Hey, it's Eric Newcomer.
Welcome to the Newcomer podcast, excited to interview Albert
Wagner of Union Square Adventures.
He just published a book called The World After Capital
and gave us an excuse to talk about universal basic income,
the sort of revolution brought about
by this new age of the internet,
what he sees as a transformation to a world
from an industrial economy to sort of a knowledge economy.
So really get into some of the big issues, talk about
artificial intelligence, his early investment, Twilio,
the Silicon Valley bank bailout and bank bailouts,
generally, so it's a fun conversation about,
you know, the future of the world and the political system.
And towards the end of the conversation,
we talk about the state of software investing,
state of climate investing, and the sort of Silicon Valley
winter that we're all experiencing right now.
So really enjoyed the conversation,
give it a listen, thanks so much.
Albert, thanks for coming on the podcast.
We're excited to talk to you.
I've been tearing through the world after capital
and obviously a career's worth of venture capital,
gossip and experience, talk through,
but thanks for coming on Newcomer.
It's great to be here.
I think like me, the big conversation,
like reading the book in the current moment
is sort of this intersection of
the rise of artificial intelligence,
which to me is like proof of your argument
that we're moving to sort of a knowledge economy
and then paired with universal basic income,
which is something that I think you're still very passionate
about where my perception at least is some of like
the enthusiasm has like waned or like we can get into like
where UBI is in terms of like, I don't know,
something that is gonna be politically achievable
in our lifetimes, but I wanna start off
with this sort of intellectual idea behind your book.
You know, like, can you just sort of give the listener
a little bit of the economic transition
that you see is going right now?
The thrust of digital technology is that
it is fundamentally different from the kind of analog
machines that came before.
And it is as different, I argue in the book,
as kind of previous really large transitions.
And so what are the previous really large transitions?
Well, one is going for being, you know,
fortress, hunter-gatherers to being a grarian.
That's about 10,000 years ago.
And then the second big transition is from the
agurination to the industrial age.
And I think so much of the mistake that policymakers
all around the world have been making,
and sometimes also corporations,
is when digital came about, they were like,
oh, these are machines, they're computers,
they're machines, that's just like previous machines.
So nothing to see here.
Except they're nothing like previous machines.
And so we are finding ourselves in this transition,
but we're kind of trying desperately to keep ourselves
in the industrial age by Hooker Crook.
And, you know, things like quantitative easing
and the central bank printing a lot of money,
these are like attempts, failed attempts
to keep us in the industrial age.
And instead, our obligation today is to try
to invent this new age, to shape it,
to help bring it about, and to help hopefully
have a transition from the industrial age
into what I call the knowledge age,
that will be a smooth transition.
So that's the fundamental argument of the book.
And that's kind of where we are finding ourselves.
We're finding ourselves at the moment.
I'm gonna put in the dumbest way possible
and let you correct me, but like,
you know, I was playing around on TikTok today,
and as I read the book, that's like,
in some ways, a misallocation of my time.
Like, I don't even want really to be doing that,
but I have few mechanisms to discourage it.
TikTok gets away with like abusing my time,
and there's no market really to step in,
to solve how I'm spending my time, right?
Is that the truth?
Turn that into something smarter.
Yeah, so the argument of the book is that
each age of humanity had kind of a defining scarcity.
So, you know, the forage of age, it was just food.
Like, you found enough food, you know, that was great.
And then in the agroan age, it became land.
You had to have arable land in which you could grow something.
And then in the industrial age, it became capital.
Like, who can build machines and buildings
and railroads and infrastructure?
And now, the sort of defining scarcity's attention.
Like, what is it that we're paying attention to?
And we have all these attention-sucking machines, right?
So we have, you know, Twitter and Facebook
and Instagram and TikTok and whatever the latest one is, right?
So, our attention needs to be allocated to things.
And how are we going to figure out this allocation?
Well, a lot of things in the world get allocated
by the price mechanism, right?
And the price mechanism has been great
for deploying capital.
It's been great for making physical capital.
But it's terrible for attention.
Why is it terrible?
Because the most important thing to pay attention for,
it don't have markets.
And when you don't have markets, you kind of have prices, right?
Right.
And a good example of that is like, you know,
a lot of people are having kind of various kind of crises
of meaning.
And that's because if you don't consciously
invest time in understanding where does meaning
in my life come from, you're going to under-allocate
attention to sources of meaning.
And then eventually, you will find this in a place
where like, my life has no meaning, right?
Or as humanity, you will under-allocate attention
to fixing big problems like infectious disease, right?
Right.
So like, we had two warnings of coronavirus,
like two separate ones.
We had SARS and then we had MERS,
each about 10 years apart.
And were we prepared?
Absolutely not.
We were not paying enough attention to it.
So is the answer to the government stepping in
to solve the attention problem or what's the answer
that I'm proposing in the book?
The personal responsibility or?
Well, the answer I'm proposing in the book
is that step one is to free up a lot of attention.
So much of our attention today is kind of trapped
in these explicitly economically incentivized systems.
So what do I mean by this?
Most of us spent most day working for a living, right?
And we have wages that determine what we do.
And then we take that money, we spend it on consumption
and we have a huge machinery called advertising
that's telling us how much we should be consuming, right?
So we have a huge amount of attention trapped
in this kind of work and consumption loop.
We now see that with AI, for example,
we could do a lot of the work and we don't need humans
so we could put human attention elsewhere.
So I'm not really suggesting that right now
the government needs to decide these are all the things
that we need to pay attention to.
I think A, starting point is just to free up
human attention and then a lot of people may fight naturally
that they want to work on interesting things, right?
So now do I believe that government needs to spend money
on some of these things?
Absolutely, right?
So if you take them like the climate crisis,
it's a problem that is of such dimension
that only the government can direct as much resources
we need in order to fight the climate crisis.
So yes, so I would say at the end of the day
there's two important motions.
One is to free up attention and then two is to figure out
what are the things that we need to collectively pay attention to
and I believe in that government has a role to play.
Right, because in some ways like the game
of the current economic system is that jobs can always
capture your attention.
It's like if we don't have something for you to do
because AI is automating everything,
there are always services that you can provide
to another person at some new price
and therefore you can be sort of wrapped up
in this sort of market-based thing
I think you illustrate that some in the book,
that's how people's time is efficiently allocated
outside of their own preferences, right?
I mean, I guess one for your UBI at universal basic income,
I guess we're transitioning into a direct head-on UBI discussion
is that people need some sort of market incentive
and that the market adjusts to tell them how to spend their time
and that if they're totally free,
they're not gonna find meaning in that.
Do you disagree with that argument?
Yeah, I mean, look, I think the basic income isn't a panacea.
It doesn't in and of itself solve all problems
and if we keep, for example, our existing education system
and just add UBI, I don't think that's really going to work,
our existing education system is really geared towards
creating kind of a uniform product of people
who mostly lack curiosity because curiosity
is not generally a good trade when you work for a company.
The company wants you to go do what they want you to do
and not be very curious and sort of have lots of other ideas
of your own.
So yes, if we keep the existing education system
and they just pay people a bunch of money,
a lot of those people might not know what to do with themselves.
But I think people inherently, that's not a,
oh my God, people don't know, people aren't curious,
people aren't interested.
Young kids ask all sorts of questions,
mostly to the annoyance of their parents,
but kids are curious, they wanna learn
and we also do see that adults retain that to a degree.
So people go and they retire and some of them do nothing,
but many of them take up a new hobby
or they become socially engaged or environmentally engaged
or politically engaged in the community.
So I think this idea that people are kind of
not gonna know what to do with them is wrong,
but I do think we need to change the education system
where we help people understand what the curiosity is,
how to feed it, how to learn on their own,
how to be a citizen, all those things,
that we would want them to be if they have more free time.
So much of what you're saying resonates with me
to be clear, I mean, I always sort of the,
kid in high school, doing very well in school,
but being like, why do we have grades?
Like writing columns, like maligning sort of the education
system and how conformist it is.
And certainly I've been excited by universal basic income
and I wrote about it early.
I mean, Andy Stern has a big proponent from Union World
and my fiance actually did a documentary on Andrew Yang.
So we've followed him super closely.
And there have been all these experiments obviously too.
I think Sam Altman has funded some.
I think your funding, is that right?
What size of universal basic income do you think we'd need
for it to be meaningful?
Or like, what's the size of pay?
Yeah, I mean, my wife, Susan Danfiger, and I were funding
a basic income trial in the city of Hudson in New York
and we're killing people $500 a month for five years.
So it was, at the time that we launched it,
it was the only small city, a basic income pilot.
There was also the only one that paid people for more
than a year or two years.
So our view is that to really see the effect on people's
lives, you need to really commit to this
for a longer period of time.
But the amounts of money don't need to be very large.
Now, I think it's 500 enough, probably not.
Maybe it could be 800 or 1,000, but it
doesn't need to be many thousands.
And we intentionally chose a lower amount
because we wanted to show that even relatively low amounts
when they're guaranteed have a really big,
outsized influence on people's ability to change how they live.
What do you think they change about how they live?
Well, I mean, we've seen some of the things happening.
I mean, ironically, one of the things that people always say
with basic income people will stop working.
But actually, a lot of the, in our cohort,
just at this point, about 128 people,
the work has actually gone up.
And that often has to do with the people
have things in their lives that, you know, like,
their car is broken.
They don't have enough money to fix it.
So I can't go to a job that would require a car to get there.
So there are all these things that sometimes hold people back
from working more.
And by the way, this is one of the great things
about basic income.
It does not, in any way, shape or form,
discourage people from earning more.
Whereas the current welfare system very much does that, right?
Because if you're on current programs
and you start to work, you often face 100% plus tax rate.
Because you make money here, but then you lose all your benefits.
And so like, it put this huge hurdle.
And then people say, well, why do people
in welfare not work?
And like, well, if your marginal tax rate was 100%
would you go work?
Probably not, right?
Right.
I mean, one challenge with UBI politically has been
that in the abstract, both sides can find things
to like about it, right?
Conservative you tell about it and they're like,
oh, great, we get to strip away some of the bureaucracy
of the safety net, a liberal, you say, oh, we're like
helping poor people sort of more.
That's great.
But then if it were ever to become real policy,
and we sort of saw a test case with the payments
during COVID, the trade-offs are made, right?
It's like, okay, we didn't strip away the safety net.
We added money.
So conservatives don't like it or vice versa.
So I guess the question is first, is it about stripping out
some of the safety net for you?
And how do you see sort of the two sides
of the political spectrum actually coming around to UBI?
Yeah, I mean, I see that we're going to need to change everything.
And so, you know, so many of the discussions about
like this tactical versus that tactical aspect of UBI
are kind of mistaken because we have to change everything.
I just mentioned we have to change the way the school system works.
We have to change the way the tax system works.
People are always like, we can't change all those things.
So those things are like, they haven't been changeable.
Like, what are you talking about?
But the reality is the longer we pretend
that we can't change all those things,
the worse the actual transition will be, right?
And so, you know, how bad was the transition
from the agar and digital to the industrial age,
where it was a series of revolutions
and then ultimately two world wars?
That's bad.
That's really bad.
And guess what?
We changed everything.
Like, we changed everything.
We went from living in the countryside to living in the city.
We went from having, you know, these big extended families
to having nuclear families, there are no families.
We went from having lots of commons
to lots of private property.
And we changed the way religion works.
Like, we changed everything.
And so, the irony to me is sort of that this happened only,
like, basically started a couple of years ago and finished,
you know, call it roughly 1945, give or take.
Right.
So, this is a very recent event.
And yet, people look at this incredibly powerful technology
that we now have and go, oh, a few incremental changes here
that will fix it.
So, like, this tactical discussion about UBI, to me,
is sort of mistaken.
It's like, try to fine tune something on a new system
that we don't have when we have to build a whole new system.
Right.
And so, like, do I know exactly what UBI should look like?
No, but I can tell you that we need something like it, for sure.
And we need to change education.
And we need to change the tax code.
And we need to change everything.
And so, it's kind of always funny when you get caught
in these little, like, oh, but explain to me exactly how
this thing is going to work.
Definitely your book has a manifesto, as, you know,
and it's sort of like, it is a revolution.
I guess my question to you then would be,
do you think that most people today believe there's been
this sort of economic revolution, right?
You know, there's a socialist at Slate
who's sort of gaining some popularity,
who was criticizing SBB.
And a lot of the tactic there is actually, like,
actually nothing is revolutionary in the tech industry, right?
I don't know, you can see people on all sides
of the political spectrum in some ways downplaying
how revolutionary technology has been.
Do you think it's a consensus view that we are in the middle
of this, like, true economic revolution?
Well, it's more than an economic revolution, right?
In my mind, I think that's important
because it's just a revolution in capabilities.
So, the way I think of technology is what technology does
is it changes the set of capabilities that humanity has.
And then the things you can do include both good and bad things,
right?
The earliest technology that we had at humans was fire, right?
And fire is great because you can cook meat,
which gives it a lot more calories.
You can make clay and pots and other things.
But you can also use it to burn down
somebody else's village, right?
So, I don't see how anybody can look at digital technology
and go, oh, this doesn't vastly,
and I mean vastly change the set of possibilities
of what humanity can do, right?
So, like, for example, I can learn pretty much anything
that's ever been taught on the internet for free.
Right.
That is so radically different from anywhere where we've been,
right?
I can put some content up that is legible by anybody
who's connected to the internet.
I now have machines that can talk like a human, right?
That can create output that we previously,
if you had seen this output,
you'd be like, that's a very intelligent person who wrote that.
That's very well written.
That's very clear and concise, you know?
Like all those things.
And like, if anybody can look at that and go,
there's nothing to see here, I don't know.
I just like, to me, that's crazy.
And...
Yeah, you know, I agree largely.
But, I mean, artificial intelligence
or this wave of generative AI,
yeah, do you think it's just sort of improvement
along the same radical direction we've seen?
In my book, I write a little bit
about nonlinear technological change.
And the example I give is heavier than air-flied, right?
So, you know, for thousands of years,
humans dreamt about flying
because they could see the bird fly like,
oh, well, the bird's gonna fly, why can't we fly this?
And then we couldn't do it, couldn't do it, couldn't do it,
couldn't do it until the early 1900s,
when the red bird was kind of work,
among the first to figure out.
And then we went from figuring out
to getting to the moon in like 50 plus years, right?
Like, around 50, 60 years, give or take, right?
So, that's how you have to think of AI.
Like, we couldn't do it, couldn't do it.
Like, even recognizing faces,
like something we humans do all day, every day,
super easily, like even like babies can do,
like dogs can do, like, you know, we couldn't do it.
And then all of a sudden we can't.
And now the rate of progress is just extraordinarily fast, right?
And many people in the field have been taken aback
by just how fast the progress has been.
These are people like Jeff Hinton,
who was one of the early pioneers of using neural nets, you know?
And even somebody like Jeff is like,
I can't believe how much this is accelerating.
So, yeah, no, this is very real.
This isn't like some parlor trick or some kind of, you know,
incremental thing.
This is a complete change in the capability set
of what there's can do.
And, you know, the writing on this has been on the wall
for some time.
So, even I am surprised by the degree of acceleration,
but I have, you know, I've been around computers
since I was 13, which is well over 40 years ago at this point.
I've always been intrigued by AI
and I've followed this development closely.
And we have completely reached a new stage of what the.
Are you making investments or?
Oh, absolutely.
We're making investments.
This is going to change the way we interact with machines
in a very significant way.
And it's going to change where machines can be used.
Now, it will always take time, right?
So, I remember first seeing the web in 93 going,
oh my God, newspapers are dead like tomorrow.
And then it took 20 years, right?
And you can look at GPT-4 and look at the computer code,
for example, and it produces and go,
oh my God, we're not going to need
software developers tomorrow.
And that's wrong.
We are going to need software developers
because the system has a huge amount of inertia.
And so, getting the code writing capabilities of GPT-4
and more networks to come out there deployed
and replacing or, you know,
dramatically shrinking, for example, engineering teams,
that takes time.
You know, there's a lot of people who are like,
I've got all these deliveries to, you know,
I'm just managing my team.
And like, we don't even have the time to explore how to use this.
So, like, for this technology to go from here
is its capability set to it's having an actual impact,
takes some time.
Have you announced investments or?
We've made two investments, one in a company
that basically uses AI to understand human emotions better.
And one in a company that really reduces
the barriers to creation even further.
So, you know, think of it like what a macro is in Excel,
like, you know, somebody gets your macro, they've programmed it.
And now you just fill in the formula
and it does a lot of things.
You can think of this like the same for this type of generative AI.
Like, here's a kind of a wrapper so that you can type the simplest thing
and you don't even have to be like a clever prompt engineer
to go get something done.
I mean, USB, obviously, famously,
early investor and Coinbase.
I feel like there's sort of, I mean, we haven't talked about crypto
in sort of your utopian vision here.
And there's also this sort of cultural clash between crypto and AI world
that I don't know if I'm well positioned to articulate,
but I feel like you can sense on the internet.
I don't know. Do you sense this sort of like,
there's some sort of intellectual disagreements
between sort of the die-hard crypto people and sort of the AI?
I'm not sure. I mean, these are like always like various intersecting circles.
But let me make a couple of observations.
One is there are interesting crypto projects happening
to try and create a basic income outside of the state mechanism, right?
These are very early and they're very small, but they're interesting.
And Susan has World Coin or what?
Well, no, I mean, like circles is a good example.
That's a project that Susan and I have supported.
There's another project called Impact Markets.
There's a project called Proof of Humanity.
So there's a bunch of people working on this and that's interesting.
Then the other thing that's interesting about crypto is that
you can use it to sign digital items, right?
And so in a world where it's very easy to create fakes at the push of a button,
it becomes more important to sign everything so that you can sort of say,
this, like we could each use our keys, for example,
to sign this recording before you publish it.
And then, you know, that will be the official version.
And if somebody, you know, spliced in some content that had me or you saying crazy things,
we could be like, yeah, but that's not fine.
Like, this is signed with our key.
Oh, I see.
It's sort of an anti-AI or like, or a defense again, not anti-book.
Yeah, it's just, it's an authenticity certificate essentially, right?
And so crypto infrastructure will turn out to be very useful for that, right?
Because we could also take the video asset and persist it on chain.
So you can always point to it.
It's permanently persisted.
It's signed by us.
And so, you know, somebody trying to create a fake would not have access to those signatures
and as a result, their fake would be unsigned.
So I do think that there are interesting intersections.
I also think, for example, that it may be possible to use the crypto-type mechanism
to incentivize training for an AI.
So if you think about OpenAI, they, you know, raise billions of billions of dollars
and the training run for GPT for a loan probably costs hundreds of millions of dollars,
like a single training run, right?
But, you know, then you look at the amount of hardware dedicated in the world to running
Bitcoin and you could kind of see that with the right design, it might be possible to
have a decentralized version.
Now, there's algorithmic issues and there's issues of latency and all sorts of things.
A decentralized version of like the GPU, like, you could have decentralized contribution
of cheap use to model training.
And lots of current features.
AWS doesn't even seem to have totally figured that out.
You want centralized come first where it's...
Well, I mean, look, I'm just...
You asked me about the intersection between the AI and crypto and I'm saying I think there's
many different ways in which those two intersect, many meaningful and important ways.
On the UBI question specifically, like, do you think crypto is the main path for deploying
it or you're more...
No, I don't think so.
I mean, in the book I write about how, you know, everybody's always focused on, oh, we
got to cut these benefits, we're going to raise taxes.
And that's because everybody's just thinking about the fiscal mechanism.
And the fiscal mechanism is one mechanism and we should make some use of the fiscal mechanism.
But we've also been printing a metric ton of money and that money has been distributed
via the bank mechanism where it goes to God knows who, right?
And so I'm a big fan of getting to basic income through a combination of the fiscal
mechanism and the monetary mechanism.
So I think we should switch to whole reserve banking or full reserve banking and then
we should just give money to people directly.
You're still growing the money supply as the economy grows, but you're entering the money
supplies entering via the people.
People sometimes call this quantitative easing for the people, queuing for people as opposed
to queuing for wealthy or the banks, right?
And so I believe we have many mechanisms that have, by the way, that ties it to the current
banking crisis, right?
If we had whole reserve banking, there are no bank runs, right?
In the whole reserve world, there is no possibility of a bank run.
The banks are always fully backed.
I know you want to talk about this as a sort of utopian, almost like on purpose.
But I mean, it's hard for me not to want to know the immediate political moves.
To me, like UBI, Andrew Yang, despite wanting to come off as like an independent ran in
the Democratic primary, like it feels like in America inherently, this is like something
that you would need to get the Democratic Party to embrace in order to become sort of
policy in the United States.
Do you disagree with that?
Well, I think in the U.S. it feels to me like there are a couple of different motions available,
right?
So one is for a candidate to kind of succeed inside the Democratic Party.
It's actually also not impossible for a candidate to succeed with this, instead the Republican
Party.
I mean, the Republican Party today is very different from even before Trump.
And so it's not impossible that either party gets a candidate that is charismatic and
delivers the message and appeals to people and parties go, well, we'll throw our weight
behind this person, right?
As has recently been proven to be possible.
I mean, I'd love to see it.
I find it very hard to believe.
Like to me, my view on like a DeSantis is like, I mean, we saw in the Trump presidency,
right?
It's like talk a lot about cultural issues and then come in and cut taxes.
And it feels like any of the candidates that's going to get support in the Republican primary
is going to get people really upset about trans issues and then change and, you know,
cut taxes.
Like, that is like everything that's happened.
And in some ways, this is where the sort of, I don't know, political pragmatist versus sort
of, I think often in venture, there's a desire to talk in sort of big picture.
But then the reality is at some point, we're not going to have a choice, right?
So at some point, we will be forced by external and or internal events, right?
So, you know, I think if you look at the late agrarian age, right?
So if you look who was in power politically, it was landowners.
And when landowners saw what this new industrial infrastructure could do, they didn't think,
oh, here comes the industrial age.
They were like, oh, how can we have more land?
Like, you know, how can we build tax and battleship to have more land?
And ultimately, this wasn't decided by them.
It was decided by others.
And I think, you know, we can sit here all day and sort of say, oh, you know, it's hard
to make this a political reality, but it'll happen.
This current system is path that's experienced it.
It will not survive.
So it's just a question of, are we going to get a somewhat smooth transition or are
we going to get a horrible transition?
You know, all this is playing out against the backdrop of the climate crisis, which
is accelerating at an extraordinary pace too.
So there's external forcing functions.
There's potentially internal forcing functions.
So now the reason I'm writing the book, the reason I'm going on podcasts like yours
is to say it's not too late to actually make radical changes ourselves and not have them
be forced upon us.
And it's not too late for that yet, but eventually it'll be too late.
And so, you know, I think we are making that some progress on things like ranked choice
voting that opens the door for outside candidates.
It's not inconceivable at some point that there might be a third party that people might
splinter off.
And if you have ranked choice voting, they might actually get some work.
So I don't think we have exhausted the mechanisms.
And if the crisis gets bad enough, we may decide that we need more radical change any
who else.
So is the crisis as you see it, a jobs crisis?
I mean, to me, that's what people would respond to, right?
If AI is taking away jobs in some way, or what do you see the crisis, or it's a crisis
of meaning or what's it?
Well, the crisis is, I think, ongoing deteriorating conditions for a large part of the population
of economically deteriorating positions, ongoing deterioration of the environment, you know,
ongoing deterioration of the banking system that we all rely on.
And so I don't know exactly what the tipping point is or what the bad thing is that happens.
I think it'll be blindingly obvious and hindsight and very hard to predict and, you know, going
forward.
But like, it's not that hard to see what the pressure points are.
It's not that hard to see why people are upset.
I mean, I think, you know, Hillary Clinton dismissing Trump voters as despicable is a
horrible thing.
Like, there are people whose lives have been destroyed by globalization, whose families
have been destroyed, you know, who've lost their livelihoods, who've, you know, become
addicted to drugs and so forth.
I mean, people have very real problems.
And now, did Trump want to actually solve those?
No.
Like, did people actually have a reason why they were rejecting the system?
And then when you look at, you know, what Democrats have been doing, Democrats have
been bailing up Wall Street, you know, right?
I mean, like, bags are more powerful than they were before the global financial crisis.
No back ever.
You're saying because of the Silicon Valley bank bailout and the related bailouts to
that or no, I'm just, I'm just saying go back to 2008 to go back to the global financial
crisis, right?
2008 was extremely bipartisan.
I mean, probably potentially a mistake, but definitely a bipartisan move.
I mean, do you disagree with the Silicon Valley bank bailout?
No, no.
I mean, we had no choice, right?
So like the US had something like 300 plus bags that had negative equity.
So like you can't, like, if you give Silicon Valley bank depositors a haircut, you're basically
looking at shutting down those 300 bags and winding up with like six bags in the US, you
know?
So that was never an option.
I mean, it's a weird regulatory failure, right?
So bags are regulated and the stuff was visible months ago, like in November, it was visible
the Silicon Valley bank at negative equity.
That was visible in November.
And basically we could ask this question, how do we wind up with this weird banking system
where lots of banks failed at the most basic function of banking, which is to think that
interest rates might rise and if you interest rates rise, you know, you need to look what
kind of assets you're holding and you know, you need to hedge your interest rate risk
and like a lot of banks just didn't do it.
By the way, very large banks didn't do it except the very large banks benefited from
assets going there when there was a flight to safety.
Whereas if you had assets leaving, like Silicon Valley bank had assets leaving for two reasons.
Start with burn cash is what they do.
And number two, people were like, oh, I can make 4% interest on bonds.
Like so why shouldn't that be holding T-bills instead of being in my checking account?
So you have those two cuts of cash outflows pretty soon.
You have to realize your losses, which is what they had to do.
So I mean, there was a Trump administration bill to lower the standards for regional banking.
Yeah, but people like to point to that and say that's the reason, but it's not the reason.
Bank of America had exactly the same mistake.
Right, in terms of buying bonds that they shouldn't have or in terms of holding bonds
that were worth a lot less because they were low interest rate bonds and they hadn't hedged
the interest rate risk.
So with interest rose, it wiped out something like, you know, theoretically 60% of Bank
of America's equity.
So this wasn't limited.
So people like, oh, this only happened because we changed this.
Like it doesn't matter whether you changed it or not.
This was all public data.
Like regulators could still have said, holy cow, we need to step in much earlier.
Like we need to step in.
Basically, the second the Fed started really raising interest rates, back regulators should
have been like looking at every single bank and scrutinizing it in depth.
And that didn't happen.
Or if it did happen, they scrutinized and they decided to do nothing, which is even
weird.
So you use Square Ventures wrote a letter to its founders, warning them about the Silicon
Valley bank situation.
Can you give us some of the backsto?
Well, we did this in November of last year.
We went to our portfolio companies and we did not say a word about Silicon Valley bank.
We just went to all of our portfolio companies.
Once we had figured out that SBB was at risk, we went to all of our portfolio companies
and we said, look, you need to have more than one operating account.
You need to keep your money in assets that are, you know, not on the bank's balance sheet
for any bank, whatever bank you're with.
So like, you know, if you have a lot of assets, move them into T-bills, latter T-bills, move
them into a money market fund that holds T-bills, right?
So just don't keep them on bank's balance sheet.
So we did that with most of our portfolio companies, which is why we had very little
issues.
But then on the actual event, you know, as SBB stock was in free fall, we're like,
SBB's going out of business.
If you still have money there, you got to move it.
And you know, like, look, hindsight is 20, 20, could you be like, oh, well, it's clear
that it was going to get bailed out.
Okay.
And it wasn't clear.
And frankly, you know, that weekend was a very fraught weekend where there were people
in the administration arguing vigorously for, you know, forcing SBB depositors to take a
haircut or to allow them to be exposed to the risk that they would take a haircut if
SBB's holdings weren't enough to pay them back.
I mean, it's possible that SBB's holdings would have been enough to cover everybody without
the bailout.
Um, no, not possible.
No.
Just like your position was too bad and obviously too bad is your position.
Yeah.
I mean, you're complaining about the 2008 financial crisis, but it feels like Silicon
Valley isn't willing to bite the same bullet with Silicon Valley bank, right?
I mean, no, the problem is if it had just been SBB, I think there would have been a
legitimate argument, but it wasn't just SBB's 300 bags.
It was never a choice for the government.
Like if it had just been SBB, if like, you know, you'd be like, okay, that seems fair.
Like, you know, people back with SBB, I mean, I think there's this other whole question.
Like, should people really have to scrutinize their bank's balance?
You understand that their bank is sold when they're not clearly, like, yeah, let's leave
that aside for a moment.
Like if this had been limited to SBB, I think he could have made a strong case for people
should take a haircut, but it wasn't.
Right.
Like, government had one of two options, like bailout SBB or face a back run on some like
300 bags of the US.
But I think there's still a very live argument about whether the bank run itself was, what
created a contagion fear for all these banks or whether it was the key sort of long-term
duration issue.
You know, the old saying, how do you go backgriped?
Very slowly at first and then all at once, right?
So the bank run on SBB didn't start on that Wednesday of Thursday.
It had started in November.
Totally.
Yeah.
By the way, in November already, when they published the 10Q, there have been $3 billion
in outflows in the months before.
And in the 10Q, there's a footnote that says, if we take our ultimate surety holdings and
we mark them to market, here's how much less they be worth.
Right.
And in November, that was all of SBB's equity, all of it.
Right.
So now you combine that with more outflows that actual day of the bank run, that was
just the finale, but it had already happened.
Right.
SBB was already a debt bank walking weeks before that.
I believe just for like the listener, like a key piece of this is that then the government
comes in and says, okay, we'll bail people out of these hold to maturity positions where
if they're held, they're okay, but at the current market rate, they're underwater because
you could get a much better interest rate today.
And like they could have done that.
I mean, yeah, I mean, this is sort of a criticism of the government where they could have done
that earlier and potentially staved off a lot of these issues.
That's my point.
Right.
That's exactly the point I'm making.
Like, like this was knowable.
If it was knowable by us as Union Square Ventures, it sure was knowable by back-breaking
waves.
But you're making me be carried out somewhere with public information, not like it was said
information to work.
The government, you know, nobody's totally sure.
They're not like you weren't like going on CNBC and like hauling.
You know, there's obviously you gave the advice and like full credit, but I'm saying, you
know, you have markets because no one is fully certain.
It's hard to have a single government actor who knows.
And part of how we've created our banking system is that they can fail.
And therefore, you know, that's how we sort of prove out whether they're good or not.
Right.
I mean, that that's just how markets work that you have to allow failures if markets
are going to work.
And if bank gets or subject to the market system, they need to be able to agree with
you.
But that particular, that's my point about the global financial crisis.
We let, you know, basically two places fail and then we built everybody else out and we
made it easier for them to basically do the same thing again, which is to screw up royally
and screw up royally at a systemic level.
So yes, any one of those banks isn't systemic, but if you have 300 of them, that's kind of
a systemic problem.
Right.
Yeah, it's one thing to say people need to be able to fail.
Absolutely people need to be able.
But large correlated failure in the banking sector is not the market.
That's like wiping out like a core piece of financial infrastructure.
So I think I am all for things failing.
It's great.
And again, if SGB have been some isolated thing by all means the government should have
just been like, you know what it is, what it is and, you know, whatever it isn't insured,
you know, we're going to have to work it out and you'll get whatever you get.
Like, absolutely.
It's been great.
It just wasn't isolated.
Right.
They pair the, I don't want to keep on this forever, but they paired the announcement with
signature, which seemed like a troubled bank on its own.
In some ways that helped fuel the narrative that there was this like big contagion risk
where and it seemed like a bank like First Republic very well could have been fine without
the fear, right?
I mean, the fear is this sort of really hard to quantify thing because it was running wild
with regional banks.
Well, the issue is this again, if the banks hadn't made this mistake and if they hadn't
made this mistake at scale, meaning lots of banks have made it, we would have been in
a differentiation.
But that's not the situation where we're in.
I mean, it's a complete hypothetical and people like, well, if this happened, like, well,
it wasn't.
It's like, but this all ties together.
This is, I think, the point I'm trying to make this all ties together.
We have chosen the particular banking system, which is fractional reserve banking and we
have then used quantitative easing to try and use this fractional reserve banking system
to fix problems that are deeper and more profound and more structural problems.
And guess what?
It didn't fix those problems.
And as a result, we now wind up with a bigger problem, which is we are now winding up with
this problem where the dollar as a global reserve currency is something that is becoming
questionable.
And so like when people think the banking crisis is over, I think that's a mistake.
We are entering the worst and most complicated face on this because we have been very relied
as a nation on the dollar being the global reserve currency and that gig is slowly up.
And so you want to nationalize the banks or you want to make sure the banks hold all the
deposits basically that they lend out?
Basically, I'm a fan of whole reserve banking.
So in whole reserve banking, the banks can't just go to the Fed and make some money.
By the way, the interesting thing about basic income and whole reserve banking is that they
were both championed by people like Milton Friedman who aren't exactly known as progressives.
So I'm not a Milton Friedman fan overall, but when it comes to banking and basic income,
I think he had good ideas.
And so my point is these things, this is really what I'm trying to get across, I'm trying
to get across in the book is.
All these things are connected to each other.
The banking system, the tax code are connected to our ability to do something like basic
income.
And you can't, when people are like, oh, how are we going to pay for this?
Like you don't have to change the tax, you're going to have to change the banking system.
And by the way, we need to change the banking system anyhow, because it's broken, like deeply
irrevocably broken.
Right now we have the worst of all possible worth.
We have fully insured fractional reserve banking.
Like that's a really terrible system.
And why do we need to change everything?
We need to change everything because we've made a huge, as humanity, a huge technological
breakthrough with computers.
And now with the things computers can do in particular with AI.
And twice in the history of humanity, when we've had huge technological breakthroughs,
the first being agriculture, the second being, you know, like chemistry and machines and
electricity and stuff, like when those huge breakthroughs have happened, we have changed
everything.
We have completely reinvented the system.
And so when I hear like socialism versus capitalism, like that's an industrial age debate.
That's not the debate we should be having.
Those are industrial age concepts.
So like I don't care whether you are trying to fix this by a socialism or capitalism.
Those are both the wrong concept.
I mean, you talk in the book about, you know, just being an optimist by disposition.
And that's something that's, I think, you know, venture capitalists try to hold on to.
But I do think, you know, there has been a sense on some of, you know, I don't know, the
Andresan Horowitz's of the world of like nihilism.
Like I just hear this vision.
I'm like, I don't know if you could sell all your fellow VCs on this vision because it
does require optimism about what government can do or what people can do collectively
through some sort of central organization.
Like, have you tried to persuade any of the other venture capitalists of the world?
And what do you hear back from?
No, I mean, you know, the thing that I find is, is my book resonates, I find, especially
with younger people in tech who, you know, I believe have retained some optimism that
we can figure out how to use this technology, not just for bad things, but also for good
things.
And how, you know, historically we have been great beneficiaries of technology, right?
I mean, if we hadn't figured out to build tractors and so forth, we would also be working
the field.
So we wouldn't be having this conversation right now, right?
So I think, you know, it resonates somewhat less well with people who believe that all
products can be solved by markets, you know, and in the venture capital industry, there
a lot of people believe that all products can be solved by markets.
I think that's wrong.
And I argue the book why that's wrong.
So I think it resonates with people who have a little more of an open mind of that tends
to be, not always, but tends to be younger people.
You've famously invested super early in Twilio.
I actually did a big profile of Vessimer.
And I think you were the one you got in when they should have done it or they thought about
it.
And, you know, was a sort of high flying sort of pandemic stock that sort of come down to
earth and is, I don't know, part, just like a company that has come to like represent
a lot of like the excitement of software and sort of sometimes disillusionment.
What do you take of all the narratives imposed on Twilio and like, what should people take
from its journey in terms of making investments today?
Well, I mean, I think more broadly speaking, we've had a big correction in tech valuations.
And I think part of that is because software has become more routine and more boring.
And that's actually a good thing.
Right.
So, you know, when companies like everyone, Snowflake with public at like a hundred times
revenues, I'm like, well, that's not really as sustainable valuation, is it?
No.
So, I think over time, the stock market, even though it has lots of operations along the
way, but over time, it's well, gee, eventually these companies have to produce earnings.
And eventually those companies should be malleant on earnings and not just a potential, but
on actual earnings, not future.
But like, you know, I think the story here is that there are great businesses out there
and sometimes they get really overvalued and then sometimes they get really undervalued
and then, you know, sometimes it finds a kind of a good middle.
But I don't think there's anything particularly about the story of Twilio or any one other
company outside this rather large sort of idea for a moment that, you know, each one
of these companies was going to be fabulously profitable at some future point.
And so, not going to have competitors, not going to have margin pressure and so forth.
And I just think we've woken up to the fact that, no, these are companies.
They have competitors, they have margin pressure, they have their own growth issues, they need
to revitalize their own technology, et cetera, et cetera.
These are businesses like all other businesses and the rules of, you know, you have to sustain
some level of profitability to be a valuable company still apply.
It's kind of a maturation of software as an industry.
And that's a good thing as far as I'm concerned.
Do you have a view on what the right or the end state multiple is for some of these?
You know, it's hard to say because so much of that, again, depends on monetary policy,
right, and interest rates.
And so I don't think that's worth trying to forecast at the moment in time when I think
we have no idea what inflation or interest rates or monetary policies go to do because
we are in such, you know, unknown territory.
So if you think about the Fed's balance sheet, you know, which got longer significantly during
the global financial crisis and then it got longer again by a lot during COVID.
And then they were so slowly attempting to dial it back and then the new banking crisis
happened and they immediately shot it back up.
I think that story is far from having played itself out.
And so we're back to this money creation and we're still not giving the money to the people
who need it, which is everybody.
So I think this is far from, this is so far from over the idea that we have somehow stabilized
the system is like we have created the appearance of stability, but not actual stability.
And the appearance of stability is in some ways the more most interesting because it
lulls people into a sense of security when in fact the next careening out of control
will only be that much more severe because we haven't created actual stability.
If you could pick, sorry, you're drawing me back into the utopian debate, but if you could
pick between the government, you know, giving everybody, you know, I don't know, $500, what,
a month or using that money to like close like the deficit or reduce by down our debt.
Do you have a?
I don't think this is I really don't think this is an either or discussion at all.
You're like spend more.
This is always the wrong way.
No, it's very easy.
I think, you know, like we have a ton of tax loopholes that need to be closed.
Like we cannot get to basic income without also changing the tax code.
You know, for example, you know, I write about this in the book, like if you have a basic
income set up, you should be taxing every dollar that's made.
You shouldn't be like, oh, you get $14,000 free, whatever.
Like, no, you're getting money from the government.
So now every dollar you make, we're going to start taxing and we could have a much simplified
tax system.
But again, these things are incredibly hard.
And so people like Albert, you're saying we need to complement one hard thing by doing
another hard thing by doing another hard thing.
I'm like, yeah, as it turns out, when you have a system where you have all these interlocking
parts, the only way to get there is if you change all the parts.
And that's also why getting there is so difficult.
It's because people like, oh, I want to just tweak this one thing.
But like, no, you can't just tweak this one thing.
We don't have the luxury of just tweaking one thing.
You have this book.
You have a number of causes.
Is this a signal that in some ways you are investing less?
Are you pulling?
No, no.
So effectively investing, we have, we raised during COVID, we raised a climate fund and
we put that to work and we've raised a second climate fund and we're starting to put that
to work and I've made continue to make other software investments.
For instance, in a company called VIM that does an operating system for robots.
I've made crypto investments like Wallet Connect, which is crypto infrastructure.
So no, I've been keeping very active.
Yeah, let's talk about the climate fund.
I mean, it feels like the, you know, still kind of value obviously was famously burned
by clean tech.
It's sort of a while ago.
I interviewed Chris Sokka, I don't know, maybe a year and a half ago now for my newsletter
about lower carbon.
What's your read on, I guess, the venture ecosystems support for like the carbon thesis
right now?
Like, are you getting follow on?
I feel like there's sort of an early stage ecosystem forming.
Is there sort of the series B and beyond layer?
Yeah.
Definitely a need for more capital for sure.
I mean, it's great to see that some of the companies in our climate fund have been able
to raise following rounds.
Some of them easily, some of them had to work for it, but there have been a number of
following rounds.
Overall though, we are woefully under-resourcing climate relative to the significance of the
climate crisis, right?
And you know, the few days in April that we just had where it was 90 degrees, you know,
is a sign of the times, right?
It's only going in one direction and it's going there faster.
The latest IPCC report dropped during the S.B.
crisis, so nobody paid any attention to it.
But the numbers in it are eye-popping.
I mean, they're completely eye-popping.
And one has to keep in mind whenever one reads an IPCC report that those are the censored
numbers, right?
The worst numbers are never even included in the reports because the oil nation still
insists on those being excluded.
So you basically, even when you censor the worst outcomes, you still get eye-popping
numbers and you still get eye-popping observations.
And so not just forecasts.
These are actual observations.
Like the temperature of the oceans, for example, is completely off the charts.
It's like literally uncharted territory.
So yes, I think we're going to see more capital come this way because the signs are there and
because the very large funds, like the big pension funds, realize that, you know, if
they want to take care of their pensioners, they can't just be producing one-year returns.
They have to also make sure there's a planet on which those pensioners can live, right?
Are there a couple investments you can talk through and with this focus on like, oh, we
need to make money.
We have made very broad set of investments.
You know, we've invested in electrification of transportation, for example, we're investors
in a software company for electric vehicles and a charging network in India called Bolt.
We're investors in another company that takes existing vehicles and retrofits them to EV
called Shift in Egypt.
We've done things on replacing fuels with Sunfuell.
So not everything can operate as an EV, like big heavy-duty trucks will have a hard time
being EVs based on batteries way too much.
We have an investment company called Remora that captures the carbon that comes out of
the table with the truck.
They have an investment company called Radiant that makes a very small nuclear reactor.
Yeah, I was asking about a nuclear company.
Are you optimistic about those?
Yeah, absolutely.
You have some people who think that's going to solve everything.
Well, nothing is going to solve everything.
The idea that this is just like UBI isn't a panacea for what we need.
Nuclear isn't a panacea, right?
I mean, the scale of this problem, people still do not have a good sense of the scale
of this problem.
And the scale of this problem is going to require us to take a large percentage of GDP
on a sustained basis and apply it to this problem.
I personally think that 50% of GDP, people think that's laughable, but like whatever
you think is an order of magnitude, at least for where we are today in terms of what needs
to happen.
And so there isn't a single, just do this one thing in the climate crisis will be over
a problem.
Like, just to give some example, we have way too much carbon already in the atmosphere.
It needs to be brought down.
And we have the tools for doing that, but we need to deploy them.
Like that means planting more trees.
That means building more machinery that can scrub carbon dioxide from the atmosphere.
I feel like it's easy on the one hand, you know, I hope I imagine Silicon Valley people
believing in the science and generally believing in it.
But on the other hand, in a world of like exponential curves, I think there's almost
too much confidence that like, oh, we'll find some technology and we'll underestimate
how quickly, you know, it will improve and therefore be able to solve this problem, whether
it's climate capture or something else.
Like, what do you, what do you say to those sort of arguments?
I believe we just need to deploy more stuff and obviously we can't stop innovating either,
right?
So because again, you know, many people don't like the war metaphor, but I think the war
metaphor is quite useful.
You know, the kind of planes with the beginning of the war were different from the kind of
planes we had at the end because it was rapid innovation.
But we also built a lot of planes.
And I think we need to take exactly the same approach.
We need to take the stuff we have today, build a lot of it.
And as we do it, we need to also improve it and people are working on the improved stuff.
It's not either or it's not like, oh, let's just wait for the perfect innovation to come
along and that'll solve all problems.
That's stupid.
We got to take the stuff we already have and scale it.
And it would also be stupid to say, oh, the stuff we have, that's all we ever need.
Like, that's stuff innovating.
I just think it's never either or it's just both of these.
Like, let's deploy a lot of what we already know is working.
Like, you know, forests work.
This is well known.
Let's make sure we plant more trees.
Like that's easy.
We know nuclear works.
It's built more nuclear reactors.
That's easy.
And then we also know like, oh, there are these potential huge unblock, like fusion.
Like, let's actually invest in fusion.
Let's try that out.
Let's invest in more storage.
We have to do everything.
And the problem is in order to do everything, there's some things we have to stop doing.
And so part of that is like a lot of this sort of random overconsumption of stuff like
needs to stop for a while.
And so like economy.
Like what sort of the or?
Well, I mean, like people having 70 pairs of shoes, you know.
When you raise a climate fund at a venture capital firm, like, are you selling sort of
the same return profile as like a.
Yeah.
I mean, our fund isn't like a double bottom line fund or easy sheet fund or whatever.
We are trying to produce venture style returns.
Ask me a few years from now how that goes, but that's the plan.
Yeah.
But and you find like, are there limited partner?
I mean, obviously you raise the fund, but in terms of.
You raise different pretty much the same limited partners that are partners that are other
funds.
We have a few people who are just in the climate fund because that's what they care about.
But by and large, it's a huge overlap with our existing investor base.
You think in the venture world, like some of these mega funds are going to go away?
I mean, during dot com, you know, investors pulled back some of the LPs pulled back some
of their money.
And you saw, I'm sure founders fund saying that they were going to shift how they allocated
some of their money.
Like, I don't know, what do you think happens to some of these like super funds?
Well, I think what happened, we can talk about what happened and then we can talk about
what may happen.
So what happened is that all the very large funds put on a huge amount of money in 21 and
then immediately came back to the trough in 22.
By the way, same as true for you three, we put a lot of money in 21 and then came back
in 22.
In 21, a lot of funds got raised, including a lot of new funds, but in 22, only the existing
funds raised money.
So there was a kind of a flight to safety moment and there was a moment where LPs already felt
very overexposed.
And when they felt overexposed, they were not going to lose their slot in Sequoia, let's
say.
So they were going to give Sequoia more money.
So I think the real reckoning is not going to come for some time because all the big funds
raised more capital in 22 and have fresh powder.
And a lot of them have been deploying it very slowly.
So I would say that whether or not these big firms are going to succeed longer term is
going to be determined by the outcomes that play out over several years now because everybody's
taken the foot of the gas dramatically.
And I think the venture landscape was much more predictable is that many of the small
funds are not going to make that is much more predictable because there was a huge
proliferation of tiny funds and they're not going to be able to raise follow on funds,
even if they had good results in many cases, which is rather unfair.
But this just isn't money around because if you combine the fact that big LPs are overexposed
to the big funds and have the denominator effect, meaning their public holdings are down,
like there's just not a lot of money to go around for the smaller funds.
And I think that is very predictable.
It feels a little unfair that VCs are getting blamed.
You would think you would be judged against your vintage year, right?
Like if I launched it the worst time, but I did slightly better, I have some good companies
out of it.
I'm probably a good VC instead of getting judged just based on your timing of launching
a fund during a particular vintage.
But I guess that's just sort of the way that I just statistics professor at MIT, Jerry
Houseman, who would work into every lecture, he would finish some proof and usually proof
would show that he could conclude less from the data than he thought he would say, let's
just go to show one more time that life is unfair.
Everything a lecture by the way.
So I love it.
Thank you so much for coming on.
I really enjoyed it.
Yeah, my pleasure.
Good talking to you.
That's our episode.
Thanks for Albert Wegner for coming on the podcast from the New New Square Ventures.
I'm Eric Newcomer.
This has been the Newcomer podcast.
Shout out to Tommy Heron, our audio editor.
Riley Kinsello, my chief of staff.
Young Chomsky for the great music.
Like, comment, subscribe, YouTube, Apple, obviously subscribe to the Substack, Newcomer.co.
Thanks so much for listening.
We'll see you next week.
Goodbye, goodbye, goodbye, goodbye, goodbye, goodbye, goodbye.
.