Reputations are always a trailing indicator of truth

Danny Crichton:
You just accept. Radical acceptance is now one of my better. I look at the world in terror and I'm like, no, I vote no, nay. All right, I'm recording and live and I think we can get going.

Chris Gates:
Okay.

Danny Crichton:
We will, we'll go. We got 20 minutes.

Chris Gates:
We got 20 minutes. Perception, reputation, and then truth.

Danny Crichton:
And then truth.

Chris Gates:
Yeah. Let's talk about the most recent newsletter. Would you, let's just start off with the general thesis and then we'll get into some examples.

Danny Crichton:
Yeah, I mean the general thesis was last week, couple of major news stories. Adam Neumann raising $350 million led by Andreessen, the largest tech in that firm's history. Masayoshi Son, the chair of SoftBank having his worst quarter in history down $23, $24 billion in a single quarter in terms of the value of the revenues. And that's mostly driven by the SoftBank Vision Fund. And then the Director of the CDC announced basically that the agency has had a complete colossal failure and needs to be rebuilt from scratch. And so, these are very divergent stories. A little bit of tech in the first two, kind of a global macro public policy question on the third one. And I was thinking about the fact that in all three cases, deep down, these are really about reputations. What is a reputation? What does it mean? And how do we understand the difference between perception, what we see in that reputation versus the underlying real truth?

Chris Gates:
Right. Okay. Well let's jump into the Adam Neumann example to try to illustrate what you're talking about.

Danny Crichton:
Well, yeah, I mean, Adam Neumann, okay, so here, here's a guy who created a $47 billion company.

Chris Gates:
Right.

Danny Crichton:
I mean if you think about it, in terms of valuation arguably not created. It might be a little fake numbers there, but $47 billion at the peak, which was a SoftBank fishing fund company, ironically enough. But had built a $47 billion company. Now, if you think about the grand scheme, the grand universe of all founders, how many founders have actually built a business valued at some point in its life at $47 billion? It's dozens, I mean there's not that many.

Chris Gates:
I was going to say it on one hand, there's got to be very few.

Danny Crichton:
We talk about unicorns, we talk about decacorns. I mean, there are not that many multidecacorn companies that have ever been built in the history of Silicon Valley. And so to me, you have this very small population of people. And then at the same time, you have this massive colossal blowup. There's a legal fight, it's now in TV form as re-crashed. It's in book form as billion dollar loser. So, you have this popular perception of a person who is sort of smarmy, has some ethical lapses, but isn't sort of the Theranos fraud side. There's no criminal case. There's just a lot of sky eyed idealism that seems to have gone into futility.

And so, when I saw this, there was obviously this immediate negative reaction on Twitter. There's very pernicious negativity that was like, I can't believe this person who blew up so much value in companies, this huge failure could raise $350 million from one of the most prestigious firms in the industry. And my view was like, this is ultimately a bet that a second time founder who's rebuilding a company the second time through does a significantly better job, that the operations are much cleaner, that he's learned from his mistakes. And the question at fundamental is what is the truth of his nature versus the perception of what we got from the media?

Chris Gates:
Well, truth of his nature, but also truth of what he built. I think, yes, it is not as high as it once was, but it's still a billion dollar public company.

Danny Crichton:
Right. Last time I looked up last week on Thursday was $3.6 billion bucks, which lets be clear, there was billions of dollars of VC dedicated to this. So, I'm pretty sure it's a big nuclear power plant where the uranium went in and steam came out. But nonetheless, he multi-billion dollar company household name all around the world. And the question is, can you capture that lightning in a bottle a second time? He clearly knows how to fundraise, he knows how to hire. He has some part of culture building, which obviously reputation, he is all over the place. And I think for Andreessen, and I'm just saying this as a spectator, is learning something from Parker Conrad who was the Founder and CEO of Zenefits, which famously had sort of a falling out issue over the fact that he was sort of doing insurance in a non-regulated way, particularly in California.

Goes back out, restarts a new company, Andreessen doesn't invest slash doesn't have access to that deal. And now that company is doing super, super well. And so, there's this question of what do you invest in behind a fallen founder, you might say. And I think in some cases the fallen founder is actually massively undervalued by the market, that the reputation is so kind of overburdensome that you're sort of missing out on the fact that these are successful people who made mistakes, maybe at the height of this chaos that came in their first companies, and they're almost certainly going to do better a second time.

Chris Gates:
Yeah, you really think they're undervalued. I would say that most second, most founders fail the first time, not as big as Adam Neumann. But most founders fail the first time and then do much better. I feel like second time founders are actually pretty highly valued in Silicon Valley,

Danny Crichton:
Usually. Usually with a smaller exit where it was clear that they have a second shot to do something bigger. So, we see this with Travis Kalanick who had a smaller company. Patrick Collison sold a company when he was like, what, 19 or 18 where there's this indication it was like, well, that was the early learning curve exit, and now they're going to do the big thing. You don't usually get as lucky to do the big thing the first time around. But I do think when there is this huge failure and there's a huge amount of questions and a lot of investigations and all this sort of stuff, there's sort of a God moral hazard, I don't want to touch that.

And I do think for someone like him, there are a huge number of firms who would not touch him. I got a lot of email sort of condemning me for the comment that I was like, "He's probably undervalued by market." And one person was like, "Warren Buffet says never work with anyone you can't trust," and a bunch of different stuff. And to me, that is the alpha, right? I'm not saying I would invest, but I understand why Andreessen or other people might say, look, he can build great companies, they blew up one time before, maybe the second time he's going to get it right.

Chris Gates:
So, here's my final question on this example, and that is I feel like Andreessen is being painted as looking at the fact in this scenario. They're looking at what he actually built, they're kind of being painted as giving him the benefit of the doubt, and he's going to do better this time. But, so much of VC is actually betting on reputation rather than the facts.

Danny Crichton:
Right. Well, and why is that? Because everything in VC, everything in startups is selling, right? And your reputation helps drive the sales. You sell to customers, you sell to users, you sell to talent when you're hiring. You sell to other VCs as you're raising more capital, and all that enters the engine, right? So, if you know how to sell to VCs, you get more money. If you have more money, you can sell to talent because you'll get better names, more money, higher salaries. If you get better talent, you can sell your customers because you have a better product now. There's this virtuous loop around reputation. The question is, and this is just an open one, if I was a early stage employee, this is actually the crux of it, would I want to work with Adam Neumann?

And that one's trickier because I think you could really argue that for the employees, particularly at WeWork, certainly the later stage employees, but even the early stage employees, that value destruction, I mean, the ones who get crushed are the common shareholders. And so, for some of the folks who thought they were sitting on millions of dollars of options or equity, only to find out they got zero at the end, but that's tough. And that I can imagine is actually the hardest part of the rehabilitation going on here.

Chris Gates:
All right, moving on to somewhat connected to Adam is SoftBank and Masayoshi Son?

Danny Crichton:
Yes. Well, as I joked, it's sort of the other side of those cheap faux Scandinavian WeWork tables is Masayoshi Son, who famously set the $47 billion price point with the Vision Fund, lost the most amount of money from the Vision Fund. So, WeWork is the greatest crater in fund two, and then the second-largest crater in fund one and realized crater. SoftBank did not have a good week last week, and also the last quarter where the company struggled enormously overvaluations, obviously the stock market is down, that's driving its portfolio quite lower. So, it lost $24.5 billion of value last quarter. And that was both from a valuation perspective and also, I mean it's a Japanese company and because of this huge issue around the Japanese Yen versus USD, those numbers were actually quite intensified almost. I believe it's like 18%, 20% worse than they would've been if the Yen and the USD hadn't hadn't changed so much.

Chris Gates:
So, Masayoshi Son has basically been running on his reputation as one, as a combat kid and also having made this amazing investment in Alibaba years and years ago, right? And so, it seems like in his case, well in VC in general, it takes so long to figure out if you're an actual winner. And so, that one big win early on in his career seems to have set the reputation for him ever since. And when is that ever going to change? Even with SoftBank down so much right now, it's hard to say he's an actual loser at the moment.

Danny Crichton:
Right. And I think that this was sort of the point of perception versus reality is if you go from the startup context where there's sort of this high frequency, it moves really fast. On the venture side, things are much slower, right? Your reputation should last, you do well in one year, you shouldn't just drop off the Forbes Midas List the next year because it takes 10 to 15 years for these companies to go public. And so, your reputation should be lasting a long time. Son invested, I think it's $20 million in Alibaba in 2000, that turns into tens and tens of billions of dollars is one of the greatest returns of all time. Now you have the Vision Fund. The Vision Fund is losing a lot of money right now. SoftBank Vision Fund two, according to the schematic, 56 billion committed down $9 billion total overall. So, has taken that money and has disappeared some of it. And so, on one hand you're looking at huge numbers. So, even though Alibaba's a huge stake for SoftBank and it's selling it off. It's sold off, I believe $34 billion in the last quarter.

But it's one of these things where it's like how do you reconcile the modern reputation, what you're seeing today in 2022 versus in the last 25 years, there's this amazing deal that in some ways dwarfs everything that ever will happen in the Vision Fund, in SoftBank, despite the fact that it's going to be years of negative news. And that was A. B, I had this issue where the Vision Fund is now made up of hundreds and hundreds of investments. They're still young, most of those investments were made in the last year or two or three, which means they have a lot of time to mature. And so, I kind of look at a lot of the snickering from the media, from critics, from other VCs, and I'm like well, but the chips are down on the table now, and yet we haven't called the bets. The wheel is still spinning on the roulette wheel. And so to me, there's so much of this navel-gazing, obnoxious sort of smarmy commentary when the truth is not yet written. And for all I know that the second Alibaba's in that set, we just don't know it yet.

Chris Gates:
That's what really sticks out to me. I remember being at TechCrunch and always wanting to check in on SoftBank. I'd be like, "Danny, give me the readout. How is SoftBank doing?" And just realizing that how probably won't know. I probably won't ever know. Maybe I'll know when I'm long beyond actually reporting on these things.

Danny Crichton:
Well, and I think it's also one of these cases where SoftBank has to report publicly, so you actually know its valuation every quarter. You see the same thing with Tiger and some of the hedge funds right now, which are on the front page of the Financial Times, huge losses. They had file their holdings requirements with the SEC regularly. So, we kind of know what they're invested in, how much they've lost. And so, you're in this context where it's like the transparency suddenly becomes very short term. We're suddenly like, oh my God, in the last three months they lost $24 billion bucks, unbelievable what morons these people are. And then you find out two years later that it's double. It's one of those things where it's like there is a reason why we don't give updates that frequently. Because in the startup world and you're building things for 10, 15 years, you just don't want to know on a daily basis how things are going. You just got to take a higher end perspective.

Chris Gates:
All right, well let's pivot to out of the startup and VC world into governance and the CDC.

Danny Crichton:
Yeah, I mean, I don't think anyone has to be told that the CDC has not had a couple of good years since COVID. And part of the problem here is this was a vaunted agency, supposedly the best of public health anywhere in the world. And yet this sort of crisis around pandemics just keeps happening. So, you go back to 1980s and the AIDS crisis widely considered a terrible response to the AIDS crisis. COVID showed that it happened again. We're dealing with the same thing with Monkeypox now, and there's a ton of great articles just in the last week, Washington Post, I believe LA Times had won that really sort of has attacked the CDC, and really argued that it was just top to bottom like a disgraceful, chaotic response, even just after going through the pandemic situation we did with COVID. And so, what we found out is that A, the CDC has sort of commissioned its own report to report on itself, and we now know it's going to be pretty bad.

And so Dr. Rochelle Walensky who's the CDC Director, basically came out last week and said, we're going to blow the place up. We're going to rebuild it from scratch. There's serious deficiencies and we need to reform. So, my question on this, because we're talking about reputation versus perception, is a question of state capacity, which is does the government have the capacity to fully and unreservedly acknowledge the failure of the CDC, and redesign and reform it from the bottom up to serve the function to dispose it to? Because in politics, it is so easy to fix the perception and not the truth.

Chris Gates:
And what'd you say in your newsletter? Like, oh God, what was it? It was like that perceptions are ultimately based upon the underlying truth. And so, it's actually, you might be able to fix the temporary perception, but ultimately it will vert back to what the truth of the matter is, right?

Danny Crichton:
I think truth always wins out, but the problem is it can take a long time, right? There's the old Mark Twain, the lies are up already and the truth doesn't even have its pants on. I think one of the challenges in the modern world is that PR comms perception, molding propaganda, pick whatever words you want is the focus of most agencies, right? Most companies, most people, most corporations spend more on PR than they do on the actual thing to fix the actual thing, right? The solution to GE when it was failing was probably to invest more in the engineering, not the investor relations and PR teams to try to smooth over the fact that the company was failing. And that's sort of a challenge when you have crisis, which is it's so easy to hire crisis PR, just get through this. I'm thinking particularly of Facebook, where it just seems like it's always crisis PR, it's always about talking points, and yet none of the actual challenges that people are identifying ever seem to actually get solved.

And to me it's like instead of hiring 10,000 comm staff to go and try to argue this in the Akron Beacon Journal, why don't you step back and say, "If we just fix the product, this all goes away." The complaints are mostly valid. We can do some fundamental product work and we can do this. So, I always believe in you have to go back to truth, you have to invest in the quality. You have to invest in the real product because the reputation will reflect that in the asymptote.

Chris Gates:
It may take time.

Danny Crichton:
So, you can sort of-

Chris Gates:
Right?

Danny Crichton:
In time, yes. And you can cheat, you can cheat a little, but it will catch up with you. And then the truth comes out and it's complicated again. But I know that that was the big stories. We had a ton of other stuff in the newsletter. Lux funded a great new startup called Trial Libraries, so definitely take a look on that on the internet. I complained about the CHIPS Act because we're now entering, believe it or not, a semiconductor glut. So, now all the FABS, we're not going to build the FABS because no one wants any of the chips coming out of the FABS. So, the CHIPS Act was great. We have a new podcast, which Christian Catalini, so if you're listening to this, you probably listened to it but that was in the newsletter.

And then we had a bunch of great article recommendations. And I think the one I would point out the most was from Sam Marsman, our scientist and residents who recommended Gideon Lewis-Kraus's profile, The New Yorker of William MacAskill. And William MacAskill sort of one of the legends, the current profit of the Effective Altruism and Longtermism movement. And his new book just came out last week. He's getting profiles everywhere. He is on Five Books He's in the Boston Review, he's in The New Yorker, he is in The Atlantic. He's kind of everywhere. And that's a really interesting topic, probably for a later episode. But the profile was great. Sam loved it. I loved it. Definitely take a look at that.

Chris Gates:
All right, I think that closes us out. Thanks so much, Danny.

Danny Crichton:
Thanks Chris.

Chris Gates:
Yeah, talk to you later.