Have We Reached Peak Uncertainty?
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Welcome to the Risk Reversal Podcast. I'm Dan Nanton, joined by Guy Adami. Guy, how are you? I'm really well. I'm excited to be here with you. I know you are. We have a very special show for you today. This is...

Monday in the afternoon, we just thought we'd kind of check in here. This is dropping on Tuesday morning. Guy and I are going to do a quick rundown about a very interesting day in the stock market, reversing all of the reversal, Guy, from Friday, at least it is at 3 o'clock on Monday afternoon.

And I had a great conversation with my good friend, Jesse Chassie. He is the head of equity capital markets for the tech group and of VC coverage over there, RBC Capital. They are a fine sponsor guy of this program. And also I've been doing some consulting work with those guys, that group for years and years. So stick around that conversation about the IPO market, whether it's going to open up, what are some of the big trends within technology? Are we going to have dual tracks with strategic M&A? What is the regulatory environment look like for both of those? But guy,

we got to look at the stock market environment today we opened up 50 basis points we are now down in the s p 1.7 that is a huge range we also talked about this morning the s p options that close this friday afternoon we're only pricing about a two percent move in either direction we got a bunch of earnings we got tariff deadlines and we have the all-important jobs report friday morning that two percent looked

a little light here because we have a VIX now at 22 and a half.

Yeah, it's a fascinating day. As you said, I'll put numbers around it. We got up to almost 59.90 in the S&P. We'll call it 59.85. And we have now sold off 130 S&P handles to where we currently are now. And you just don't see days like this that often. And it does mean the VIX is going to trade where it's trading. And one of the things we've been saying now for the last couple of weeks, if not the last few months, is that we're going to be trading at a rate of 1.5.

is that volatility is going to be a story in the broader market. And, you know, day here, day there, it seemingly is. And my fear is it's going to be more than a one-day event at some point, and we're going to be in this heightened state of volatility. And the market, I don't think right now, is basically set up to deal with it.

Yeah, again, it's funny because you have a 10-year yield guy at 4.17 right now, and you would think that that would have been constructive for equity evaluations, but a lot of air is coming out of some of the biggest trades or one of the biggest trades that powered a lot of the gains in the S&P 500, two consecutive years of 25% returns. As we're speaking right now, NVIDIA is down nearly 8.5% on the day. Now, Thursday, the day after they reported earnings, the stock was down 8.5%.

It rallied 4% on Friday when we had that big reversal, but it's about to take out the lows of this past week or so, the post-earnings thing. And then if I look around the semi space, I mean, I see Taiwan Semi down 4.25%, Marvell that reports this week down 5.5%.

Broadcom, this is going to be a big one. You and I are both focused on this one. Down 6%. They report also this week. So it seems like the semi-trade is coming undone right here. And you know what? Like we all thought it was going to be. It had to be NVIDIA, the last battle fought.

It's happening right before our eyes. And on that one big downdraft day after deep seek, Nvidia lost over $600 billion of market cap in one day. For perspective, they're probably just a handful of companies in the world that are that big in the first place. And since then, we've seen a couple of $300 billion days

and what have you. And this stock, which was $153 stock in January, an all-time high, had that what we call engulfing pattern to the downside. And quite frankly, Dan, it's never recovered. And now we're at levels we haven't seen probably since September of last year or thereabouts. So I think it's interesting. And you bring up semis for good reason. The semiconductor trade

generally has not been a performer now since last July. And I think that's fascinating. I don't think a lot of people realize that. Yeah. And I guess, you know, if NVIDIA was the pure play and the picks and shovels, you know, secular shift of generative AI, you know, just like CX,

Like semis, Microsoft hasn't made a new high since July. If you look at Amazon and Google, they both sold off after their CapEx guidance that they gave, right? So there's air coming out of this trade, which is why I think that Marvell and Broadcom are so important. I think we highlighted it on Market Call earlier. When you think about the next shift of this trade away from NVIDIA, you know, GPUs was going to be custom GPUs that all of NVIDIA's customers were basically going to

be contracting with Marvell or Broadcom. So it'll be really interesting to see how that plays out. Anything else, Guy, in tech really quickly that you're looking for? We know that we have a handful of retail earnings this week. I think that'll be interesting. It'll also be interesting to track how some of these

banks are trading on Friday when we saw yields touch 4.2%. And we know that we're below that right now. The money center banks had a heck of a day on Friday, but they're giving a lot of it back today. Well, you know, the one thing in tech that's sticking out is Taiwan Semi. And now the underperformance of that stock, again, since January, I mean, it made an all-time high of about $225 or so. And now as we're sitting here, it's trading about $173. I mean, that's a pretty precipitous decline in

And Taiwan Semi is one of the five or 10 most important companies in the world. Apparently, the CEO, I believe it's the CEO, don't at me if I'm wrong, is at the White House. They're announcing $100 billion investment. But around the sides, around the surface, things are happening in the semi space that I don't think a lot of people either A, realize, or B, don't realize.

or B, believe could have happened at this point in the cycle. Yeah, it's funny. So I'm looking at these headlines and Trump is actually reading them off a little bit. And they're talking about that $100 billion in new capital. And so they're going to be in Arizona. Well, let me be really clear here. Taiwan Semi has already been building fabs

in arizona so a lot of these announcements are just these folks just kind of recommitting to some existing um projects really quickly guy um this week i think as you're listening to this you're going to start getting focused on some retail earnings two weeks after walmart

Thoughts here, if there's a lot of concern about consumers, we have the jobs report on Friday. We keep hearing about some of the economic data weakening here a little bit. Are these retailers, Costco, Best Buy, Target, are they important to you, what the guidance is? They are important. Unfortunately, I don't think Target is necessarily a tell on the consumer. I think Target is going to be a tell on how well they're operating. So I look at Target as Target-specific.

But in terms of Best Buy, I think you can probably glean how the consumer is doing by just the average ticket price as to what people are buying, whether or not that's going up or down. And obviously, Costco, this is an environment that Costco wins to in the stock market.

I like Walmart suggests exactly that. So yeah, I think there's a lot to learn this week, but I'm going to be really focused on Costco first, Best Buy second, and then Target third. Target only because I want to see how they're operating. All right.

last thing before we get out of here jesse and i spent some time talking about small cap stocks because a lot of the ipos that they're working on or the companies that they want to get towards the public markets come from that small to mid cap sort of uh you know part of the private markets i'm looking at the russell 2000 guy it's down 5 in the year it's down more than 15 from its recent highs

post-election, which were not new all-time highs going back to 2021. What does small cap weakness mean to you? Because listen, there's the push and pull. Yields coming down is kind of good for them, right? Their cost of capital is much higher than that of higher market cap companies. But does the trade tariffs, the input costs, all that sort of stuff, is that more important right now? You just hit the nail on the head. One would think if yields are coming down, the most economically sensitive names are

via the small caps are going to be the ones that basically those are the ones that get the most bang for that buck in terms of lower yields. That's not happening. So the subsequent move in yields lower, and then obviously the move in small caps lower suggests that

that yields are moving lower because things are slowing down. And that's not a good thing. And that goes back to something we talk about all the time. In terms of lower yields, be careful what you wish for, because if they're going down for the reasons that I think they're going down, it's no bueno for the equity market.

Yeah, no doubt. And just last thing here, you just talked about volatility being a thing. If you just look at the moves intraday of the S&P over the last few trading days, the volatility bands are widening here with a VIX now above 23. And when you're kind of depressed like this, we said on Friday that felt like a short squeeze a little bit. It was not a lot of news out there other than bad news. So rallying on bad news, not

a bad thing to happen if you're long. But right now, selling off on really no news is probably not a good thing, especially when you have equities and treasury yields going the same way. So again, I'd be a hard-pressed guy to see this not close on the lows today. We'll know, obviously, at some point in the not-so-distant future. But this doesn't feel like a great setup into tomorrow.

No, I agree with that. And we're going to find out a lot more. And then you have, I think, I don't know if they call it the state of the union or the state of whatever, but President Trump is speaking tomorrow night. And honestly,

I'm going to watch it only because I want to hear, you know, in terms of potential market moving things, whether it's crypto tariffs and those types of things. So I think that becomes must watch television for a myriad of different reasons. Yeah. I wonder if the market selling off this way is kind of some sense of what is going to happen with these Canadian and Mexico tariffs. As you're listening to this, that will be the deadline on Tuesday. All right, guy. I appreciate you being here for a quick market touch. Stick around for my conversation next.

with Jesse Chassie. He is the head of RBC Capital's Tech Equity Capital Markets.

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In today's hyper-fast markets, it's never been more important to consider every option to raise capital, drive growth, and create value. Stay one step ahead with Strategic Alternatives, a podcast from RBC Capital Markets. In this season, RBC's experts will examine how corporates and investors are evaluating their strategic plans, reassessing their portfolios, and reallocating capital to help them lead today and define tomorrow. Tune into Strategic Alternatives, the RBC Capital Markets podcast,

podcast today. All right, welcome to the Risk Reversal Podcast. I'm Dan Nathan. I'm joined by my good friend Jesse Chassie. He is the head of technology, equity capital markets and VC coverage at RBC Capital, who also is a fine sponsor of this podcast. And I do some work with you guys. I've done work with you, Jesse.

for eight years now, haven't I? Eight years. Welcome back to the podcast. Good to see you. Yeah, so I see you every week, so it's not like the conversation we're about to have is new to either one of us, but I think it's a conversation that a lot of our listeners are going to be really interested in hearing about. You and I are going to talk

macro. We're also going to talk about the pipeline as it relates to IPOs. There's one big one possibly coming this week, and there's a laundry list of others that might come, not just in the AI adjacent space. So we'll talk about what are some of the conditions that make for a good IPO market. We might talk a little policy and the like and what that might mean for strategic M&A as a dual sort of track for reopening these capital markets a bit. So

Where do you want to start? You want to start with the macro here? Because you have a report out, I think it's a quarterly, I dig through it. I know a lot of investors dig through it. It's a state of the markets. You kind of start with kind of where we are, where we've been, what are some of the kind of tailwinds, what are some of the headwinds.

And, you know, just generally the stuff in your space. Obviously, you have a tremendous focus on technology. You want to start with the macro? Yeah. Yeah. Let's start with the macro. Look, I think last time I was here, if you think about the setup of the market and how that sort of changed a little bit, we were just on the back of the election.

There was a pretty meaningful wave of optimism. Small caps were finally catching up. That trade was sort of catching hold. And look, I think there was a couple of things at the time. We had, you know, ongoing economic resilience. Everyone felt better about that. We were sort of finally through the beginning of the rate cutting cycle or at least the kickoff of a shift

and policy around rates. There was clarity around the incoming administration. I think there was excitement around the pro-growth agenda, deregulation, et cetera. But you sort of fast forwarded to where we are now and how we started the year. I think there's been a bit of a dose of realism, right? Market's pretty soft.

And really what it all boils down to is there's still tons of uncertainty, right? So as you think about the political landscape, tariffs, Doge, I think that excitement out of the gates has sort of faded into questions around what this will mean. I think that has knock-on effects on the economy. I mean, this earnings season, a big theme in software at least was like,

Where's the risk that Doge just really impacts the numbers on a forward basis? So there's sort of peak uncertainty there again. Rates have been stubborn. And then there's just ongoing tech uncertainty. You know, I was listening to our good friends Brad and Bill's podcast, and he talked a little bit about like AI is a great theme to invest against, but no one really knows how it's going to play out and where the collateral damage will be. So, you know, uncertainty across the board. And as I think about the conversations I've had in the last few weeks, you know, my world

really has been focused on when does the small cap trade finally materialize, right? Like it's great that indices are marching higher. Let's take a pause there for a second. Why is small caps, that's the second time you just mentioned, why is that important? Is that because where you sit, a lot of the kind of IPOs this year are likely to emerge at a small mid cap or is it just something more about the broadening out trade? And also if you have a pro growth agenda, then it should affect

Small caps first. Is that what you mean? Yeah. Well, so a couple of ways. One, if you think about my clients and the equity capital markets, the majority of large tech companies are profitable. They're generating cash. They don't need the capital markets in the same way. And when they do, they use debt. They're not really using equity to fund and finance their balance sheets.

The majority of my clients are small and mid cap software companies. They're growthier. They're maybe still losing money and they need cash. And so that's where I spend my time. And, you know, we've talked about this in the past, but just look at the Russell since the peak of the market in 2021. It's done nothing.

We have two years in a row where major indices are up more than 20%. The Russell's down. It's still underwater. And so while investors broadly feel like we've been in this rip-roaring market, the majority of companies I talk to, CEOs and CFOs, their stocks haven't really run that much.

And then you couple that with a liquidity squeeze as valuations compress post the peak valuation multiples we see in 2021. And, you know, a lot of these management teams feel like they've been out there doing tireless IR work. They've executed, particularly in the past two to three quarters from an earnings perspective. But the stocks have just done nothing.

And so that's where I feel sort of the maximum pain when I'm out talking to my clients. And that's where the most of my clients sit is they're just small and mid cap tech. So big, big bifurcation between what happened in the S&P or the Nasdaq 100, largely because

They have been powered by the gains of the Magnificent Seven or whatever you want to call them. And even last year when the S&P was up 25%, Nvidia's performance was 25% of the performance of the S&P 500. And if you look at the Russell 2000, it had a really nice-- it did outperform the S&P right after the election, but that literally lasted like two or three weeks. And then it never made a new all-time high. And that last high, to your point, was the end of 2021.

And now it's down about 14% from those highs where you have an S&P and a NASDAQ that's down a little less than 5% each. So again, maybe small caps are kind of telling us a story. I also read this this morning. I think it was a David Rosenberg, Rosenberg Research.

He said as of Friday, there were only 8% of the S&P 500 that were trading at new all-time highs versus, let's say, 25% right after the election or so. So a lot of that enthusiasm in the Trump trade, at least as it relates to public equities, has kind of faded a good bit. So does that, when you think about...

I know so many investors are pining away for a whole host of different reasons for the IPO calendar to open back up, right? So if you think about the potential for deregulation, that would be a big one, less scrutiny on some of these companies that are coming public, which we can all agree after what happened in 2021 with the SPACs and everything, scrutiny is okay. You know what I mean? When you think about it, right? And especially when you think about this new administration, you know, just dismantling the CFPB or whatever they're going to do with the SEC, they're

A little regulation is fine. Now, on the flip side of that, MegaCap Tech has not been making acquisitions of the sort of companies that you bank because of regulation. So speak to that a little bit because I think that's really important. You can have both of those working, the IPO and the M&A. You can have one working,

But you probably have one working rather than the other is IPO market reopening would probably be suggest a level of health for the existing public markets. Is that fair? Yeah. I mean, look, it's fair for the entire ecosystem. I mean, there's a lot of talk.

You know, every other day you see someone write an article about the quote unquote zombie corns in the private market. So all these companies that sort of raise capital at north of a billion dollars and now, you know, their exit options are few and far between, right? Because we're in this market where both the M&A and the IPO markets have been closed.

So no demand for public down rounds, you think, in general? Because these stories are not AI adjacent. These are the stories that were probably more consumer oriented or like cloud-based. Yeah, this is one of the themes that I completely disagree with.

all I hear is the IPO market's closed. There's no demand for new stories. It's just not true, right? Like if you look at the IPOs that have come to market in the past few years, and this is in the deck that we referenced, but there's been like a ton of diversity in terms of size, scale and market, right? There's been internet stories that have performed quite well, frankly, like look at Reddit. There's cybersecurity names, like look at SailPoint and the outcome of that IPO, ServiceTite. And so there's plenty of demand for IPOs, right? Like

All of these IPOs, we're seeing them every day. There's a ton of focus from investors. They're digging in. They're doing real work. They want to own these assets. And it makes sense, right? Like if you think about, we've talked about the scarcity of growth in the public markets. And I think the last time I was here, I mentioned this. But, you know, just look, and this is in the report as well, look at the dissection as you think about segmentation of public market tech names.

and those that are growing north of 20%, there's a handful, right? And so there's demand for growth stories. The IPO market is the source of those growth stories in the public markets. And then the other thing that happens is, look, investors understand that the mega cap tech trade is crowded.

right? They want to own something else. Like two years in a row where Mag7 sort of carry the day, I think there's a view that I can't continue to just own those and outperform my benchmarks. So where am I gonna go find alpha? And as they go down cap, a lot of those names have become liquidity traps just because

liquidity has dried up. It's pretty tough to establish a new position based on how they trade. And it's even tougher to do so without driving the stock price up. And so the IPO market is really a great source of supply for new stories to go long. And that's why the demand's there. So look, everyone can talk about the IPO market close. We're just not seeing that.

The demand's there. The market's wide open for new stories. And I've said this ad nauseum, but it just remains an issue of supply. There's just not a lot of new companies looking to go public. Now, I do feel like that's starting to change. So if you think about

Let's just take the last four quarters. I think what we saw is macro finally started to stabilize for a lot of these businesses. They've had two or three good quarters behind their belt, right? Most of them have gotten at least to break even. If not, they have line of sight to break even.

And then in the past quarter or two, growth has actually started to accelerate again. So I think if you put all that together and play it forward, I think if you have another quarter or two of that sort of setup for these private companies, they're going to want to go public. And so that's why it does still feel like

The backlog is going to meaningfully open up more so the back half of this year or next year. But things are working again, for sure. So you're really focused on the back half of this year. We're basically through, let's call it Q1 at this point. And then Q3, probably towards the end of that, is when you get things dialed up. So let me ask you this. Given all the uncertainty that we have right now in the economy,

And I think actually, I think it's interesting what you said. There was a bit more clarity towards the end of last year, obviously, once the election was over. That said, the Fed pivoted pretty hard, right? They cut interest rates starting in September, 100 basis points, and then they pivoted away from that. They were worried about a weak economy in September, a weakening jobs market.

And then we kind of finished off the year pretty good. Markets were at all-time highs. Inflation had been coming down. Unemployment was at 4%, which is near 50-year lows and everything like that. There was a lot of optimism about a pro-growth agenda. But it feels like, to me,

And this might be somewhat subjective here that the administration is about to have a little bit of an own goal right here. So we're recording this Monday afternoon and Tuesday are supposed to be the tariffs, 25% put on Mexico and Canada, which are two of our biggest trading partners. We already have additional 10% on China. And if they really follow through with this,

then it really is likely to kind of slow growth. But the uncertainty is the thing. So let's just take a step back before you're a private company thinking about IPO. If you're a public company right now, you're dialing back on the spend, whether it be hiring, whether it be R&D, whether it be CapEx, you're probably extending certain life cycles or this or that or whatever and slowing up on different contract obligations. So that has the potential to really push things out of it. Is that fair? Yeah, no, look, I think...

My biggest fear through this entire cycle has been stagflation. And in the fall, it felt like we kind of finally broke the back of that as a concern, right? Like we all kind of knew that inflation was going to be persistent, but it wasn't really accelerating, right? And economic growth had been really resilient, particularly last year. About 2.5%. Right. And that's why I think that there was finally some hope that the market would be less fragile, returns would broaden out away from just the MAG-7, and that

And now I fast forward, I mean, it's only two, three months, right, since the beginning of this administration and stagflation as a term is creeping back into the market again, right? Like you have with tariffs and Doge, potentially slower growth and higher inflation. And there's just no way to self-correct out of that. And in that world, where would money obviously go? It would go back into mega cap tech stocks. But those stocks are so overdone. Well,

Well, they're buying treasuries right now, too. If you look at treasury yields at 418 right now. And that's the concern, right? Because in the past four weeks, we've seen the biggest outflows of dollars from public tech stocks that we've ever saw in history. Like it's been a massive outflow. So rather than stocks just rotate or dollars rotating within equities, we actually see some dollars actually leaving equities. And I think that actually characterized part of that risk and concern is maybe treasuries and cash or even bonds is a better place to be right now.

Right. Especially after two 25 percent years in the S&P 500, you're kind of digesting a massive secular shift, which is obviously generative AI, which powered, let's be frank, a lot of that economic activity or optimism. When you think about the hundreds of billions of dollars have been spent on, you know, building data centers and the like, you know, but you mentioned, you know, it's not just about tariffs.

It's about also immigration. It's about austerity, right? It's about a really uncertain geopolitical sort of backdrop when you think about what's just gone on over the last week with Russia and Ukraine. Well, what about this notion, and you and I especially,

Recently, we've talked to a bunch of like founders of, you know, CEO founders of private companies who try to make the case. And I don't mean try, who are making the case why they don't need to go public because, you know, basically, you know, debt is over.

open to them. There's lots of different ways to find. Talk to me about that narrative, because I think if you're an investor, to your point, if you're looking for output, you need new stories to come to the market, especially as we're getting this digestion phase of generative AI. Yeah, look, I mean,

You and I run around, talk to whether it's a dinner or just hanging out with a lot of these founders. And yeah, there does not feel to be any sense of urgency around getting public at all. And there's a few things driving that. I think the first is that for the best companies, there's still plenty of capital available in the private markets. Some of them don't need capital because they've spent the past two or three years getting fit and now actually are generating cash.

Their investors have, you know, this is the one thing I really got wrong. I thought investors would be

board members and investors would really be pushing a lot harder to get these companies public. That really hasn't been the case. And part of that is because whether it's through tender offers or just secondary liquidity, they've been able to get some liquidity. Companies have been able to also buy back stock from early employees. Just explain that for a second. So the secondary market and the private markets has been probably as active as ever been. There's

platforms, there's a lot of like, it used to be that certain the companies weren't open to it, or the you know, VCs weren't open to it, that sort of thing. But it seems like because a lot of folks have settled in private for longer, there's been a lot of openness, I guess, to actually having employees or early VCs kind of cash out a little bit. Yeah, they've been working on a one off basis, but also that market has gotten relatively institutionalized. So

You know, there's a private company that we just did a private for raised $250 million and it was 100% secondary. So all of a sudden I'm executing transactions in the private markets rather than being fundraising for primary capital or growth. They're just transferring, you know, secondary to new shareholders and giving that company a little more runway to stay private for longer. And so there's multiple opportunities for secondary liquidity in the private market. So let's just

push this forward a little bit so let's just say for the macro doesn't really cooperate let's say a lot of the uncertainty you know is not really cooperating let's say hypothetically you know the ipo market is not building the sort of steam as you would have hoped for the back half this year maybe it gets pushed into 2026 but let's just assume and this is you know purely anecdotally um

you know, any of the mag seven or looking to, you know, buy a company that's got a hundred million ARR, you know what I mean? And they like the technology, you're going to open them up to do this. Do you guys, do your M&A guys feel and gals, do they feel like this is probably an okay environment to do that? Because again, you know, the cost of capital is coming down if you think about it. So how are they, how are you guys thinking about that for that new

normal dual track IPO and M&A, is M&A starting to look more interesting to a lot of companies given this backdrop from a regulatory standpoint? Yeah. So there's a couple of things.

There was certainly, similar to what we saw in the public markets, there was certainly a lot of optimism post the election that with Lena Kahn leaving her seat, things would just open up and there would be a ton of M&A appetite. We haven't really seen that yet. And I think a big part of the reason for that is twofold. The first is

CapEx for a big portion of the strategics has been dedicated to sort of AI and they haven't been as focused on M&A. And the other thing is, is while regulatory uncertainty around M&A has seemingly come down, regulatory uncertainty broadly has not. Right. And this goes back to the questions on tariffs and Doge. And if you don't really have a great sense for how that's going to impact the bottom line, it's tough to go out and do new M&A.

And then the other thing is just the non-strategic buyers from an M&A perspective. So the financial buyers, I think private equity, the big PE shops who have also been a source of demand for M&A, a lot of them have been sort of value hunting in the public markets, right? So spending time on a lot of these companies that are really beaten down in the

public markets, there's more information visibility. In some ways, it's a lot less risky to go take those companies private. And so that's where they've been spending a lot of their time. And so last year, I think, was the second year in a row where there were more tech companies taken private than

than brought public. And so that all of those things together don't necessarily bode well for the M&A environment for sort of private tech companies. But I will say broadly, and now I'm sort of channeling my M&A partners a little bit, there's still a lot of optimism similar to the IPO market that it's opening up

It should be better than next year, but we really haven't seen the proof points for that yet to just kind of give us full confidence that that's where we are. So on the VC side, again, you talked to a lot of folks. Last week was this upfront summit in LA. I think most of the people...

not most but a lot of people we know in vc um were there and you know some of the stuff coming out of at least the way the information was writing it up um and i talked to a few friends who were there is that you know there's this idea that we are going to see a correction in the private markets because some of these valuations have gone too far too fast like so if you think about okay we can get caught up in open ai or anthropic or cohere or a handful of these others because they apparently were skipping up five ten billion dollars

You know, a week or something like that. I know that sounds ridiculous, but there's some big, big valuations here. But this is Vinod Khoshla of Khoshla Ventures, and he was one of the earliest backers of OpenAI. And this is from the information. He described what he called the great greed phase rippling across venture capital. Investors are being indiscriminate and greedy when it comes to backing AI startups.

And I thought this was really interesting. And he goes, many of these startups will eventually have to raise down rounds or financings at lower valuations than their prior round. What do you think that would mean? Because, again, let's just look at the public markets for a second. Microsoft hasn't made a new high since last July, right? NVIDIA is down more than 20% from its recent highs but was really stagnant.

in a range over the last six months or so. Amazon, Google all sold off after their results despite giving really good CapEx because what they saw was higher than expected CapEx but decelerating revenue growth. And so that's why I just think that that narrative might have permeated Upfront Ventures Conference because if you think about that's going on in the public markets with all that transparency, think about the private markets with less transparency and then you have all

All of these investors who need this to work, they've just deployed a shit ton of capital in some of these valuations that we've never seen in the private markets. Yeah, look. At scale. Right, at scale. So number one, that reckoning that Vinod alludes to.

in many ways feels like it has to come. I don't know that it's avoidable. The other thing that I worry about in particular with AI is, on one hand, these companies have gotten a scale just given the revenue growth faster than any set of private companies in history, which I think has facilitated their ability to raise capital at pretty meaningful valuations.

On the other hand, the amount of capital required to build that scale is also greater than any other cycle we've seen, like very different than software companies, for example, as you think about the CapEx cycles.

And then just where that growth has come from, right? As you think about people getting caught off guard from a supply-demand perspective, demand maybe rationalizing and finding equilibrium, and a lot of that revenue being sort of one time in nature and that revenue growth being one time in nature, those cross currents are really concerning to me. The one thing that sort of gives me optimism

that it won't end so bad is that VC is power law by nature. The whole dynamics in VC is about power law investing. And I do think within that cohort, there will be a handful of lifetime investments, whether it's Anthropic or OpenAI, 100X returns that will sort of make

the capital that was invested across the entire theme worth it? Because you just need one winner in your portfolio to really account for all the sort of names that maybe go to zero. Yeah. And I wonder, though, because you have these crossover investors now, as you know very, very well. And you think about I wonder with like an open AI,

how much of that is being recycled in a way, right? You know that these later stage investors who are normally looking to, you know, before crossover, you know, if you're a huge mutual fund complex, you pretty much had to wait until the IPO. Then you got, you know, 15% if you're Fidelity or Wellington or whatever. Now they're all participating in,

much earlier. And I just wonder, you know, who the incremental buyer is. Like, is it just retail? Because if it's just retail, by the time they're going to get to an open AI, if it's a literally a half a trillion dollar, you know, company when it goes public,

I can't like fathom, and I've been in the business since 1997, and you know, those internet IPOs in the 90s, they were tiny. Like literally they were raising like, you know, $100 million or something. Think about that, right? And so now this time around, these companies have already spent tens if not hundreds of billions of dollars

on CapEx, certainly that will be the case for OpenAI. And then how do they ever bring these companies public, like those companies? Well, we may get a test of that in the next few weeks. I think the information reported last week that Corweave was potentially looking to flip public and IPO in the next few weeks. And I heard $4 billion they're looking to raise in the public markets at a call it $35 billion valuation.

We'll get an answer. Look, you know, just think about the fallout market. If you try to think about corollaries in my world, all the time companies go public and maybe their sponsor owned and, you know, maybe one of those sponsors owns 90% of the business still and they need to monetize for four or five years after the IPO and the public

markets. And investors do show up for those. You know, you tend to price those things down four or five percent. And so I actually do think the demand's there. I think a lot of the crossover investors in particular view that type of investing as seeding their ultimate public market

positions and will look to buy more in the public markets. And it'll open up the aperture of potential investors because you now have companies getting public as large cap companies, which is something that's also new. And so I actually, I worry less about that. And I do think there are that incremental buyer concern. I'm not so worried about that. I think

public markets are ready to step in and underwrite those businesses. So CoreWeave would be a really interesting test for the generative AI trade. So, you know, NVIDIA has backed this company. They're a huge buyer of NVIDIA GPUs. Like you said, they're looking to raise multiple billions. You know, their revenue is up fourfold in the last year or so. They're, you know, maybe a $35 billion valuation. And I guess for me, this would be a

total referendum on what we've seen in the public markets, really out of 10 names or so. And I mean, I hope it comes because this is one that I think will give us a really good sense of whether we are in that digestion phase and whether that greed phase that Vinod speaks to will actually move its way into the public markets. Because we've seen a few, like if you look at a Palantir, it became a meme stock.

Let's be honest. This had nearly a $300 billion market cap. I'm not asking you to opine on it whatsoever. This is my opinion. You know what I mean? And the way in which investors were tripping over each other to buy the stock after the last two earnings reports, these were not institutions buying the stock.

these were retail investors buying the stock. You know what I mean? And so what I always worry about is that retail is the one they're always left holding the bag. I mean, think about the whole SPAC trade. You know what I mean? Institutions got out of it. The sponsors got out of it. And it was retail who wrote those things from like 12 down to zero.

You know what I mean? And so that's what I guess I would worry about with some of these names, because just like we saw Sun Micro do this and you were probably in eighth grade back then, probably less. You know, they were doing all of this vendor financing for servers back in the day. And ironically, it was servers. You don't even need to power the Internet thing. So I don't know. I hope it comes. I'd like to see what happens.

- Same, I'm excited. - We just talked a little bit about some of the conditions that would cause the IPO market to kind of reopen. We also just talked about the fact that a lot of these private companies are staying private for longer. They're getting much closer to profitability than I guess in past cycles, you would expect some of these new high growth sort of companies to come.

Well, that also means that a lot of these companies that we just talked about are going to be coming at much bigger market caps. Like, how do you think that would affect? Would you rather see the market, the IPO market tested with a bunch of like small to mid cap or some of these jumbo IPOs? Yeah. Look, as we've said sort of time and time again, in some ways it's inevitable. Companies are just bigger. Yeah.

And so when they get public, they're also bigger. Look, the risk that that creates and one of the things I worry about is it makes the bar a lot higher as it relates to the success of those IPOs and how they impact the health of the public markets. Right. Meaning if a sort of small cap hundred million dollar company goes public and doesn't trade well.

That $100 million is unlikely to impact broader risk appetite in the IPO market and just appetite for IPOs is an asset class. But if CoreWeave gets public and sells $4 billion worth of stock and then all of a sudden is underwater, there's going to be a lot of investors that aren't buying IPOs for a month or two. And so I think the risk is that the IPO windows can open and close in a pretty more meaningful way.

And the success of those jumbo IPOs is much more critical to the overall success and health of the IPO market than in the past. You know, and I go back to an interesting corollary to this is Facebook. If you remember when Facebook went public, I think it was 2012. That didn't necessarily trade well out of the gates. At the time, it was a massive market.

and it closed down the market. Like the IPO market shut for a month or two. I remember on the back of that. And then when we took Alibaba public, you know, a couple of years after that, that was a big consideration is can an IPO of this size, suck all the air out of the room. And so that's something I'll watch out for. Uh,

and be a little concerned about is every incremental jumbo billion dollar plus IPO that gets public is just going to matter a lot more. Yeah, you could make the case that back in 2019, it was WeWork that did a very similar sort of thing. And actually, though, it took Uber to reopen the market. I mean, Lyft went first, right? Much smaller. But then Uber, yeah, was much bigger. And that was kind of the all

uh clear if you will the one thing i just say is we had jeff richards of notable um on the pot a couple weeks ago we were talking about some of these big valuations in the public markets and you know with a lot of the the generative ai names and um just the size of the market caps of these companies and he was saying i'd look lower down the market cap

There's a lot of really interesting stories that are just starting to harness the technology, that sort of thing. So, you know, if I, and I'm not you, but if I was sitting in your seat, I'd love to see a mix of both of those. I'd love to see a couple jumbos really kind of test the market. Maybe Corweave will help you do that. But then some of these fast growing small to mid caps, because you're right, man, like investors, they're sick of these same names and they need some good new growth stories. I mean, look for the, for the tech ecosystem to truly be healthy, uh,

and i'm speaking my own book i think you need small and mid-cap tech ipos like i need you need that ecosystem to be working because it's a capital refresh issue right and you know there's and i run these numbers all the time like there's a couple hundred private tech companies that got valued north of a billion dollars and the question becomes if the m a markets are not appealing to them or or are looking for those stories if the ipo markets are

are an outcome that they can pursue. What happens to that capital, right? Does it all just go to zero? And there's a lot of it that's still hanging out and waiting to see what happens. All right, Jesse, we covered a lot of ground here. Appreciate you coming back. Hopefully we'll do it again next quarter when you have your state of the markets back out. Jesse Chassie, thanks for being here. Good seeing you, buddy. Thank you.