On this week’s Partner Meeting episode we cover the following topics:

• Recent tech layoffs and whether or not it’s an indicator for what’s to come
• CPI data that suggests inflation is slowing
• The FTX debacle and what that means for crypto
• Business Lesson: building marketplaces

Show Links:

• Podcast: The King of Marketplaces with Fabrice Grinda of FJ Labs
• Books: The Cold Start Problem: How to Start and Scale Network Effects by Andrew Chen

Transcript (this is an automated transcript):

MPD: Mikey. All right. It's been a momentous week. Coming off the back of the Twitter round of layoffs. We now had the Facebook layoffs. What's happening? Why are the companies pulling the bandaid off on this right now? What does it mean? 

Mike Rogers: Yeah, it's a good question and I think we take a step back and think about what's been happening in technology for the last 

Brett Palatiello: really 10 

Mike Rogers: years, maybe 15 years.

If you look at companies like Google, I 

Brett Palatiello: don't think they've actually ever had a down 

Mike Rogers: quarter of revenue year over. So what does that mean when a company grows that fast? What do they have to do? They have to hire people for the anticipated future growth of the business. And because tech companies, especially venture back businesses are growing at a hundred, 200, 300% a year, which if you look at that versus a normal business that's, say a bank or something like that's growing at maybe 10 or 15% or 20% a.

How many more people does the tech company need to hire to support the future growth of two, 300% versus a, more steady state institution that might be growing at 5, 10, 15, 20% a year? It's a lot. So when the, when shit hits the fan like it is right now, and growth is slowing, which was is the intention of the Fed, right?

They want to slow growth to slow inflation. And the higher growth industries are going to feel that on a percentage basis, much more so tech companies that have been hiring for 300% growth now need to say, Cool, what happens if we don't grow next year? And that car's moving a lot faster, and it's gonna hurt a lot more when you hit the wall.

So the layouts we're seeing in tech makes sense to me because these businesses that are, we're hiring for high growth are no longer going to experience that high growth and when, Yeah. I think there's a lot of pandemonium in the news right now about how all things are so bad in tech world. These businesses are still doing good.

Facebook's still doing great. Twitter's a little bit of a different situation with you. I must take over, but the high level, Some of these big tech companies, just because they're laying off doesn't mean that businesses are necessarily in bad shape. It just means they don't think they're gonna grow us fast next year.

And you know what? 

MPD: That's okay. Does this mean now that we're seeing, I think the Twitter situation's all different. Obviously there's a whole unique situation with that. Yeah. Facebook comes behind and says, Hey, they have been aggressively investing growth really around the metaverse. They slice a big chunk of their comp, of their workforce out.

Is this the beginning of a pattern? And one of the reasons I ask that is it's not just, there's a market trend of things happening, but there's also a social trend. There's a cultural thing. If you're a CEO of another tech company and you're thinking you might have to do layoffs, you know when you do it, it's right after Facebook does it and Twitter does it.

Yeah. Because you don't look like the cover. Yeah, it's cover. You don't look like the executive who's just shit in the bed. While everyone else is growing and thriving it becomes part of a macro trend. You're doing the responsible, normal thing in the market and you just look like you're managing.

So are maybe, are there Penta layoffs coming? What does this mean for the rest of the industry? Oh, yeah. I'd 

Mike Rogers: say across the board we're seeing companies lay people off. And I agree with you that a big piece of that is not that they necessarily need to, although let's touch on that a little bit. I think the other big trend here that we're seeing is it really just an investor sentiment shift.

So I'd say from 2010, call it coming outta the great financial crisis to today with interest rates at zero capital was extremely cheap and easy to find, and cash in the bank was worthless. It was literally interest inflation of 2% was above interest rate was above the risk free rate, so having cash was worthless, so you had to put it somewhere in order to get a return.

What that led to was a lot of people putting money into things like technology, and then eventually at the bottom of the risk or the top of the risk stack was crypto. So we won't touch on crypto. We're gonna stay on jobs here for a second. But what enabled was a lot of people and startup founders to continue to raise more and more capital on growth.

And we called it, and everyone's heard this term before, but growth at all costs. 

Brett Palatiello: So 

Mike Rogers: the only metric that investors cared about in the market was revenue growth, not unit economics, not profit, nothing like that. So as people had to drive higher and higher revenue growth, they needed more people to do. And now we are shifting investor mentalities with interest rates at 5% and cash being much more valuable as you can go buy a tea bill right now and make 5% on it.

So what happens? Investors say no, we don't want you to grow at 500% a year. We'd rather you grow at 50% of a year and make money because that cash is valuable to me as an asset now. And that shift changes one big operating cost. That is the biggest operating cost for any business in the market. It is people.

So what do they do? They're gonna have to fire people, lay people off, whatever words you wanna use, and that will increase the net operating income for these businesses and create more cash. But it will slow growth. It's a trade off, but investors don't wanna see growth at all costs anymore. Because of that, we're gonna 

Brett Palatiello: see more lays, but we're also 

MPD: living on the front lines of this.

A lot of people are reading these headlines, on their news. At Interplay Fund stat we had 2000 people apply for a job in October, and that is up from our norm. We always have pretty, a lot of people interested in roles, but it was 2000 people. I think that is a signal for the labor force shift that is happening right now.

A hundred percent. Are you seeing this on the front lines out as in you. Companies you're talking to, are you seeing it more on the local micro level layoffs or company things are happening. 

Mike Rogers: I'm getting a lot of the Hey, we did a rif. Here's our top three or four people that we laid off that we think are really good, but we just don't have a seat for them anymore.

And then I'll take those people and I'll try to find homes for them at other portfolio companies might be hiring, except again, back to human sentiment here. People are like if they're really the. Why they get let go. So I think like in any market, the way people are thinking and feeling is really important to overall economic activity.

As much as we wanna believe that it's anything more than just how we feel as a group of people. That's a big piece of it right now. So as we all feel like the market's getting worse, as we hear these scary economic terms and we read the news and it tells us that impending. People get more conservative by nature and thus it is harder to hire field roles and grow the economic activity.

I think we will need to see some sort of light at the end of the tunnel before that machine will start pushing in the other direction. So yeah, there's people floating around and by the way, a lot of them are really talented and I think the good ones. 

MPD: Yeah. I wanna put, not a market, but an operational comment.

I don't care if com if people get fired. I used to think that was a stigmatized. When I was younger, I really believe hardworking, passionate, organized people are going to be successful. And it's just about finding alignment, the right role for the person. And there's probably a lot of people who are they landed in an okay role for them that maybe they're not passionate about it, maybe it's not their superpower.

So the hope is for folks who are being fired Our passion and willing, willing to lean in there. There is a psychological thing, like if you're looking to be lazy, it's not gonna work out no matter what role you're in. But if you're looking to build something and kick ass I hope people find better alignment in roles where they're thriving more and they're happy and successful.

I'm a hundred 

Mike Rogers: percent in line with you, and I think as a public service announcement, come to interplay, we'll help you find a home. Whether it's here at a portfolio company we're actually doing quite a bit of this. 

MPD: A hundred percent. Awesome, Mike. Thank you. All right, Chris, what is happening in the world?

Hello, Mark. 

Chris Zhang: It's actually been a really calm week. Of course there, a lot of the focus of Mark is on crypto, and I'm sure Brow will talk about. In macro markets, it's been come for the past three or four days, up until the CPI data that was released yesterday, Thursday, November 10th, the headline c p rose, 0.4% month on month versus 0.6% expected.

And year on year, that's basically 7.7% versus 7.9%. Obviously a good data point. What's more important is a core CPI X food and energy that rose six point to 8% year on year versus 6.5%. Which is especially positive compared to the 6.6% rise in core in the months of September, which was a 40 year 

MPD: high.

But all of this is the headline of all these numbers is inflation is slowing. At least we have one data point now suggesting it. 

Chris Zhang: But we're still very far away from the long run average per, which is around 3.6%, and even further from the feds target around 2%. So we've got a long way to go, but this is certainly a step in the right direction.

How does the market react to that while on the back of CPI data peak interest rates in the future's market and are now slightly below 5%? So that's versus a week ago, which is standing at 5.2. That translated into the equity market which, which turned out to be a 5% intra day rally the biggest in basically two more than two years.

90% of the stock in the benchmark index were in the green. That brings the year to date return on the s and p index to be bowel negative 17.5%. Still a long way to come back. But we're at least one step in the right. 

MPD: Okay. One of our most avid listeners, aka my wife , came to me and said, Hey I was listening to last week's episode, and Chris has changed his tune.

Yeah. He's got a new level of positivity in the market. Where the hell did that come from? And that comment was happening in the backdrop of some major layoff announcements. So we're hearing a narrative that market's improv. But it seems like the sky is falling for the labor in the labor market and people with, real world, real lives.

How do the numbers on the screen reconcile with reality? Hi Laurie. Great catch. 

Chris Zhang: To answer your question, basically let's, let me unpack in two different ways. One is you've got to look at more short term media term long. I think last week the part I probably didn't explain too well is that I think in the shorter term, uncertainties have dissipated and there's a way, there's a path to higher in stocks that wasn't very clear to everybody before in the media term.

Long term, we've yet to see, we've yet to see a lot of earning adjustments that were expected in q3. So let's see what happens in Q4 earning. That could trigger the next reversion to the bottom and potentially, in terms of concrete numbers, when we're looking at s and p, maybe back to 3,500.

So in terms of labor market, you're completely right. We're obviously, the mainstream media is capturing all these sort of potential layoffs in especially across tech companies. But if you look at really the, macro across all the companies out there, labor market is still very, We're not seeing unemployment pick picking up at a rate that's unexpected.

We're not seeing jobless claims going through the roof. None of that stuff. All that stuff is so very much healthy. So I would suggest that, we, when we look at the economy and we look at trying to forecast earnings six months down, nine months down the road, we look at across the.

Not just on Twitter, on Facebook on, on a few select companies. That's not to say that I personally don't expect unemployment to take up. I think that's to come. But there's the pace of which unemployment goes higher. I think currently there's a way, there's reason for us to expect that to be very much.

So we won't see, all of a sudden, 

A knee jerk reaction to 10, 20% unemployment in a country, back to the days of the Great Depression or 2008. As long as we get there, in a more slow expected fashion, I think there's a way we can avoid 

MPD: a lot of pain in market. I've been having a lot of journalist conversations lately.

I was on, in an article, an insider this. And the conversation, the theme that a lot of journalists are curious about is the tech, are the tech layoffs a bellwether for broader sweeping layoffs across the economy? Yeah. We're all know, we all know about the meta layoffs. I would argue there's a heck of a lot of idiosyncratic meaning companies, but specific things happening at that company.

Yeah. But we're also seeing it in other places. Are we entering a phase with these higher interest rates and whatnot, where, we're gonna hear everyone jumping on the layoff bandwagon. Management teams are gonna be less reluctant to do it because there's already a lot of other news out there, which gives 'em some shelter, right?

Are we gonna hear layoffs of Coke, Coca-Cola, and everywhere else, every other mainstream company coming? 

Chris Zhang: Yeah. Great question. So I agree with that. I think. Has historically been a leading indicator in many different sort of macro events and layoff. And Hill employment is certainly one of them, and the reasons, fairly straightforward.

These tech companies are, even though they're, a big chunk of s and p, they're still more growth oriented. A lot of their valuations are contingent on hyper growth going forward. And as, as a result, if you're familiar with sort of the valuation models you're, they're more sensitive to interest rate.

So as you go high, as interest goes higher, the margins get compressed, the valuation goes down, and the one way to salvage the situation is to cut costs. Layoffs and restructuring of the company. That will also translate into, for instance, retail and banks. Other sectors that are more sensitive have thinner margins that are more sensitive to interest.

So yes, we, I think the expectation should be that we will eventually see a more broad based layoff, but hopefully it won't be in the fashion that we saw in 2008 or the great impression. Great. All right, 

Brett Palatiello: Chris, 

MPD: thanks for the update buddy. 

Chris Zhang: Of course. Short and sweet. See you next week. 

MPD: Okay. And just a reminder for everybody, Chris is an SCC registered raa, Nothing he said should be considered.

Financial advice, blah, blah, blah, blah, blah. All right, Brett, big week. Let's talk block. 

Brett Palatiello: So this week was probably the worst week the industry has has had to date over the past 10 years, arguably. So a little bit of context. Sam Bankman Fried he's the CEO of ftx, which which is a centralized exchange.

So I think a lot of people are more familiar with Coinbase. They're one of their competitors. He's been the poster child of the industry. He's they ran a very lean small shop, but they managed a tremendous amount of money. He was a billionaire. I think he was worth about 16 billion.

He also had a hedge fund called Alameda Research. His background is in high frequency trading. Some of the allure too was he practices effective altruism. He planned on giving. All of this wealth that he had accumulated. And ironically, I guess in the end he did. But so to set the stage a little bit there.

Also I should also mention just to put in context again, the terror collapse earlier this year which broke the bank for a lot of hedge funds and asset managers. Just keep that in the back of your mind as as I'm going through this. So last week a report came out about Alameda research again SPFs hedge fund that he.

That they had a tremendous amount of liabilities relative to their assets. Caroline, the CEO of Alameda, came out and tried to reassure everybody that everything was fine. SPF did the same. But it wasn't until Binance CEO cz as he is known on Twitter, that's his initials began selling his FTT tokens which were the tokens created by ftx.

After certain revelations were made so the token began plummeting. People began making withdrawals. FTX had to start pausing, withdrawals. So essentially it's not exactly a bank run, but it was similar to a bank run where people were trying to get their deposits out very quickly.

And before you knew it finance was looking to purchase or acquire ftx which. Was a little crazy to fathom considering how big FTX is and how much money they had and how much reach they had in the ecosystem. But shortly after they said, They were no longer going to do it because things were worse than they had thought and they couldn't reconcile a lot of the things that were going on internally.

The exact numbers of Alameda and FTX ties are. Coming out leaking out a little bit, but essentially what happened was or supposedly what happened is Alameda, when when Tara Luna earlier this year collapsed, also blew up apparently they were over levered as well. So what SVF did was he tried to plug the hole and give them FTT tokens that they can then use as collateral.

Continue to invest and hopefully make people's money back. Mind you, ftt is a token that FTX creates basically at a thin air. It's not like they plugged the hole with a whole bunch of US dollars. It was basically this token that's. The utilities to get a reduction in fee trading fees on ftx.

And I think you, there's a burning mechanism. So the fees that get taken in from FTX or a portion of them are used to burn the FTT token. Nevertheless, it's still under the purview of FTX and it's still something they, they created from thin air. So shortly Not too long ago FTX filed for bankruptcy for chapter 11.

So did Alameda Research. And we're still starting to see a lot of ripples around the, across the industry about who, who had deposits there. Because there, there's still uncertainty about who can get their money out. Also a lot of people made an investment or direct equity investment into ftx.

People are marking those to zero. We saw Sequoia market to zero. And Sam appear spf appears to be trying to do what's best for the customers and trying to make them whole before any investors or anything like that. So hopefully he delivers on that promise because it would be a real a real dent in the industry's credibility because SPF was quite actively involved in Congress.

For good, for better or for worse. So what people are worried about is. SPF who they believed was a more reasonable player in the space, rightly or wrongly is clearly somebody that cannot be trusted. It, it puts a big stain on the industry and hopefully people can step up and get congress to realize that this is exactly why we're building what we're.

Because it takes away a lot of that power and makes all these things that we didn't know was going on at Alameda. And FTX makes them transparent. It's a really tough week for the industry. FTX was a big player in the Salwan ecosystem. They weren't probably for a year now.

I think people are overblowing how actively involved they've been recently. There's some collateral damage there because SPF loved Solana. And there was actually a rumor at some point that FTX was selling so tokens to prop up the price of the FTT token. So that wouldn't collapse.

Nevertheless, it was a crazy week. 

MPD: Let me recap this though, cause you're going down a whole rabbit 

Brett Palatiello: hole here. Yes. Big picture. 

MPD: You've got a exchange, which looks a little bit like a bank to an outsider and that they're holding deposits Yes. Is over levered. Yes. One of their competitors figures it out.

Makes some moves to draw awareness to this. Everyone suddenly wants their deposits back at the same time. It's effectively running the bank. Yeah. The company does not have everyone's deposits and has essentially filed for bankruptcy. Yep. And the issue is the guy at the top. Who may have had no malice in this.

It's not a case of theft as far as anyone can tell. It's just, over levered took too much risk. Yeah. Was a figure ahead in the industry. And now a lot of people are saying, Wait, this guy doesn't, no one in this industry can be trusted. Yeah. When the reality is, it was a classic over leveraging.

So what does this mean? What does this mean for Bitcoin and Ethereum? Prices are down. What does this mean for the industry? A little longer term? Forget the Congress optics. They'll have to work through that. That's all in the. What are the implications of this? Cause everyone's hearing the story now, but what 

happens next?

Brett Palatiello: Yeah, so I think it's it's a bad thing overall. It's gonna, it's definitely the people that were on the fringes that wanna come into the space are definitely less enticed to do so now because the centralized exchanges are supposed to be traditional ways people interact with Say, trading stocks and bonds and things like that, so they didn't have to deal with the dirty world of defi or at least try and dig around there.

But from a positive standpoint, I think it's good that we're washing out a lot of this bad leverage and now we can actually focus on building things that are useful for the real world instead of this circular leverage cycle that we've gotten into. It's all. None of this stuff is really financing any real world assets or anything really super productive or at least the amount of money that's been built up in this space.

It's all been a lot of bad leverage. So if anything, I think this gives us a clean slate to start. And now we just need to prove that this technology is worth its salt. Instead of just being a big casino for a lot of people. 

MPD: I appreciate that perspective. The leverage ratios he had at this, are those regulated the way banks are regulated or is that the issue here?

We need some, this needs some adulting. 

Brett Palatiello: Coinbase, the Coinbase ceo Brian Armstrong came out and he made a good point, which was a lack of regulatory clarity in the us. What it's done is it's pushed a lot of people offshore. Into these far less regulated regions of the world. And this is creating some sort of systemic risk here in the us.

We're not immune to obviously things that go on overseas. Yeah, I mean it, I definitely think it, it, hopefully it doesn't usher in a wave of regulation that's an overreaction to what has happened. Hopefully we still have people that are a little bit more measured and understand what the space actually means.

What it's trying to do because I do think there's a tremendous amount of benefits that Congress should appreciate like transparency, right? A lot of people talk about, one thing is called proof of reserves. And what that does is you cryptographically prove that every dollar you have in your account or in your business is backed by actual cash.

So there's a lot of things that are really interesting that could potentially benefit everybody. And hopefully those don't go underappreciated after. More to come. We'll be watching this 

MPD: one. Thank you, Brett Fong. All right. What are you gonna teach us this 

week? 

Phuong Ireland: So this week we're gonna talk about marketplaces, which is fresh in my mind because we're actually building a couple of them with two of our incubator companies.

Now marketplaces are really great because they bring together buyers and sellers in a way that, can really quickly scale if they're executed. And they also allow you to build product and service businesses without owning a ton of inventory or any at all, or having a ton of employees.

But marketplaces can be a little tricky cuz they're a lot of pieces to figure out. Obviously you need a good product with a great user experience and all of that's important. But a great product is just table stakes. It's not the most important driver of the business. I think the most important part is really your ability to get boatloads and boatloads of people using your product.

And how do you do that? That's a big nut to. In his book, The Cold Start Problem, Andrew 10 talks about some interesting strategies that some really well known marketplaces use to build their base. And they did that by solving the cool start problem, which is basically the dynamic that, that, in a marketplace, sellers will only come to your platform if they're allowed of buyers, and buyers will only come to your platform if they're allowed of sellers.

But in the beginning you have neither, so it's like a chicken or egg thing. To solve this problem, here are three steps that you can think about. Step number one is to figure out how to leverage network effects to build and grow your marketplace. So without network effects, you're not gonna be able to u to grow your user base fast enough, and you're gonna have to spend a ton on customer acquisi.

Now network effects is the idea that products get more valuable as more people use them. So you have to get that flywheel growing going. Like how do you exponentially add people to your platform as more and more people join? This is we can illustrate this by talking a little bit about Uber.

When Uber first started, there were only a few drivers, and so customers would get frustrated cuz they have to wait too long for a ride, then they cancel their rides, then they leave the platform. But the more drivers you add, the better experience the rider get, which allows them to gain more riders, which attracts more drivers.

And that's the flywheel that you want to start building. Now tip number two is to start small. Don't cast too out of a net. So you start with small groups of people that are the basic unit of your marketplace, right? So it could be a geographic market or a college campus. If you're a Facebook or a functional group, if you're building a SAS product.

You use this user group and you test your product with them, get tons and tons of feedback on their experience. Use that to perfect your product. And then lastly, once you get this group to love your product, then you just add another, then another, and then another until you're growing your user base exponentially.

Growing kind of group by group is really effective because it allows for growth in a really dense, in organic way. You can you really have a higher chance of viral growth because the user groups are in closer proximity to each other. So then you're able to attract new users as people see their friends and their coworkers and their colleagues using your service, and then they also join.

So yeah, those are the three tips I have this week. 

MPD: Big marketplace fan over here. The network effects you're talking about, not just make these companies accelerate and growth, when it starts, when the flywheel starts, it ch it, it's really hard to disrupt them once you, you got companies out there that, in my opinion, have very outdated products.

Take like an eBay, I think their interface is Yeah, wildly out. Yet no new players can really disrupt them because the marketplace is just so powerful. The network effect is so powerful and what that translates to is not only a real moat, it's one of the strongest barriers in business. It's understood by investors that this moat has real value.

And so these companies tend to garner bigger multiples at Exit. So if you get into a marketplace company or you start a marketplace company, the backend value can be more. Than if you do a different type of company. We had a gentleman named Frenda, a friend of mine runs a VC firm, FJ Labs who is like a marketplace guru on this podcast.

And he said a bunch of things similar to what you said. For folks who are interested in marketplaces and going deeper, I recommend you go find that episode we can probably link to in the show notes. And listen to that question for you. F. Chicken and egg, right? You're starting out a marketplace you're a cold start, right?

You're at zero. You start with supply or demand. How do you get that going? What's, Is there too much supply or too much demand at the beginning? How do you balance that? 

Phuong Ireland: Yeah, I think that, just in kind of that Uber example, how that shows is that you really wanna concentrate on the supply side, cuz that's what's gonna attract your buyers, right?

You make sure you have a critical mass of supply and that attracts your buyers. And then the more buyers you get then you'll keep adding more suppliers and then that'll attract more buyers. I think just really having that value prop in terms of what you're offering from a supply point of view is really important.

MPD: Love that. I think that's dead on. One of the other pitfalls people hit is they'll do the supply first, but they'll do a huge amount of. Take Uber. Imagine they get a million drivers on and have no rider. The drivers are gonna defect. They're gonna be unhappy with it. Exactly. So it's this little stepping stone.

You're leveling up both sides in sequence, in a cadence. It's a little bit of an heart to it. Thank you for this. This is awesome. 

Phuong Ireland: All right. Thanks so much.

MPD: Awesome, lively conversations today. I hope you enjoyed that. Stay tuned 

Brett Palatiello: for.

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