[0:00:03] The goal of this series is to bring together students, members of the New York technology community, entrepreneurs, investors, and thinkers from the global tech environment. When you think about people who are innovators in business and entrepreneurs in technology, it's only natural to think about Mike Bloomberg. Mike started this company with a core belief that the power of technology could bring transparency to the capital markets. We are proud of the Cornell Tech and Bloomberg partnership, and I'm honored to begin tonight's session by introducing our company's founder.
[0:00:33] Mike Bloomberg. This is the first edition of Cornell Tech at Bloomberg. And it is a new event that brings together Cornell Tech students and faculty, Bloomberg employees, and members of the New York City tech community. It is a great fit for us because Bloomberg, we think, is dedicated to bringing people and ideas and information together. And you're going to see some of that tonight. We have an exciting lineup in the weeks ahead. Most importantly tonight, the first person, Sam Altman.
[0:01:02] Now Sam is not, you will see, wearing a suit with a button-down shirt and a tie and a jacket and that sort of thing. He looks exactly like what you would expect and feel comfortable with. This is a techie. He is the president of Y Combinator, one of the most successful accelerators in tech today. Its companies include Airbnb, Codecademy, Dropbox, and Stripe.
[0:01:29] And he is going to be joined on stage by Tom Gillis of Bloomberg Businessweek, who is a very smart writer. Tom Gillis just became the executive editor of Bloomberg's newly formed global technology team. So please welcome Sam and Tom. You guys set out with some pretty lofty ambitions. I'd like to get your sense right now at the almost two-year mark, where have you come the furthest and where do you have the furthest to go? You know, these things always...
[0:01:57] What are some of the companies you find yourself targeting now that wouldn't have happened three years ago?
[0:02:25] And the last two years that we didn't do at all before that is biotechnology. So we funded, in this upcoming YC class, out of about 120 companies, there are 15 or 17 biotech companies. That's up from zero two years ago. That's a really important area. I think people still are underestimating the impact that synthetic bio is going to have on all of us, even with the hype. AI is another area that we didn't do much before and that we've really ramped up a lot.
[0:02:52] Energy is an area that I'm personally really excited about. If I could pick one problem I'd love to get solved, the very top one would be strong AI, but the second would be cheap clean energy. How often are you kind of re-evaluating what the companies are worth, either on an individual basis or collectively? Never. One of the things that I have learned over the course of my investing career is that intermediate valuations for startups are completely made up and don't matter. The only time I care about the valuation is once when we invest.
[0:03:21] And once when we get liquid. And beyond that, I never think about it. If a company goes public and then I have shares in a public company, then I have to think about it. Do I want to sell at this price? Do I not want to sell? And I usually just sell because it stresses me out to have to watch the price go up and down. I really try not to get caught up in the debate about valuations and is this overpriced? Is this underpriced? Because I'm not selling.
[0:03:43] And we always buy at the same price. We have a very standard deal. We don't deviate from it. And we don't sell until the company gets acquired or goes public. So you avoid talking about a bubble. I won't ask you to answer that question. But you do talk about this idea of a bust. Yeah. And the area that you have identified that you're most concerned about is the later stages. Why have those gotten out of line so far to the extent that they have?
[0:04:07] Yeah, this is the point on the tech bus. I don't really believe we're in like a full out bust, but I think that it is an interesting thought experiment relative to the current fashion that we're in a crazy tech bubble. The PE ratios of public tech companies are lower on average than non-tech, which seems crazy to me given the difference in growth rates. Early stage startups feel expensive. They felt expensive to me for years, but...
[0:04:28] They keep really earning those valuations on average, plenty of individual failures. So I can't point to any of those areas and say the prices have become disconnected from reality and everyone fervently believes that they're going to go up because no one believes they're going to go up. I think the one place where you could say they're disconnected but still there's not fervent belief is on the late stage. You can't earn a return on capital any longer with interest rates basically from anywhere unless you want to take crazy risk. And so in the 0% world,
[0:04:57] Which we've not had for eight years. It's crazy. This has basically never happened. If you look at a graph of interest rates over the last few hundred years, they've gone down and down and down over time, but they've never stuck at zero for this long. So no one knows how to think about this. And then there's this question like, you have capital, you'd like a return, you don't want to see inflation just eat it away. What can you do with that?
[0:05:19] It's gotten harder to answer, right? Like, it used to be that at the very minute, you know, if nothing else, you could buy U.S. government bonds. And you still can't do that, and thankfully they aren't yet negative. But that's not what most investors are going for. You have people trying to synthesize debt because there is no natural debt available. And one way you see this happening is people buying these complex instruments in private companies that they claim are equity so that they can maintain their venture capital fund exemption with the SEC, but actually look nothing like equity at all.
[0:05:48] We saw one recently that had a minimum guaranteed 2x return and a maximum possible return of 3x. And that was the first money out of the company. So this was a company that was worth more than $10 billion, or maybe near $10 billion. And the investor invested, I don't know, a few hundred million, a hundred million, something like that. So chances of them not getting their money back, very low. Chances of them getting a 10x return, zero. And I think something like that starts to look more like that than equity.
[0:06:17] When you look at the prices on an equity basis, they look really high, but that's just this sort of synthetic thing. Why are startups accepting terms like that? Well, it's not an irrational thing. If you're a startup and you're very confident in how you're going to do, you might just want to raise debt. In many cases, raising debt makes more sense than raising equity. Traditionally, it has not been available to startups, but on the negative side, it's become harder to buy debt anywhere else. And on the positive side, startups have become
[0:06:46] More mature and better understood and more stable and generating more cash flow. More investors willing to do this. So, yeah, you could very easily decide that you want to raise debt instead of equity and now that's available to you. Who's hurt when you start seeing more and more terms like this? The people that I think get hurt most often are employees at these startups that look at these valuations and think they're not fictional. And so someone says, well, you know, I have this one offer.
[0:07:13] That's like X hundred thousand dollars a year in cash. And this one that's a third of X, but I'm getting this equity and it's worth this much. And they use that last round sticker number. And that is nowhere close to reality. I think that's who gets hurt when someone gets hurt. Should the SEC change the way it is allowing investors to classify themselves? Should we see more stringent rules around the exemptions there? That will probably happen. Although, again, I don't think anyone is deceiving anyone at this point.
[0:07:43] I think everyone understands what's going on. And so, no, I don't think we need more stringent rules because everyone, every actor understands what's happening. How has this discussion and these concerns about later stages changed the way you're advising your companies? One of the things that I think Y Combinator does really well is that we advise our companies to try not to burn huge amounts of money. This has actually been somewhat bad advice for the last couple of years because capital has been so incredibly available.
[0:08:11] That sometimes it is worth just growing faster. But you can't count on that forever. And we think it's better to err on the side of safety when it comes to burn rates. As a side benefit, I think you get a much better culture if you have a very frugal company. We're seeing a lot of people who might, like a decade or two ago, go into, say, investment banking, work at a securities firm, go into consulting. We're seeing a lot of those people gravitate toward Silicon Valley.
[0:08:36] Gravitate toward tech, gravitate toward software. What kinds of misconceptions do you find them coming to Silicon Valley with? Yeah, certainly the MBAs have been coming recently. The biggest misconceptions that that crew of people has is that it's easy, that what they learn in business school will help, and they're going to make a lot of money quickly. And we try to explain to everyone that none of those things are true.
[0:09:05] Starting a startup sort of is hard in a way that most people don't have a framework for, harder than any kind of regular job. And it takes far longer than anyone thinks, even if you adjust for that it's going to take really long. You don't make a lot of money for a long time, and then all of a sudden you make a bunch of ones. Or maybe not. Usually you don't make any. And so we try to explain this to people. In the election cycle, we're talking a lot about investors and carried interest and how that should be taxed, whether that should be taxed as regular income.
[0:09:35] A situation where you started to see a discussion of should venture capital gains be taxed more? Oh, I think we should be taxed like ordinary income, and I donate my difference. Tell me why. Because I think it's ridiculous that we get a tax break on carried interest. I think that there is no way, there is no logical way that I can justify why the returns that we earn managing other people's money should get capital gains treatment.
[0:10:03] How does that discussion go over dinner parties with your friends in Silicon Valley? Well, there are strongly opposing views. There are more people that sort of agree with me that we should be paying income tax on our income than you would think. There's a separate question, which I'm actually not entirely sure what I think about whether there should be a capital gains tax rate at all. But certainly the carried interest thing.
[0:10:31] I have a hard time defending them. We talked a little bit about, at the beginning, about cash burn and your concerns about that. What kinds of advice are you giving to your companies about their expenses? How has that changed over the last several months? What we tell startups is treat the dollars you've raised as the last you'll ever raise and have a plan C about what happens if you can't raise any more capital. It's fine to operate on plan A, but continually think about plan C and whether you have that in grasp if the world goes crazy.
[0:11:00] You've written on your blog and talked about the problems unique to the post-YC phase. What are some of the biggest pitfalls you see startups fall into? One big problem is that there is a lack of focus and intensity after YC for some founders that they had during YC. This is a really high class problem to have, but YC has become, it's sort of like gotten to the point in the ecosystem or whatever where you can like coast on being a YC founder.
[0:11:28] And if you want to just like go speak at events and have coffee with sort of important and interesting sounding people and not work on your startup, you can do that. We have a lot of founders that go through YC. They focus on growing every week. They ship product. They talk to customers. They do everything right. They raise a few million dollars. They come on Bloomberg TV. You know, their tech wrench writes an article about them. They go to Sun Valley. They do whatever. They do whatever. And then they realize or they decide that that is more fun than actually like grinding out a startup.
[0:11:57] At our reunion dinner, the thing we talk about the most is many of you are probably already going down this path and it's not too late. You can still save the company and turn this around, but you've got to do it now. And you have to really commit to doing the things that made you originally successful and not getting distracted on all this other stuff, which will not work. New York as a startup hub, Cornell, obviously a big part of that discussion. The addition of tech jobs in New York.
[0:12:22] Over the last seven years, it's been something like 58% outpacing Silicon Valley, though not San Francisco. What do you see in terms of the potential for New York to develop as a tech hub? The two problems that I hear about most often from people who I trust to get this right, one is the short-term focus. So everyone in Silicon Valley, whether or not they will admit it, wants to make a lot of money, but they're willing to wait a long time to do it. If they have to work on something for 10 years, that's okay. And in New York,
[0:12:50] At least from what I've heard, people have had a harder time finding large groups of people willing to put their heads down and commit for 10 years to something. And the other problem is that New York is still, although less and less every year, dominated by finance. And it is really valuable if you're working in the industry that is dominant in the city. There is still a real value, I think, to being the number one industry of a city. But maybe in New York, that's going to flip. And I think if tech becomes the biggest thing in New York and not finance,
[0:13:19] Then Silicon Valley is really in trouble. How do investors feel about investing in a company that's full of people who may not have the technical expertise, but they have the idea and are trying to contract it out to other people? I can't speak for all investors, but I can speak for us, and I can say that we hate that. We really don't like...
[0:13:40] Companies to be outsourcing their product in the early days. Very hard to do that well. The thing that matters the most, probably, when you're developing an early product is a very fast iteration rate. And if the founders have the idea and are contracting that to developers and it has to go through these hops, it's very bad. There are a lot of reasons why it doesn't work, but the biggest one is that cycle time issue. The second biggest is that if you don't have great technical talent on the founding team, it's very hard to attract great engineers to hire out the engineering organization.
[0:14:10] Don't undervalue the non-engineering work in a startup. You really do need to be good at both. I'm an MBA in tech. Sorry for everything I said. No, it's OK. There's a couple of us in the room. And on that same note, I'd like to know, how do you think we can best contribute to the tech scene in a meaningful way? MBAs that come for the right reasons, I think, often end up being some of the best employees at a startup. So if you love tech and you love startups,
[0:14:38] And you've gotten really good at sales, customer development, managing people, which is an important and difficult skill that most startups are horrific at. You can really contribute a great deal. MBAs that come because they love a particular product or they love the sort of process and the spirit and the soul of a startup, they're great. And I think those are probably the most common areas to contribute. This event really gets to the heart of what Cornell Tech is about, which is bringing together thought leaders like Sam,
[0:15:08] Inquisitive question askers like Tom and like the audience. And really building a much more porous kind of interaction between academia, sort of students and faculty on the one hand, practitioners and thought leaders, and not having these very separate communities of academic silos, what's happening in industry, and what's happening in the investing and venture world.