Markets Swirl on AI Promises...David Sacks & Parker Conrad Spar on X...A Look Back at Iconiq
Plus, VCs weigh in on candidate Kamala Harris
The Main Item
A Market Rotation or a Bursting Bubble?
A swoon in the big-tech stocks that have powered global markets for much of the past year dominated financial news this week, with Bloomberg declaring unequivocally in a headline Wednesday that it was all because “investors soured on the promise of AI.”
But don’t tell that to the AI-obsessed VCs who drove Q2 venture funding to its highest level in more than a year. Or to the punters whose “rotation” out of big-tech into small-cap stocks has led the Russell 2000 index to outperform the S&P in July.
The daunting costs of generative AI and uncertainty about the size and timing of the revenue opportunity are certainly part of the problem for the Magnificent 7 tech stocks, which lost $1.7 trillion in value over two weeks. The news that OpenAI is on track to lose $5 billion this year, despite bringing in $2 billion in revenue, underscored the risks.
It’s also true that the big-tech pullback came after a dramatic run-up since the start of the year, and eased somewhat Thursday on strong GDP data and trader sentiment that the Fed will move sooner rather than later on interest rate cuts. The relative strength of smaller companies, which have mostly missed the recent rally, is a healthy sign for the market overall, some analysts said, and along with easing interest rates could even be a good sign for the weak IPO market.
Melissa Smith, JPMorgan’s co-head of the innovation economy practice, told us via email she was optimistic about the trends. “The expectation that the Fed will begin cutting rates later this year as well as indications of a ‘soft landing’ in the US is certainly good news for companies in the Innovation Economy,” she wrote.
A challenge for the current crop of IPO candidates is finding good comparables in the market, said Don Butler, managing director at Thomvest Ventures. Falling rates could boost financial performance and make that easier: “A lot of companies have adjusted their expenses and expectations for a higher-for-longer interest rate regime,” he said.
And despite ever-louder chatter in the startup world about the difficulties of generating AI revenue and the precarious position of big foundation model startups, venture investors don’t believe the game is over yet.
Crunchbase’s Q2 funding report showed global venture funding for startups at $79 billion, a five-quarter high. Granted, much of this came from a few mega-deals, but it’s still promising for a market that’s been slowly climbing back from a 2-year slump.
Sentiment about AI is likely to keep bouncing around in the coming months. But private markets and public markets don’t stay disconnected for long.
VC Drama
A Messy, Revealing, Old-School Twitter Fight
Hey, it’s Eric.
Silicon Valley is a very small world. Sometimes it’s like a high school cafeteria.
All-In Podcast host, Craft Ventures founder, and Trump donor David Sacks’ reputation is catching up with him. Sacks has been on X calling President Biden’s decision to drop out of the Democratic primary the “real” coup, as opposed to the supposedly fake coup attempt on January 6.
Parker Conrad, the former CEO of Zenefits and the current CEO of Rippling, kicked things off, quote tweeting Sacks and writing, “Let me tell you, coups are this man’s speciality.”
In case you aren’t a student of Silicon Valley lore, here’s the quick backstory: in February 2016 Sacks, then the chief operating officer at Zenefits, teamed up with Andreessen Horowitz co-founder Ben Horowitz to push Conrad out of Zenefits, the then high-flying HR unicorn Conrad founded. Horowitz and Sacks blamed Conrad for failing to get all of the company’s insurance brokers licensed and for creating a tool that kept employees logged in during insurance licensing exams when they were inactive. (More importantly, in my opinion, was that Zenefits was a major bet for a16z and was starting to miss its financial targets.)
Conrad was led to believe that he could leave peacefully, and resigned. Sacks then turned around and blamed him for the problems, hiring master press manipulator Lanny Davis to go on the attack while taking over Zenefits and making peace with regulators, but ultimately failing to make the company a success. Conrad started a new venture, Rippling, that is now one of the most highly-valued private software companies in Silicon Valley. Sacks got semi-famous hosting the All-In Podcast, and supporting Trump.
Now back to the messy tweets.
Y Combinator founder Paul Graham, whose accelerator backed both Zenefits and Rippling, joined the attack on Sacks, writing: “I was talking recently to another investor about whether you’re the most evil person in Silicon Valley.”
Sacks certainly has his enemies. Cloudflare CEO Matthew Prince offered that Sacks “had a reputation for being a complete asshole” even in a University of Chicago law school class that was “full of assholes.”
All-In co-host Chamath Palihapitya says they’re going to talk about it on the podcast. I tweeted about it and my feed is on fire; a roundup of key tweets is here.
I’m close to this situation, having co-written the Businessweek story about Conrad’s ouster when the whole saga was unfolding, and then visiting the plot to oust him in more detail in “The Unauthorized Story of Andreessen Horowitz.” Conrad was the first guest on my old podcast, Dead Cat, because I thought he was unfairly villainized. I’ve covered the rise of the All-In Podcast closely too.
A few quick observations on Thursday’s food fight:
Sacks is an extremely smart guy, as evidenced by his very lawyerly precision in prosecuting the case against Conrad. He’s also a jerk, on the podcast and off. He comes off as someone who’s been so successful at bullying people that he’s blinded to the fact that you can’t bully your way to a good reputation. Unfortunately Sacks has found a home in a political party that likes bullies very much, starting at the top. Fortunately he’s not as good of a polemicist as he thinks he is. (If Sacks is so principled about regulations by the way, why was his firm a major investor in Adderall prescriber startup Done? The company’s CEO and the company’s clinical president were both indicted last month as part of what the government is calling a “$100 million Adderall distribution and health care fraud scheme.”)
Conrad is a nice guy and it’s fun to root for a comeback, but he still has to prove that Rippling isn’t just another over-hyped unicorn. Investors are generally very bullish on Rippling, but I’m not sticking my neck out on the idea that he’s proven the world wrong until the company starts throwing off real cash.
The media lives and dies by narratives. Zenefits oversold itself to the press and investors with pieties about revolutionizing human resources, and once a bit of air started to come out of the balloon, the morality play focussed on the failed CEO was just too good a story. The main thing many people remember about the Zenefits saga is that there was a condom in a stairwell, cementing the idea that it was brought down by the abuses of bro culture. But Conrad is not some bro, as anyone who’s met him knows. Images like that have a lot of staying power.
Ultimately I think financial performance rules all in these stories of startups blowing up amidst scandal and outrage. Companies that are doing well have happy employees and happy investors and no one to leak bad news to the media. Uber’s mega burn rate caused immense angst among its private investors, as did Zenefits’ slowing growth. Weaknesses in the business made ethical or legal issues appear much more serious.
The overlapping hatreds and alliances here are mystifying. Founders Fund is a key Rippling investor. Peter Thiel runs Founders Fund. Sacks was the chief operating officer of PayPal while Thiel was the CEO. They are core members of the PayPal mafia.
Meanwhile, Andreessen Horowitz is clearly trying to keep its head down and avoid getting tagged in the latest blow-up because they were certainly a co-conspirator in Conrad’s ouster. Like Sacks, Horowitz is now a Silicon Valley Trump supporter. Unlike Sacks, Horowitz is widely respected and admired.
Finally, there’s actually been another dramatic discussion on Threads: Elon Musk’s daughter has spoken out about his comments about her. (Musk of course is a good friend of All-In Podcast co-host Jason Calacanis.) Small world.
On X, Sacks accused me of being a “useful media ally” to Conrad, which is pretty rich given the ubiquitous conflicts of interest on the All-In Podcast. Conrad and I were both on the Harvard Crimson but we didn’t overlap.
Meanwhile, I’m friendly with Conrad, but Graham, his current defender, blocks me on X. That’s a story for another day.