Speaker 1: Welcome to the BiggerPockets Money podcast where we interview a mod for G and talk about the state of the tech industry.
Mindy: Hello, hello, hello. My name is Mindy Jenta and with me as always is my super nerd co-host, Scott Trench.
Scott: Thanks Mindy. It’s great to be here.
Mindy: Scott and I are here to make financial independence less scary. Less just for somebody else. To introduce you to everybody’s story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott: That’s right. Whether you want to retire early and travel the world, go on to make big-time investments and assets like real estate, start your own business or think about the technology industry like a seasoned technology CFO. We’ll help you reach your financial goals and get money out of the ways you can launch yourself towards those dreams.
Mindy: Scott, I am so excited to talk to a mod today. He was introduced to us by our friend Jordan Tibido, who runs the Silicon Valley Investors Club on Facebook. Aman has a huge amount of experience in the tech industry and is kind of the perfect person to talk to you today. So I am excited to bring him in in just a moment. But first, we’re going to give you our money moment. This is a new segment where we share a money hack tip or trick to help you on your financial journey. Today’s money moment is, if you’re traveling overseas, skip exchanging currency at the airport. Exchanging at the airport is one of the most expensive ways to trade US dollars. Instead, you can order currency at your local bank or credit union for pickup before you leave. In addition, you can also use a debit or credit card that has no foreign transaction fees or ATM fees. If you have a money tip for us, please email money moment at biggerpockets.com.
Scott: Awesome. and as a reminder, we’re always looking for guests to come on the show to share their money story or to be coached on our Fince Friday episodes. So if you’re interested, please apply at biggerpockets.com/guest or biggerpockets.com/financereview for the Fince Friday shows.
Mindy: All right, before we bring in a mod, let’s take a quick break.
Aman Virji is a senior financial executive with over 15 years of financial and operational experience in both private and public technology companies. He’s been a member of the management teams at some of the most successful companies in the world including PayPal, eBay and Sonos. He is now a VC making investments in early stage companies hoping that they turn into the next PayPal, eBay and Sonos. Aman, welcome to the Bigger Pockets Money podcast. I’m so excited to talk to you today.
Guest: Thank you, Mindy. Great to meet you, Scott. Excited to be here.
Mindy: Aman, can you give us a quick overview of your tech career and the businesses that you’ve worked for?
Guest: Yeah, easy, easy to do. So I went to Stanford University undergrad where in the late 1990s, tech was kind of sort of a thing. I studied a I did economics and political science and so I my initial my first job was an investment banking. But I met a lot of folks at Stanford who would go on to found PayPal a little little after I left. The principal founder was a guy named Peter Teal. Peter actually offered me a job right out of Stanford and I said, I said no. I went to work on Wall Street. I had bills to pay. I didn’t really understand, you know, we were in a tech bubble. I kind of understood what
Scott: What was your biggest financial mistake? That question.
Guest: Yeah, that question. Yeah. Okay. I think it was employee number 237 at PayPal and had I been an employee, let’s say 15 at PayPal. I probably wouldn’t be here right now. We would not be talking. I’d be on the beach Bali or something without range, not of signal and and who knows what, but I really enjoyed the the a stint I had at Wall Street. I went to law school. Peter tried to talk me out of law school. I went to Harvard law and I was like, I had in my head at that time, I wanted to go to law school, I wanted to go to Harvard. everyone wanted me to go to Harvard. My mom, my dad, my uncles, my friends, my mentors, all those all those idiots said go to Harvard. It’s the obvious thing to do. You’ll you PayPal will be there in three years, you know, all that stuff. And Peter was the only one to try to try talking me out of it. And uh, anyway, I graduated from law school, then I go to work for PayPal. I have a 10-year career at PayPal. first job was like the junior guy in the IPO deal team. So we were I was like the youngest, you know, member of that of that team. We were I was in the finance marketing and analytics side. Um, PayPal goes public, eBay vice PayPal. and so I’m working for eBay Inc for the next 10 years. And then my last job at PayPal was running finance and then I had a couple years at at eBay Inc running their North America finance team. Um, and then I left to go to Sonos, which is a consumer electronics company. It’s now public and traded on the NaSA. Uh, it was there for almost three years. Did another CFO stint in uh in New York, uh where my uh younger daughter was born. My older one was born in Boston I was at Sonos, the other one is a New Yorker. And then I came back to join my my old friend Dave Mcler who I’d met him at PayPal before before the IPO. He and I became fast friends. Our careers we were working together for like three years at PayPal or our careers diverged and we had separate commercially successful, you know, careers like Ronnie Dio and Black Sabbath or something. And then like they’re like we then we rejoined at uh his firm 500 startups in 2017. He was a CEO. He hired me as the chief operating officer. It was about five years ago and I’ve been a a venture capitalist working with Dave ever sense.
Mindy: Okay, so it’s safe to say that you know a little bit about the tech industry.
Guest: I think so. I’ve been around it enough anyway that I osmosis have picked something up.
Mindy: Great because I want to talk to you about the tech industry. Uh we’re seeing a lot of layoffs in the tech sector. Layoffs. FYI is a website that was created to track all of these layoffs and they’re reporting 340 tech companies have laid off 101,807 employees in 2023 alone, which sounds super scary. Some news reports are indicating that this is an ominous sign of things to come in the economy, while others like friends that I have in the tech uh in Silicon Valley are saying, no, this is just companies cutting the fat. What are you seeing?
Guest: Well, I think if you look at the if you look at layoffs at FYI and look at 2022 and 2023, I think it’s something like 260,000 announced layoffs and it’s it’s making news because a lot of these companies are like meta did a second round apparently, they announced it this week. They did another round in uh November. you know, it was like 11,000 people, it’s like 13% of the workforce. And PayPal is doing a 7% riff. Alphabet announced, I think 12,000, that’s about 6% of the workforce. So companies that are and then I think Amazon like is doing a a kind of a minor one at 5%. I think 5 to 10% layoffs. I mean, I used to when I used to work at PayPal from 2001 to 2010. I was working for Elon Musk at the at the very uh at the very outset. And then Peter Thiel was CEO. And then we had a number of like managers and who were coming from eBay with a little bit of that GE finance background, like operational excellence and they took efficiency really seriously. That was part of my part of my like job description was to make sure that we had efficiency metrics we were supposed to manage to. And we would do 5 or 10% layoffs every year. And we were growing at 30% a year. So this was like just part of the part of the bugging. I remember I remember walking in walking into uh more than one budget where we we had a great year, we grew the revenues by 30%, we increased profitability and my guidance to the team was like, let’s start with the exact same number of people you had last year and let’s make do with the exact same number of people next year. And how do we grow 30% without, you know, without adding a lot of people. where we were an internet company, we were supposed to be about efficiency and scale and if we can’t do it, then you know, who who on this planet could? And so that was just our mindset and that’s how we operated. So to to think of 5 or 10% you know, layoffs in the tech industry, that doesn’t really that doesn’t really scare me. I think the other the other piece of concept context to remember is the last five years, all these tech companies have just added a tremendous amount of head count. Like from 2000 from Q3 2019 to Q3 2022. Let’s just take those those three years as our benchmark. So meta added 94% to their workforce during that time. Amazon’s doubled, Alphabet added 57% to their head count, Microsoft added 53%. So like all these companies have essentially increased over the over that three-year period, they increased by 50 to 100% of their head count. So a five or 10% head count, I think is a lot more like trimming the fat, a little bit of operational excellence as their businesses have slowed down. They just tired for a different economic reality and they all they all bulked up during the pandemic. and I think a lot of that we knew was unsustainable. So I think what you’re seeing is just a little bit of the right sizing of the workforce, um, certainly nothing, you know, certainly nothing concerning or that suggests anything is untowar in in tech overall.
Scott: So you know, one of the things as a as an outsider, you know, let’s let’s use the Twitter example specifically, right? I mean, what percentage of the workforce at Twitter has been let go, forced out, encouraged out, whatever word you want to use uh to describe what’s been going on over there. And they don’t doesn’t the I I use Twitter, it seems like no impact to usability or anything on the platform. How how do we how do we kind of uh make sense of that situation?
Guest: Yeah, I think what’s happening at Twitter is a is a warning shot across the bow of all the all the tech companies. like Elon has figured, I think when if you look at the last uh I don’t know, 8 or 10 years that Twitter’s been a public company, there there was a time way back when right after they went public where they if you looked at the the head count they had, they were something like, I don’t know, 3,000 employees or so when they when they went public, they’re they were at 7500 when when Elon bought them. So they had they had more than doubled their head count and they hadn’t quite doubled their revenue. So their their costs were essentially increasing far faster than revenue. They weren’t making money when Elon took them over. If you had bought in on the Twitter IPO, like you not you would not have turned a profit in the seven or eight years post Twitter being a public company until until Elon bid, you know, $54 $54.20 a share. So it was not a good experience for shareholders. And Elon comes in and I think he basically said, I’m going to eliminate half the workforce. kind of like the Thanos snap, like half half of you are going to, you know, half of you are going to go away. So I guess 3700 was the number he was solving for. Um, he tweeted about a week ago that were with there’s been a lot of attrition and voluntary attrition and people just not wanted to work for the company where, you know, you’re going to have to work hard harder and work hard and you’re going to be accountable for results. And so there was additional attrition and the number he said in his tweet was 2300 employees left. So I guess that means about 70 a 70% head count reduction from from the moment that he took over the company, the site is still running, traffic is up over the last three months, not down. like the user metrics are all, there’s at least as much activity happening on the site as there was three months ago. Nothing’s crashed, like nothing’s broken. It seems like the the site’s working and I think you have to assume that, you know, that that example shows you that you can run tech companies on much leaner workforces. whether it’s a 60 or 70% reduction, it doesn’t seem like the product road map slowed down much either. They’re they’re innovating, they’re putting out new features, they’re they’re um, they’re launching and and pulling back new features and learning as they go. So it seems like it continues to work and and he’s he’s he said, hey, we can cut two- thirds of the workforce and nothing’s going down and maybe we’re actually better off on the other end. If other companies take that seriously and they start cutting costs the way that that he has, it’s it’s at least plausible that companies will start taking deeper cuts, 10 to 20% now, you know, not the 5 or 10% we’ve seen so far, but 10 to 20% now to get more more efficient and he’s proving that it’s possible.
Scott: What what do you think is happening there? Is it is it that these these these companies get bloated and these folks are actually in the way because there’s more people involved in project projects and that actually speeds things up in addition to reducing cost. You you’re a seasoned technology executive in the finance world. Yeah. Walk us through how you make sense of that and and uh maybe if there’s a harsh lesson or or something that we should take away from this.
Guest: Yeah, I can tell you exactly how um I can tell I can tell you from personal experience how it happened at at PayPal and eBay. The the early PayPal team like 2001, 2002, we we had as part of our KPIs like Peter pushed it to David Sack who was my boss and David pushed it out to the rest of the organization who was the COO. We were aiming for 1 million in revenue per employee. This is back in 2000, 2001, 2002. So that’s the goal that we were shooting for on every budgeting cycle. and we were able to maintain we were able to maintain that for a lot of those 2000s. If I look today at where PayPal is, it’s something like $820,000 in revenue per employee. So after 20 years, it hasn’t improved. In fact, it’s gotten a little bit backwards despite inflation and, you know, all the other stuff that’s like the dollar is not doesn’t buy now what it did back then. So somehow they’ve been able to add head count at a rate that actually means they’re not they’re not getting more productive. So how how does that happen? Well one as the as the organizations grow, there’s a tendency for scope creep and and bloat. I remember back in 2009, 10 at eBay, we we looked at a a whole workforce plan because we had to cut costs in that recession. We ended up downsizing by 30% in in 2008, 2009. and we were looking for job descriptions and who was doing what and there were multiple job descriptions for people doing the exact same thing. There was conflict, but we had a US team looking at the PNL one way, they they included certain metrics and excluded certain metrics and kind of made sense, but it was the US way of doing it. So I fly to Europe and they pitch me a whole different presentation about their team and the metrics don’t tie. Like if I add US and Europe and Asia, it doesn’t it doesn’t add to what we’re reporting to Wall Street. I’m like, how come this isn’t tied to what we’re reporting to Wall Street. It doesn’t make sense. I have three different geographies, right? Not not more than three. This should have all add to a number that I that I can recognize. So the Europeans told me, well, you know, the US guys are excluding all those metrics. We include them. I’m like, well why would you do that? Well, it makes sense because, you know, uh, we think it makes sense for a business. It’s the exact same business that the Americans just in a different language. Yeah, but we have a different opinion. I’m like, okay. So who reports the metrics in the US? It’s like a US based team. Who reports the metrics in Europe? It’s a European team. They’re doing the exact same work, but you have different processes and methodologies, so they’re just duplicating the effort. And so there’s a team in Prague doing what the team in San Jose is doing. And this goes on and on. So what we ended up doing is we said, look, let’s centralize all the analytics, put them under one team. We’ll have them all report to the same person. We’ll basically cut the head counting half and because now the metrics tie and I don’t have to make sense of this this gibberish. I’m actually much more efficient in the job that I’m doing. and I think there are tons of examples that, you know, at Twitter that are just duplicated teams doing work. There there’s empire building, people coming in and they hire people and it just becomes hard to hard to manage. I think in Twitter in particular too over the last three years, they’ve had a content moderation policy that’s much more active than what it should be or at least what Elon Musk thinks it should be. Um, so they’ve got individuals going through statements looking for offensive statements and hate speech and just using judgment calls in order to essentially patrol the site. and that’s a very manual intensive process without a lot of transparency and a lot of use of AI to figure the stuff out. And so I think they’ve just put a lot of a lot of time and a lot of effort into these kinds of content moderation efforts and that’s just been hugely unproductive and that’s that’s how they can double head count without doubling revenue.
Scott: How how do you even justify the uh incredible compensation achieved by the very short-lived Twitter CEO prior to Musk? I think uh his name was Parag Agrawal.
Guest: Yes. I uh I can’t. I’m not I I don’t want to. Scott laughs. Guest: I think it’s I actually think it’s uh I think it’s obscene. I think what those payouts look like and the general council, I think those are just incredibly obscene payouts that just have there’s no real justification for it other than they negotiated that as part of their contracts, I guess and so more more power to them. but as a Twitter shareholder, that that’s that should just incense Twitter shareholders.
Scott: So I’m an employee at one of these companies and um Aman has come in as the CFO. I’m I’m worried because uh this guy is gonna uh uh right size the business or whatever whatever this is, right? for potentially, if I’m if I’m at risk. How do I how do I think about it at my level if I’m making decisions about my well-being? Is my division adding value? Is my role uh because I can’t see that as a front line employee or an engineer at Twitter whether I’m directly correlated with with business outcomes or or whatever. What what are some ways to kind of get your spidey senses tingling and and kind of recognize whether those risks are apparent in your role in your division. How can you stand out?
Guest: It’s a great question. I think it’s really incumbent on on uh like it’s a tough to ask a um I guess in your words, a front line employee or someone who is kind of junior of the organization to understand what the what the value add is But that really clear direction from the top and if it’s confusing or if the the deliverable or the metrics aren’t clear, uh, you know, I think that’s I think that’s it’s it’s challenging for the junior employees to do it and it’s really incumbent on management to provide that clarity. I think in every organization a new like in my job coming in if I had to send that message about efficiency, what what I would try to do is with the management team, we had to we had to figure out what the focus priorities are, what we’re going to do, what we’re not going to do and be very clear about the deliverables and the metrics and then be cascade that through all of our employees. and if you if you know what those metrics are and you know what the company’s priorities are and you are working on those projects with real actionable metrics and deliverables, then you feel as a as an employee, you feel like, okay, I’m useful, you know, I’m doing what I’m supposed to be doing. this feels right. Um, now the reality is, you know, companies change strategy all the time and so those those goals change and uh and in some cases the employees going to get caught as collateral damage. But I think that you know, at Twitter, I think the message from Elon was was very clear. you’re gonna work a lot harder than you were before. We’re gonna have clear metrics and deliverables. Um this whole work from home thing is probably not gonna happen anymore. So this’s gonna be an emphasis on coming into the office. and he’s also, you know, he’s also said like I’m a and I’m here because I want free speech. So if you’re the kind of person who’s like really rooting for um censorship and the elimination of hate speech and you want to kick off, you know, the sitting president of the United States because he said something offensive. but you want to keep the Chinese Communist party. Like if you want to engage in all those debates and interactions about who gets to who gets to engage in free speech. This is probably not going to be a good culture fit for you, you know, so if you’re your spidey senses is like, ugh, this this doesn’t seem like the direction of the company. I’m not sure I want to work more than 40 hours a week, you know, I’m pretty happy working from home. Like if that’s you, you’re you’re spidey sense should be up, you know, up up up. But if you seem like I you know, I can I can dig what Elon’s saying, I get what the deliverables are, they’re clear. I’m excited about working at a site that that really makes a difference and stands for something like being a free speech platform, then you know, I would imagine those employees would want to double down. And I think we saw a self-selecting uh process where a lot of those employees stuck stayed and a lot of them just they got a severance package and it was very generous and they and they left and that’s all that’s all great.
Mindy: Do these deep cuts have any effect on the economy? These are high paying jobs that are just gone now and they’re and I mean they’re still centered primarily in the San Francisco, Palo Alto, San Jose area, right? I mean all of these people they were they may have been working from home and that home may have, you know, moved while they were out of work for so out of the office for so long, but it’s primarily, I don’t want to say affecting because it seems like it’s a small percentage, 5%, 10% of the whole workforce there, but Yeah. But are you seeing any sort of economic uh, impact locally with these cuts?
Guest: Yeah, I think so. It feels, it does feel local. I think um, like by the way, I don’t think we’ll see anything from Apple. I we’ll Apple runs a very tight ship. Um, during that whole three-year period where like Meta added 94% and Google and Microsoft were adding 50%. Um, Apple added only 20% to their workforce. and I think they did that just because they’re a a consumer hardware business, they they know about business cycles. They they didn’t benefit like the other companies at the early part of the pandemic. They actually they had lockdowns in China that affected inventory and had to sell their stuff, all the stores had to close. So, I think they took some hard actions early on and have actually come out of it, you know, really well. The other tech companies are right, it’s a local effect. So in San Francisco if you go there today, um, it just feels like a little bit of a, I don’t know, the walking Dead or something. Like the commercial vacancy in uh, the vacancies in commercial buildings is something like 30% in San Francisco. It hasn’t come down post the pandemic. Um, buildings are empty, employees aren’t coming in. Um, school budgets are being cut just because, you know, they weren’t the number of students have gone down and and the budgets are kind of tied to the number of students. So budgets are coming down here in Palo Alto where I live, the budgets, the the public schools were kind of flat, you know, we were up 2% year over a year. Um, 2% is not a lot when when inflation is at 7% and parents were kind of kicking and screaming about, you know, why you know, why are we paying higher taxes and inflation is up and and um, the teachers obviously want more but there just isn’t the money to go around. So what’s affecting the Bay Area a little bit. I don’t think the unemployment rate here is still 5%. so it’s still, you know, a really strong economy overall, the tech out to side, the unemployment rate in the country is 3 and a half% and it’s been like unbelievable. Last six months have just been record low unemployment rates like 50-year lows in the unemployment rate. So the the uh the overall economy seems to do seems to be doing fine and I think the the affected workers are being absorbed in other industries. So I don’t I don’t I don’t worry for the rest of the country, particularly the sunbelt. but I do feel like California and maybe New York are seeing and maybe Illinois are seeing some some more localized slowdowns and and you’re seeing that in some of their employment rates and where people choose to live now.
Scott: To lean operations cause any risks like worker burnout, security risks, etc?
Guest: I think they can if not managed properly. I think in my experience the the uh some of the best times I had were was PayPal like early on. It was just a a lean but very aligned team. and we all kind of knew what we were doing. Um, I remember David had a rule like if there were more than four people in a meeting, you you shouldn’t be here. Like we shouldn’t have meetings of more than four people. So let’s just let’s just end it and there are totally fine if you want to leave the meeting and go do work because we shouldn’t just we shouldn’t have too many people in this meeting. I moved over to eBay and we routinely had like 12-person meetings. My calendar was booked from every half hour increments by my executive assistant from like 8:30 in the morning to 6:00 p.m. and every every meeting was like 12 people or more. Everyone wanted to be in, you know, I guess these these broader conversations and representing their otherwise silo business unit. and that’s kind of demoralizing too, right? So I think just being around organizations that are that have too many people and aren’t productive has its own form of toll. So I think if, you know, I think the the opportunity is to to be leaner and more focused and that could be more satisfying, but it’s it’s hard to manage and managers have never done that before, you know, we’ll have to learn how to do it. And so I think there is a risk that some of these organizations will have just fatigue and burnout and and as employees opt out and your friends leave, that’s always, you know, at least temporarily demoralizing.
Scott: So walk us through how this how this impacts the uh a venture capital world, right? Um in the last yes year or so, transaction volume, investment activity has dropped off a cliff, right? Um, from from the 2022 first part of 2022 and 2021. Uh how is that impacting what you do currently and how you think about investing in businesses? Are you looking for lean, well-run, of course, we’re looking for well, but what what specifically is change? the growth at all costs versus profitability?
Guest: That’s exactly it. I think in 2021, you know, in a lot of in a lot of categories, the the availability of financing made it easy for companies that that were burning cash to raise a lot of money, keep burning, invest in growth. And so there were a lot of a lot of exciting but high growth startups and a lot of companies especially in more speculative categories like crypto, um, and Web 3.0 generally were favorite categories just because they seem exciting. there’s a possibility of a long-term payoff when money is free, you can you can plan, you know, five years ahead, uh borrow at really low interest rates and and uh swing for the fences. and as the interest rates have gone up and money is no longer free. so fundraising has been much, much tougher this year. We’ve seen it at our at our firm but I think across the board it’s just a harder conversation for for venture capitalist to raise money. so money’s not free anymore and and startups that were in these speculative categories have just seen their evaluations get not sideways. And now I think as as we’re financing now, we’re much more focused on, you know, what’s your what how much cash do you have? what’s your burn? how do you manage burn? If you have to trade off growth for unit economics, you should trade off you should make that trade off. focus on profitability, we wouldn’t call it profitability but at least unit economics, which means that the margin for each customer you should be able to make make money on each additional customer and know how you’re doing that. If you’re burning cash, you have to be able to demonstrate why that why that makes sense in the long run. and founders who can’t can’t do that are essentially getting eliminated. Like every quarter we’re seeing more and more startups not being able to to make the cut. So I think the good news is it’s it’s creating some it’s creating better founders because they have to manage into the downturn, they have to figure out how to make these tradeoffs and manage their burn. And the surviving companies are a higher quality than than uh than everyone else. So that that’s creating I think a positive selection bias. but whether weathering the next, you know, year or so, having weathered the last year and having to weather the next year just means there’s going to be some continued attrition and so we’re just being selective, we’re focusing on unit economics, we’re going to have their categories that make money that can generate revenue, like SAS or Fintech and just staying away from some of the more speculative categories like crypto.
Scott: Is the pressure you’re seeing coming on revenue production and like like EBIDA, the the the creation of of cash flow in these businesses or is it a valuation compression due to rising interest rates that’s forcing the the toughness that that needs to come in in in selection bias that as you you’re talking about.
Guest: Yeah, it’s it’s a bit of both. The conversation I have with the founders is always just focus on what the first thing you said, cash flow and can you make money? And it doesn’t have to be EBIDA, but it has to be profitability at the customer or cohort level. Don’t don’t worry about that but then but then everyone’s like, ah, okay, that sounds hard. Yeah, that’s it’s running a business. and everyone gets worried about valuation and the valuations are definitely like we’ve been cut in half in the private sector and very few people want to take that, take that medicine and they feel bad about the valuations. But you know, I have the benefit of having a maybe this is where the Peter Teal story pays dividends like I my my my Wall Street background has made me savvy to the ways of finance. And so I know how valuations get set. And I keep telling these founders that it’s a lot of this is stuff you can’t control. Like think about when Facebook went public, their their their valuation was like 45, they had a $45 a share price. They were trying to go public at 100 billion dollars. I don’t know why, 100 billion is like a Nice round number, you know, it feels feels nice. Yeah. And so they kind of first the valuation up up up and they got out and you know, that was great, but then within the next two weeks they were down to $18 a share. So they were cut in half, more than cut in half. the exact same company. The exact same company that went public three weeks ago went from 100 billion valuation to 50 billion. Today they’re up to 400 billion. Let me just check the ticker. Yeah, 400 billion today. They were at a trillion dollars, you know, now then they came down. You think like, you know, is it the same company that’s just delivering results? Yeah, but somehow the valuations go up and down because stocks go up and down. There’s nothing you can do about it. So if the market sets your valuation at a billion dollars or at 100 million dollars, like don’t sweat it, you know, it’s just a, it’s a short-term thing, tomorrow will be different, you can’t control it. Well you can’t control is, am I gonna build a successful business with revenue, unit economics that lead a profitability and do the right thing for my customers and shareholders. If you do those things, the rest will take care of itself. And it’s what gets, um, I think it’s just psychology. The there’s people get worried about stickers and sticker prices and valuations. It is tougher to challenge, it is tougher to manage now in a downturn because making money is harder, growth, you can’t, you don’t have free money to grow, so the growth has to be disciplined, it has to be focused on recurring growth that’s sustainable, you have to make tradeoffs for unit economics, you have to make tough decisions to not, you know, not hire um, as much as you would a year ago and that means focusing and prioritizing. So it’s it’s hard work and that that’s really where the the bulk of the battle ought to be and and should be and that’s where it’s gonna be win or lost.
Scott: So can you give us some practical examples then of change of of uh uh the changes that are happening in real time in the last year to that are in, you know, aligned with what you just said, folks shifting from from growth at all costs to uni economics. Like what what’s a specific example of this?
Guest: Yeah, I I think it comes down to when when you could raise money every year, it’s easy to throw money into marketing and you’re spending money on growing new customers and then selling them new stuff and you can show like hey, I’ve got a payback period of I don’t know, two years. So every customer I buy essentially the unit economics works that they pay back within two years and that’s that’s okay, you know, that sounds like a lot of founders think that’s really good. If I look at the last 75 companies that have gone public, that were unprofitable. They’re like SAS companies. their median payback is like one and a half years. So I tell founders, you got to get from two years to one and a half. So you got to like optimize what you’re spending, which means you got to know what works and what doesn’t. You got to experiment. If you’re throwing money at Facebook and Tik Tok and throwing money at Instagram, like just you got to be disciplined about your your test results. You got to be tough on sales comp, you got to really think about uh quotas and how you’re managing the sales team so the right kinds of incentives. And so and if you’re not, you know, you can’t you can’t waste money. So a lot of companies are located here in here in Palo Alto and I don’t really know why companies that are, you know, that are starting up would want to spend money on Palo Alto real estate? I I live in Palo Alto and I just had this conversation with my my ex-wife and we’re very amicable relationship and she wants to move from Palo Alto. she’s like, oh, you know, and by agreement whether we have kids and so we’re like any anytime one of us wants to move, you want to have a a handshake agreement to be, you know, in in sync with who’s gonna live where, not to veto the other but just so we can support the kids and I’m like, you don’t you don’t have to be in Palo Alto. She’s like, oh, I don’t know. I’ve lived in Palo Alto all these years. What do you think? She goes to Redwood City, literally 20 minutes uh 20 minutes north of here. and the rents are 20% lower. And she’s like, heck, if we don’t have to be in Palo Alto anymore because the kids are at the at the age when we don’t have to be in the Palo Alto school system, why don’t I move to Redwood City and save myself, you know, $1,200 a month. I’m like, that’s a great idea. In fact, I should tell all my founders, just move to Redwood City, move to, you don’t have to be in Palo Alto with Stanford campus, Sandhill Road, you know, you don’t have to be in San Francisco with their rents, just you can move to Redwood City or San Jose. As Mindy said, you can be in, you know, freaking Arizona and working from home, like you guys have a distributed workforce. You can hire people in India. you could hire people in different geographies to cut costs and have really good. I was I was just in Armenia, you know, for um, for a a business trip last week. Uh, talk about great developers at like 10 a 10th of the price and they’re dying to have people come and Silicon Valley company is coming to hire there. Like if you do a little bit of that work, you can build these distributed teams at a much lower cost footprint. Um now companies have to figure that out, which is I think a really a really positive thing because it will it’ll help him in the long run. So those are all real specific examples in the past week where we’ve we’ve helped companies to manage and cut their costs by just thinking about geography, location, um marketing spend and where you want to where do you want to hire your development team?
Mindy: So if I am an investor and I’m looking at companies, I’m contemplating investing uh not at the IPO but shortly thereafter. What should I be looking for when I’m evaluating these companies?
Guest: So into the into the public markets, you mean.
Mindy: In the in the public markets. I don’t have VC money, so I have to wait till they go public.
Guest: Yeah. I think the uh, you know, what what the category, the the category that I like a lot for public companies right now is the software as a service category. You’ll get a lot of companies going coming public, I think in the next 6 to 12 months as the markets reopen with really strong franchises and the SAS companies that we that we like are typically growing at more than 50% year- over- a- year. So you’re looking for I think growth, you’re looking for a company that has a um has a retention rate with their customers that’s really, really high. Over 100% is excellent. Um and then you don’t have to worry about profitability that much. But if if the company is growing and the the retention rate is over 100%, typically those companies have done really well. If you would just systematically invested in those companies over the past 10 years, you would have probably made 20% a year in the in the public markets. So I don’t I think it’s good to be, you know, you don’t have to be very selective. The the as the company’s come public, it’s a very, if you don’t really know the space well, you don’t know much about the markets and what they do, um, rather than focusing on what you don’t know, just be systematic about deploying money across a bunch of companies, take a bit of a basket approach, diversify your risk. and I think if you just think, let me bet on SAS over the next five or 10 years given the valuations that we’re seeing right now in public companies. I think that’s a really good recipe for success for the long term. You know, on this question of what what do we what do you invest in public markets? One of my favorite investors is Warren Buffett. It was not the biggest tech fan, although I think he is a very good and thoughtful. Um I mean I’d like to hear what what he has to say and I followed a lot of his his disciplines and um and then of course I have my own. But he was telling this wonderful wonderful story about the first the first stock he bought as a kid in 1942. And I can’t remember the name of the the name of the stock. but he like he was like nine years old or something and he was following it in the Wall Street Journal or in the in the trades or whatever at the time. and he like he bought this the stock at $39. and he was telling the story about how excited he was because he had researched the company and he he liked it and he knew what he did and he had some, I guess some intuition about it. And he’s like it went down to $37. and I was really disappointed. Like I came home from from school and I was crestfallen. and then went up to $42 and I sold it and I made, you know, three bucks a share and um and do you think the story is going to enough with, oh, and I was hooked because I made money. so I was really happy and like for the rest of my life, I was into stocks. And he’s like, you know what? I shouldn’t have I shouldn’t have sold at 42 bucks a share. because a year later it was 200 bucks a share. and he bought these he bought this in like 19462 and the headline, he showed the headlines for the New York Times in 1942 and it was like three months after Pearl Harbor and the markets were tanking and everyone was, you know, all the bad news about was all the experts were saying you should sell this company, that company. and I think deep down he was like, I just I just fundamentally found that America was going to win. We’re going to win the war, we’re going to win this generation or company’s going to do well. So he says, if I just put $10,000 into the stock market in 1942 and just done nothing at all. Never traded, never bought, never sold. What do you think that $10,000 would be worth today? So think about that and have a have a number in your head. The answer is $51 million. Like you would have $51 million if all you would have done is just put the stock market on autopilot and you didn’t have to learn about accounting, you didn’t have to have a conversation with your stock broker about the latest hot stock. And so it’s like the lesson is, yes, we buy companies and where, you know, we’re very good at evaluating great businesses, but if if all you do is just systematically bet on America. That’s, you know, that’s pretty winning strategy for 80 years at least. Probably since 1776, at least it’s a 250 year strategy and rising. And I think with SAS and tech, a lot of this too is that you can be, you know, clever and you can pick and choose your winners, but systematically, if you just think technology is going to be a great force for the next 10 years for for progress and economic wins, the valuations in tech have been really badly beaten up in the last year and we’re trading at a PE ratio or a SAS multiple. they’re just that they’re just below their average. their long-term average. not terrible, but just below their long-term average. Anytime you bet on tech and it’s cheap to some historical mean, that’s I think just just go for it and just put a little bit of money in and diversify and you know, don’t don’t worry about the stock price the next day. Don’t worry about the next Pearl Harbor. Well maybe she’d worry about the next Pearl Harbor, but you know, don’t don’t get too threat, don’t get too worried about the the minutia and the day-to-day transactions. just think about like what are the next 10 years look like and um and find companies that you think are at reasonable multiples that you can know that feel that SAS or growth mindset and you should do fine.
Scott: I love that mentality. I think that’s fantastic. I I I think that’s a a great nugget here and by the way, um without getting into a whole geopolitical discussion, I think there’s a lot of reasons to think that America is poised again for the next 30, 50 years as one of the strongest uh countries developed nations in the world. Um we’ve got a lot of population, all that kind of good stuff. Uh uh demographic trends that are relatively less bad, is one way to put it, than the other developed countries in the world. But let let’s let’s um I I would love to chat about what you look for in a specific investment as it relates to the management team and and uh the founder or CEO. Um what what what specific qualities are you looking for there in addition to of course the growth and the unit economic um, evaluation that you’re looking for.
Guest: Oh, that’s a great question. Um, so it depends a lot on the stage. You have a do you have a stage in mind or are you just asking for a
Scott: Yeah, you know, uh, seven the employees, you know, uh, you know, uh, middle market, uh, business size, that kind of that that kind of growth profile. self-interest, no self-interest at all.
Guest: Sounds like it sounds like a self-serving question, but the 70 companies is still early. So those are, you know, those are still companies where they um, they should definitely have a uh, like a a product market fit. um, and I think the the the best things are like the a manager or a CEO who I think at that stage is probably, so let’s see, they’ve probably got, you know, I don’t know, 6 to 10 direct reports. everyone’s different and there’s no right answer, but if I go back to the GE Jack Welsh mindset, which has a lot of merit and I think the Valley can learn a lot from, I think he was like arguing that 6 to 9 direct report is sort of the right the right number, more than that is too much, you know, and and so at 70 employees, maybe all your directs have a direct. So you’re the CEO probably knows everyone, right? At that stage. Now you’re about to tip into this territory where the CEO doesn’t doesn’t know anyone past 70 to 100 people and so you’d better hope that that next level down is really good and they can hire really talented people and that they know what they’re doing because the CEO can can only have so much impact at the at this level now. So the company I think is is is hopefully in a place where um it’s got a solid business, it has product market fit, it’s growing, they know who their customers are and the and the CEO is very focused on the customer and then has done a really good job of communicating to the next level and the next level like what the what the priorities are. Um and I would look for like how do you hold people accountable? What what are the metrics that they talk to you about in every quarter? whenever you meet them for your for your performance review, what are your what are your conversations like? Um if it feels tight and crisp, that’s that’s a really good sign. If it feels loosey-goosey or if it feels like they’re, you know, they’re micromanaging or jumping into a lot of conversations, that’s uh that’s kind of a warning sign. I do like to ask people how do you spend your time just so I understand where they like to focus and where they feel like they’ve delegated and where the holes are in the team. Um, usually at that at that stage if the company’s got, you know, 70 to 100 employees, they’ve probably got 50 to 100 million in revenue and you can tell from the business results, the growth rate and the unit the unit economics and profitability, what they’re tracking, what they’re measuring, whether they have momentum, um, or not. And anything in this environment, we’re looking for companies that are doubling year over a year. Like if you’re not doubling from 50 to 100 to 200, um, that’s uh it’s going to be a tough to raise in this environment and the companies that are succeeding right now are able to deliver those kinds of results. Uh depending on the category, we’d look for like that recurring revenue, that SAS business. We’re looking for what kind of contracts do you have, what kind of customers do you have, what’s your customer retention rate, so that’s those are all things that we we would look at at Sonos when we were at that stage, we didn’t have recurring revenue contracts, didn’t have that at eBay to ne at PayPal. So there it’s much more about like customer metrics, do customers like you or not? you know, do they keep coming back for more because they they give you a favorable rating, a high net promoter score, um stuff like that. If the CEO isn’t measuring that stuff, if they’re not aware of their customer metrics, that’s, you know, that’s another that’s another red flag. So we have a little bit of a diligence checklist that kind of goes down those those things but those are some of the things we look for in our in our diligence.
Scott: Awesome. Well, Aman, this has been fantastic. Do you have any parting thoughts for us about the the tech layoffs, their impact on the economy or anything else that you’d like to share before we uh unwind here?
Guest: Yeah, I think the only other thing I’d I’d share is that the um there’s a there’s a silver lining I think with respect to the the embrace of efficiency in the tech community. Um and that is like the rest of the economy outside of tech is extremely short staff. For the first time that I can remember, like America is facing a just a huge labor shortage, right? Like this is this wasn’t the case in the 70s and 80s when we seemed like we had enough people to you know, to do what we needed to get done. Every every business now is screaming for for employees. and I don’t exactly know what what happened to be honest? Like the labor force participation rate was 67, 68% in 2007, it’s down to 62% right now and dropping. And I think some of that is because we don’t have as many immigrants as we once did, like the last six years have just seen all the all the immigration trends have gone the wrong way. So talented, qualified people wanting to come to America to work are just not coming in the same numbers as they used to be. Uh some of that might be the aging of the population, some of that seems to be like kids staying in school longer and learning stuff, which I guess is fine, but like not working as much, which is like is not fine. Like the number of people working their way through college. I mean, I’m right across from Stanford University, like none of those kids are working their way through college. I don’t I don’t understand how that’s possible. I did. My parents sure did. Somehow these kids are graduating with debt and you know, and I don’t know and I don’t know how they, we just can’t get enough people to like wait tables and do stuff. So I actually think that as these tech companies rationalize and consolidate, which is not not a bad thing as it’s done right, it’ll actually free up people to work in other industries that where it’s really needed and I think that’s a really positive outcome. Um, you know, in this economy, this is an efficient reallocation of labor. So we can, you know, focus on the negatives, which is that tech companies are laying off people. But I think the positives are like the rest of the economy needs people and they’re going to get people. uh and we have a huge labor force shortage and this you know, this is just nature’s way of I guess resetting and and pushing people to where they’re needed. So I think it’s a really uh I think the long term is going to be really good as a result of this.
Scott: Yeah, I just want to uh chime in there on a couple points. One, um we’ve got 10,000 boomers retiring every single day, right? And that is and I talked about how America is relatively less bad, it’s because we have uh that problem is exacerbated in China and Japan and all these other economies where the population is even older and we do have enough some um many more immigrants than many of those other highly developed nations. So that’s one thing. We’ve got this whole fire financial Independence retire early community um that we’re a part of uh with those uh as Mindy has said, you know, those loser file people who don’t want to work and leave the workforce. um And I think you’ve got some good points there as well. Um, I do also think that the pandemic was a really efficient reallocation of capital for both or labor for both businesses and employees, right? Because you can now, if if you’re in um, Chanooga, Tennessee and you’re a really good software developer, you can now make income that is higher than that, for example. Uh, and there might have been a reallocation away from some folks in Palo Alto or those folks to a certain degree, maybe indirectly, maybe very subtly over time. Um, and in the other direction, but I think it’s a very efficient allocation of of uh of that because you can go to really any job in the world if the job requires it and that was normalized during the pandemic. I wonder if that will change in the future. um is as employers may get maybe get more power in Redwood Forest, for example. um that you got to come into work here. Um but I do think I do think there’s some questions and and uh um lots to think about here.
Guest: Yeah. that that’s interesting. I mean, Elon I think it’s one, he’s kind of the exception where he’s like, even with Tesla, he’s like, you got to come into the office and you got to, you know, you got to put in a 40-hour week dude. Like I I put in 80 hours. You do 40. if my daughter ever told me, I want to, you know, I maybe old-fashioned like Elon. like if my daughter ever told me, um, she’s 11, so you know, this conversation’s going to happen in 10 years or something. But if she was like, I got this great job, daddy. And I’m like, oh, tell me about it. And she’s like, well, the number one benefit is I don’t have to go to the office. I’d be like, what are you nuts? That’s the stupidest thing. go get a job, go meet the CEO, have the sit and talk and work with the people next to you because that’s how I learned from Peter Teal and Elon Musk. You think those idiots taught me anything by Zoom? They could care less. The only way you’re going to learn from the best is to be there. So there’s real benefit I think to being in a in a close community. Um, but that’s that’s me and Elon. I think there are a lot of CEOs are like, hey, you want to come in two days a week, three days a week, it’s fine, you know, we we can we can accommodate all sorts, Chanooga Tennessee, fine, you want to live there, just fly in once a week, fly in every other week. You want to raise a family, cool, but you know, just let’s have some protocol on how we work together. And I think we’re still figuring that out. Most of our CEOs tend to be much more supportive, I guess of like the the hybrid models and I think that you know, that maybe supports what you’re saying is it’s an efficient, you know, there’s the efficient reallocation of uh of work and effort and um and the types of jobs that can get done should be a big positive. The other thing that I think does strike me that America has that no other country, literally no other country in the world has is we can open up the immigration tap at at some point. Like I’m I’m a I grew up in Canada, so I feel very strongly that there are a lot of immigrants who want to come to America. Like I had a job after I graduated from Stanford. I feel like anyone who comes from Canada, from India, from wherever, graduates from Stanford or MIT with like an engineering degree, give that person a diploma and just let that give that person a visa. Like when you graduate, here’s your visa and you can just work. Now, you can’t, you can’t vote. Okay, you can’t get welfare benefits, you can’t take from the, you know, from all the social services that are expensive to provide. and if you break the law, you know, and shoot someone, you’re gone the next day. Okay, I get I get putting some strings on this, but the fact we make it so difficult for, you know, for qualified Stanford and MIT graduates, PhDs in data science, like they have to apply through a whole two-year process to get a visa to work here. and it seems like and and both political parties agree on this. Like we had Trump saying one thing, the immigration policy hasn’t changed in the last two years. So it seems like a bipartisan consensus that we don’t want to bring the best people to America. And I’m thinking if I’m like, you know, if I’m if I’m running the Kansas City Chiefs, like the best football team in the world. What do I want to do? Don’t I want to recruit the best players? If if Patrick Mahomes happens to come to me and says, hey, dude, I got a visa problem, maybe me or my son or my wife. I would be like, Patrick, I want to take care of that visa problem for you because I want to recruit the best people from all over the world. If you were born in Africa, Nigeria, but you can throw the ball 60 yards, just come play it for my team. We’ll figure out the visa process later. That should be our mentality. Like let’s recruit the A team to America. If we opened up the doors tomorrow because of some political miracle, we can get a million people a year into America just like that. qualified talented people who will work, work, work and uh and not take welfare. China can’t do that. If China throws open their doors tomorrow, you know how many people will move to China? Like zero. They’re they all want to leave. Everyone in China wants to leave right now. Everyone in Saudi Arabia wants to leave. Everyone in England wants to leave. like no one nobody wants to go to these countries. England might be okay, but very few of these countries can attract immigrants the way that America can. And so all we have to do I think is have the political will to just say, okay, let’s let’s just recruit the A team. If we just do that, we we offset all the aging demographics, everything you Scott talked about. I think all that is solvable just by having a more thoughtful immigration policy. And so I feel like maybe that’s where we’re headed. At least that’s the uh that’s the optimist in me that says America, America will do fine. China, I’m not as convinced. Europe, I feel I’m not as I’m not as convinced. Um, Africa has a lot of potential, you know, Latin America maybe has potential, but the USA should be on top for a long time if we play our cards right.
Scott: Great, I got a good uh economist for you if you’re interested in learning more. uh Peter Zhan, he’s got a great uh hour hour and a half long talk. I watched the YouTube video of it at the University of Iowa, has a great handle on this particular issue. the best I’ve seen. So, uh for anyone listening, that’s a great topic. We’ll link to that in the uh show notes here. Uh yeah, so this is this has been fantastic. We usually don’t talk about immigration policy and other things that touch on politics, but we’re going to leave this one in because I completely agree with you and so does Mindy. um on this. And by the way, as bad as we are about immigration policies and visas and all that kind of stuff, we’re again the least bad at that in the world for all the other folks that were competing with are even worse at dealing with those things. So
Mindy: You know, I don’t like to be the least bad at something. I would prefer that we are good. America is a melting pot and everybody should be welcome.
Guest: Yeah, I agree with you. I’m self I’m self-serving, but I you know, I mean I could have lived in any country in the world. coming out of Canada with a Stanford Harvard education. I’m sure except for North Korea maybe. I’m sure a lot of people would have wanted to recruit me, but I chose America and I did it because I saw that it afforded me and my kids the best opportunity to to assimilate, to be a part of this team, to be a part of this country. and I spoke the language and you know, I love everything about this country. I just watch Super Bowl yesterday or. So I feel like we can, we can win and we can be the, we can be the shining city on the hill. We don’t have to be the least bad. That’s said, I’ll I’ll take least bad if that’s where we’re at, but I think we can do better.
Mindy: Yes, I absolutely agree. Uh, I I I would like to see us be good. All right, Aman, this was fantastic. I appreciate your time so much. This was a fabulous conversation and I I am thankful for you sharing your time with us.
Guest: Thank you Mindy. Thank you Scott. Have a good day. Aman will we’ll
Mindy: Oh, oh, oh, where can people find you? I’m sorry, I didn’t even give you that opportunity. Where can people find out more about you?
Guest: They can go to our website is practicalvc.com. They can go there, they can they can uh they can meet us on our website and they’ll learn all about us.
Mindy: practicalvc.com. Awesome. Thank you Aman and we will talk to you soon.
Guest: Thanks.
Mindy: All right, that was Aman and that was kind of my favorite episode Scott. That was super fun to talk to somebody who has not only been in the tech industry at a high level, he’s now outside of the tech industry working in VC, looking for and analyzing more tech companies up andcoming companies. That was a really exciting conversation. Scott, what do you think?
Scott: I think that uh we’re unlikely to have Aman back on for a Fince Friday episode.
Mindy: Yes, I definitely agree. He is not going to come on needing any help with his finances.
Scott: No, what a what a brilliant guy, right? I mean this and I love I what I appreciated about Aman is that as a technology CFO, uh he was totally unapologetic and totally practical and straightforward about the context of these layoffs and these types of things. And look, this can be an emotional topic for a lot of folks. um but for someone in his profession, it’s just straight business. This is what this is how how it’s done, why we do it. And it’s a matter of fact, right? And and it was a a reminder and a practical note he he’d have to say anything. It was it just came across clear as day that this is a business and this is the reality of it and every dollar of cost needs to be aligned with financial and business outcomes for the business for for businesses and uh that has to take place with good management, alignment up and down the the company stack and if it’s not there, then layoffs are going to happen and big changes are going to happen and that’s just exactly that’s just how it is. And I I really appreciated that uh that frank straightforward uh no nonsense, no dancing around that topic way he approached this.
Mindy: I think if you’re an employee at a company that your dad doesn’t own, your resume needs to be updated every three to six months. You just need to have it ready to go in case layoffs happen. And that’s unfortunate. You also, I mean this is where financial independence comes into play or financial cushion comes into play. You have an emergency fund in case of emergency. You have an emergency fund in case your company goes out of business or you get caught up in a round of layoffs. This is exactly why we’re going on this journey to financial independence is so that we are not dependent upon one source of income. This is why you invest in real estate so you have an alternative source of income. This is why you invest in stocks and invest in uh dividend producing stocks and you know, have all these alternative sources of income. What is it, the most successful people have seven sources of income or something like that. I don’t know, maybe I just made that up, but there’s people have multiple sources of income so that they’re not fully dependent on one company. And if your only source of income is your W2 job, hop to it. Go to get a second, third, fourth, fifth, sixth source of income so that you aren’t shocked when a layoff happens.
Scott: I completely agree, right? And and in these, in the cases that we’re talking about, many, not all, but many of these employees are making six uh six figures, 100,000, 150,000, 200, 250, 500,000. Some of the some of the folks that maybe have been impacted by these layoffs, um, will laugh at the numbers that I just that I just threw out there. And look, that’s the deal, right? This is a competitive, professional environment every job is that way, but in particular, technology, uh, and some of these other these big professions. And the solution, uh, Mindy, I completely agree with you, is pursue financial independence. Save 50% if you can, of these really high incomes and build assets, right? Because the moment you’re no longer a good ROI for the business, they’re going to move on. And if they don’t move on, their CFO is not doing their job, right? Aman is not doing his job if he’s not making that decision the moment that that is no longer true. And that’s the harsh reality of this. And the solution again is take control of your finances for yourself and, you know, build build your own business, right? Uh, I know Mindy, you hate Robert Kiyosaki, but uh, the rich dad motto is mind your own business, right? That’s what you got to do. You got to be building this this uh this portfolio on the side, um, real estate, stocks, whatever it is, emergency fund, so that um, you are in control of your destiny and your job is another incremental income stream, not the only one that you can depend on.
Mindy: Oh, that’s a great place to end this Scott. That’s a good quote. All right, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, give a bug a hug, ladybug.
Speaker 1: Bigger Pocket’s money was created by Mindy Jensen and Scott Trench. Produced by Calen Bennett. editing by Exodus Media. copywriting by Nate Winraub. Lastly, a big thank you to the Bigger Pockets team for making the show possible.
