💣 Here we go again… FTX

+ tech layoffs, lowered valuations, and why the math makes sense

Every damn time I think I'm finished writing about crypto, it just reels me back in.

This recent saga reads like a hybrid script of if a soap-opera and The Onion had a mutant baby. Eventually, you just stop being surprised by crypto and just accept that it’s a looney house.

I wrote up a short-ish simplified version of these latest shenanigans that led to FTX going from being a $32 Billion company to being worth $0 in less than a week.

If reading crypto rants is this your thing, you can read this crazy write-up here.

This was cool

After being a fan of the This Week In Startups podcast for so years, it was pretty neat to actually sponsor last week's episode via Smash Digital. It just feels good to hear our brand mentioned among the big boys that usually sponsor Jason’s pod.

Important clip for all founders AND investors to hear

Speaking of Jason, the last All-In Podcast had a segment that I think is really important for everyone involved in business, startups, or investing to hear.

The entire episode was great. But what’s super crucial is their conversation about the recent tech layoffs, why valuations are dropping so much, and how the math behind this all actually makes sense.

Just pay close attention to everything Chamath says from 15:30 onwards and get educated. It’s brainy stuff and they explain it better than almost anyone else can.

For those who don't watch it, I'll go over some easy cliffs-notes.

  1. The risk-free return rate (govt bonds) is approaching 5%. I can earn that without taking any risk whatsoever.

  2. So that means that other investment opportunities need to provide a return well in excess of this. If I can invest risk-free for 5%, or in your higher-risk deal for 8%, I'll take the 5% all day long.

  3. To quote: “The dollar that is right in front of you is now meaningfully more important than a dollar that is far far away from you”.

  4. The cost of capital is going up along with rates. It's more expensive for many companies to access capital and operate.

To give a real-world example, I own an e-commerce business that sells a lot of stuff on Amazon. Last year we were being offered loans in the 7.5% range, but today the rate is 12.99%. That means if we were to use (or need to use) the loans then we have to get a return far in excess of 12.99% just as the starting point for it to make sense.

When you start running the math everything changes. Strategies that were once profitable just a few months ago could now lose money.

Think of all of these buyouts over the last few years. A classic example is the Amazon aggregators. If they are buying Amazon co's using debt, as most are, then now the debt payments on the same amount of capital have gone up substantially.

With that, the aggregators can now only afford a much smaller amount of debt, which drags down the market multiples. So just having higher interest rates in the world made my actual e-commerce company worth less, even though its revenue and profit haven't budged.

This is an important concept for all those in business to grasp.

Meta is cutting costs and laying off 11,000 employees

Joining in on all the tech layoffs is Meta, laying off more than 11,000 employees (or 13% of their staff).

This goes to show that even Meta – where Zuck has complete voting control – has to face the realities of the market and rein in their spending.

All these stories point towards big tech, in general, coming to the realization they’ve overstaffed and overspent. What we see might be the changing landscape of hiring in tech going forward as companies focus on profitability over growth at all costs.

And who knows, maybe Meta is aware of something about the shifting economic tides. All that ad and ad spend data might give them exclusive insights into what'll happen in the world. Either way, something’s changing and this story is an important signal to take note of.

Note* Since Meta announced these layoffs, and a return to trying to actually make a profit, the stock has soared:

Bearly.ai: another cool text-based AI tool (free)

I feel like every week there is a new fun AI tool leveraging GPT-3. I thought this one was well done.

It's called Bearly.ai. It's essentially an always-there helper that you can use in your browser. Just use a keyboard shortcut and this box pops up.

GPT-3 is amazing, but the real value comes down to how it's applied. Content At Scale is a clear and unique example, where they built layers on top of GPT-3, and BearlyAI is as well.

It's the same algo, just used in an easy and efficient way.

Below is the "Executive Summary" function used on my article last week, which I thought was pretty well done. It's a long article and summarized it in 10 seconds.

Until next week,

Travis

Huge Disclaimer in Smaller Font

This content is being provided for information and discussion purposes only and should not be seen as a recommendation to do anything at all, especially not to buy or sell a security. Opinions expressed are that of the author, who is NOT a registered investment adviser, or a financial professional, or can barely even tie his shoes half the time. Do not try and copy the author or you’ll probably lose all of your money and have a rather bad day.

Scrooge McDuck wannabe