s a platform for abject manipulation of the masses. I mean, it’s most obvious form, you can see it every day. And it’s just so easy to manipulate people now. I think in 2020, it was like question grenades, people would throw out a question and oh, my gosh, all these people would pile on and create threads and influencers didn’t have to do any work in 21. It was actually like authentic sharing, like how to do various things. And now in 22, it feels like just a stream of threads on life and business advice. I wonder how many of these are written by chat? GPT? Actually? Well, it’s my question for you is, so he’s a part of open AI. So is this a part of that strategy? I don’t know how open or closed the API is for Twitter. But it’s the ultimate place for discourse. I mean, even though they were trying to create the world’s greatest Town Hall, and what they really built was the world’s greatest disorderly saloon. It’s still an approximation of human behavior and could be a big advantage for open AI. Look, I get it, but it is in the public public domain. So it’s arguable that anyone that can index content would have access. Yes,
18:04
I get it. Jeff Bezos bought the Washington Post. Elon Musk bought Twitter. It’s appropriate, say March 1, I think people really are exaggerating the power of the platform relative to the power of the voice, right? Twitter is not a powerful platform. Trump with a powerful voice, right? Elon Musk has a powerful voice. Kim Kardashian is a powerful voice. Kim Kardashian is not on Twitter, she’s on Instagram, by the way, because her voice is better tailored to Instagram or imagery to imagery. I’m on LinkedIn, very powerful in LinkedIn, that’s sort of the place where if you didn’t make it in the top four, that’s where it sort of you play the second league, but but really, I found LinkedIn to be a phenomenal place to to have the kind of discourse I want to have slightly more nuanced, a little bit more work related. But I think the idea that human would buy the platform to improve it or not improve it, it’s just to me is so ludicrous, so ludicrous. Like, how are you by what by making product decisions, you will improve the platform? It’s, it’s to me it’s in the same category as Mark Zuckerberg trying to reinvent the metaverse as the new platform because Facebook doesn’t own a platform and in the physical world, like it’s just not how consumer products evolve or take shape. It’s way more. It’s way more serendipitous than that.
19:24
So So candidate for biggest, m&a blunder of the year acquisition of Twitter by Elon,
19:29
definitely the base base of $50 million. I don’t care about his loss of money. I care about getting time. This guy’s gonna waste so much of his fuckin time.
19:39
Yeah, but the mistakes hurt. And they become lessons. Right? Like, there was another individual that was called the greatest entrepreneur of our time. And it was Steve Jobs, hates horrible mistakes, and in some ways, He parlayed those mistakes into successes, right with next and
19:58
SBF as well. Oh, Okay,
20:00
so So Steve Jobs Apple let’s let’s talk apple. Let’s talk Microsoft we last year we touched on antitrust, you can choose who to start with, where does Microsoft and where does Apple sit right now in potential antitrust exposure.
20:13
I’m really impressed with what Microsoft accomplished with X Box, by the way, but this is a company that never made hardware before. All its hardware attempts roll abject failures. When I was in college, actually, I actually interned at Microsoft and worked on the Dreamcast, which was the predecessor to the Xbox it was this first project ever. In the it’s really done an amazing job building the x box into a platform that people love. Right now. They just as the brief summary is they’re trying to buy Activision, which, you know, Activision Blizzard, which makes Call of Duty and other console manufacturers, like Sony, are freaking out that Microsoft could basically limit limit the limit the game to the Xbox, and as a result, they’re going after the Clayton Act, which basically, you know, Trust Act preventing mergers, that lesser competition, and I don’t know what where that will end up, I think the acquisition might go through my thought was through. But what’s interesting is the following, right, Microsoft, today’s console, the Xbox is probably number five or six, there is so many other ones ahead of it, right steam deck, Sony PlayStation, Nintendo Switch, they’re all ahead of the Xbox, and so on in your game is not really the issue of it. Microsoft, however, is the number one in the streaming game category, which is tiny, but it’s the fastest growing gaming category, like streaming games, where the game is not running on the console,
21:26
Microsoft is number one.
21:28
And the challenge here is Microsoft does have a very, you know, anti competitive moat, which is Asia. But Microsoft has servers all over the world, which is really well tied to streaming games. And so I think the story is still unfolding a console meets a game is really secondary, it’s going to be ager versus ager as plus a console that will end up being a very interesting leverage of dominance in one market to to own the other. It’s very different than Amazon, by the way, like Amazon. I think a newer was your was pointing this out, you always tell me, you know, Jeff Bezos started two companies, not one, right, Amazon and AWS, but the synergies are out. The synergies are interesting, but they’re not. They’re hard. They’re hard to sort of argue in a quarter, you know, is it hard to convince somebody without reasonable doubt that they’re really
22:18
I mean, the the two other companies that seemingly they’re trying to build our healthcare company, and also a streaming company, but streaming video. So AWS is complimentary for the streaming business line, but
22:29
100% 100% Well said, it’s different. It’s really complicated. It’s very nuanced. First of all, Apple doesn’t require anybody, you gotta give it to them. They have just built the thing. Yes, they build the ecosystem, and they build ecosystems, I have nothing but respect for him for doing it. And so the Clayton Act doesn’t apply here. Folks are going more after what’s called the Sherman Act, specifically, section one, which prohibits contracts that restrain trade. So the argument folks are making is Oh, Apple is asking us to sign this agreement that says we have to give them 30% of our revenue in order to be able to appstore that restricts rate, I think lawyers will debate this over and over again, and it’s gonna get very nuanced. And most people are not really gonna understand that the arguments, but it’s the far fetched, they build that app store. And they’re asking people to pay if you want to be on it, and you don’t have to be on it. There’s another device called Android. And there is another device called Samsung, that you can go around and if you want to, and they have very strong arguments for why they want this closed ecosystem, or why they don’t want sideloading. And also Apple is actually has a different in a very in a different way. Apple’s like like Google is all about, like there is a Zeitgeist in the world today about privacy. And Google is against that, like Google’s Terms of Service are the worst in the planet. But Apple actually is in the right side of history when it comes to focusing on consumer privacy, privacy, actually, like Apple regulators, like the fact that that Apple is blocking Facebook, from tracking its users across apps. And Apple has shown a lot of flexibility. Right, working with regulators in different parts of the world, to sort of appeal to them. You know, I think there’s something there’s some something that use it the other day about possibly switching from USBC solely from the proper lighting and on the iPhone to esbc. Because they’re going to ask him to do that, or getting payment apps access to NFC chips. I think it is something in Korea would like. So it’s very hard for me to see Apple being like really decimated by the entire class situation.
24:29
I mean, they’re very smartly politically positioned. I’m sure some of it was good fortune, maybe some luck, but they have created this situation to a certain degree that really protects them and sets them up. Well, I mean, right, who
24:43
would have thought would have thought that Apple would be bigger than that Android in the US?
24:48
Well, well, that plus like Android is is a complement to Apple at this point, because it it helps them avoid any antitrust exposure, and it allows them to keep their closed ecosystem where they Take exorbitant percentages of anyone that builds on it.
25:03
I will say 30% is a little higher, to be honest, I think when you’re investing in
25:08
a marketplace business, what what sort of take rates
25:11
15 to 20. I mean, it depends on how much like you really controlling supply and demand. But typically, you know, 15 to 20%. But it’s not a marketplace. They’re not, it’s a version of it, if Apple was simply an app store connecting consumers was was was was app makers, they would become a marketplace, just a pure marketplace connecting Person A was Person B, but Apple was a gated community saying this is the right run, you know, on on this user base that we own,
25:38
they own the interface, they own the only way to access the marketplace and how you do so. So Robbie, we got to talk a little crypto and FTX. Here. You had a very nice profile in Fortune, titled a VC who’s been panning crypto since 2017. discusses where he’s investing now. I think the best part about this article was the photograph your photographer deserves an award
26:03
correct. And what happened there is I got this notice from Fortune saying, Hey, we saw this post, you said shitting, on crypto from 2017. And seeing the whole thing is a scam. And we’d like to write an article about it. And I was like, sounds great. And they’re like, Are you available for a call right now? And of course, I hopped on a call. And then they said can you send us a picture and I didn’t have a picture and send them what I have like this is crap, can you please take a picture and lo and behold, Nick Moran is walking into my office because he’s in town in Berlin. And Nick Moran takes my phone and takes this amazing photo that is going to be you know, an iconic one for the fun for the ages. So thank you for Robbie. I want NFT rights to that photo, certainly. And we’re going to try and I will lie to you in the firm if you’d like. Worse, I mean, the blockchain allows you to do that. Right? We can have a smart contract and a licensing and the rights will be available to everyone. It’s going to be great. We’re going to change how we do properly.
26:50
So the key question is Rami, where are you investing now?
26:55
I mean, of course it is finally
27:03
always a pleasure to have Rami on the program and hear his insights. Tune in for part two of our discussion where we cover this decades Biggest Losers, Google’s competition with chat GPT Andreessen versus Tiger, and we do a quick fire round of sectors Ramiz, bullish and bearish on in the year ahead. Hope you can join us for part two. Until then over prepare, choose carefully and invest confidently See you next time.

Transcribed by https://otter.ai