Twitter’s “Warning Shot” and What to Look for When Investing in Tech

Mindy:
Welcome to the BiggerPockets Money podcast where we interview Aman Verjee and talk about the state of the tech industry. Hello, hello, hello. My name is Mindy Jensen, 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 are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in 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 way so you can launch yourself towards those dreams.

Mindy:
Scott, I am so excited to talk to Aman today. He was introduced to us by our friend, Jourdan Thibodeaux, who runs the Silicon Valley Investors Club on Facebook. Aman has a huge amount of experience in the tech industry and is the perfect person to talk to 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 [email protected].

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 Finance Friday episodes. So if you’re interested, please apply at biggerpockets.com/guest or biggerpockets.com/financereview for the Finance Friday shows.

Mindy:
All right. Before we bring in Aman, let’s take a quick break.
Aman Verjee 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 BiggerPockets Money podcast. I’m so excited to talk to you today.

Aman:
Thank you, Mindy. Great to meet you. Thank 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?

Aman:
Yeah, easy to do. So I went to Stanford University undergrad where in the late 1990s, tech was, kind of, sort of, a thing. I did economics and political science and so my first job was in investment banking, but I met a lot of folks at Stanford who had go on to found PayPal. A little after I left, the principal founder was a guy named Peter Thiel. Peter actually offered me a job right out of Stanford and I said, “No, I want to work on Walt Street.” I had bills to pay. I didn’t really understand. We were in a tech bubble. I understood-

Scott:
What was your biggest financial mistake? That’s the question.

Aman:
Yeah, a jumping question.

Scott:
Yeah.

Aman:
Okay. I think I was employee number 237 at PayPal, and had I been employee, let’s say, 15 at PayPal, I probably wouldn’t be here right now. We would not be talking. I’d be on a beat valley or something like that, out of range, out of signal and who knows what, but I really enjoyed a stint ahead in Wall Street. I went to law school. Peter tried to talk me out of law school. I went to Harvard Law and I was ahead of my head at that time. I wanted to go to law school. I wanted to go to Harvard. Everyone wanted me to go … My mom, my dad, my uncles, my friends, my mentors, all those idiots said, “Go to Harvard. That’s the obvious thing to do. PayPal will be there in three years,” all that stuff. And Peter was the only one who tried to talk me out of it.
And anyway, I graduated from law school, then I go to work for PayPal. I have a 10-year career at PayPal. First job was the junior guy in the IPO deal team, so I was the youngest member of that team. I was on the finance, marketing, analytics side. PayPal goes public, eBay buys 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 of years at eBay Inc., running their North America finance team. And then I left to go to Sonos, which is a consumer electronics company. It’s now public and traded on the Nasdaq. I was there for almost three years. Did another CFO stint in New York where my younger daughter was born. My older one was born in Boston when I was at Sonos. Everyone is a New Yorker.
And then I came back to join my old friend, Dave McClure, who I had met him at PayPal before the IPO. He and I became fast friends. Our careers, we were working together for three years at PayPal, our careers diverged and we had separate commercially successful careers like Ronnie Dio and Black Sabbath or something, then we rejoined at his firm, 500 Startups, in 2017. He was the CEO. He hired me as the chief operating officer. It was about five years ago, and I’ve been a venture capitalist working with Dave ever since.

Mindy:
Okay. So it’s safe to say that you know a little bit about the tech industry.

Aman:
I think so. I’ve been around it enough anyway that my osmosis have picked something up.

Mindy:
Great, because I want to talk to you about the tech industry. 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 Silicon Valley are saying, “No, this is just companies cutting the fat.” What are you seeing?

Aman:
Well, I think if you look at the layoffs at FYI and look at 2022 and 2023, I think it’s something like 260,000 announced layoffs and it’s making news because a lot of these companies are like Meta did, it was doing a second round, apparently they announced it this week. They did another round in November and that was like 11,000 people. That’s like 13% of their workforce. And PayPal is doing a 7% riff. Alphabet announced I think 12,000. That’s about 6% of their workforce. So companies that are … And then I think Amazon is doing a minor one at 5%.
I think five to 10% layoffs, when I used to work at PayPal from 2001 to 2010, I was working for Elon Musk at the very outset and then Peter Thiel was the CEO, and then we had a number of managers 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 job description, was to make sure that we had efficiency metrics we were supposed to manage to, and we would do five or 10% layoffs every year, and we were growing at 30% a year. So this was just part of the budget.
I remember walking into more than one budget where 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 to 30% without adding a lot of people? We’re an internet company. We’re supposed to be about efficiency and scale, and if we can’t do it, then who won this planet could? And so that was just our mindset and that’s how we operated. So to think of five or 10% layoffs in the tech industry, that doesn’t really scare me.
I think the other piece of context I remember over the last five years, all these tech companies have just added a tremendous amount of headcount. From Q3 2019 to Q3 2022, let’s just take those three years as our benchmark. So Meta added 94% to their workforce during that time. Amazon has doubled. Alphabet added 57% to their headcount. Microsoft added 53%. So all these companies have essentially increased over that three-year period. They increased by 50 to 100% of their headcount. So a five or 10% headcount 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 bulked up during the pandemic. I think a lot of that we knew was unsustainable. So I think what you’re seeing is just a little bit of a right-sizing of the workforce. Certainly nothing concerning or that suggests anything is untoward in tech overall.

Scott:
So one of the things, as an outsider, let’s use the Twitter example specifically. What percentage of the workforce at Twitter has been let go, forced out, encouraged out, whatever word you want to use to describe what’s been going on over there? I use Twitter. It seems like no impact to usability or anything on the platform. How do we make sense of that situation?

Aman:
Yeah. I think what’s happening at Twitter is a warning shot across the bow of all the tech companies Elon has figured … I think if you look at the last, I don’t know, eight or 10 years that Twitter spent a public company, there was a time way back when right after they went public where if you look at the headcount they had, there were something like, I don’t know, 3,000 employees or so when they went public. They were at 7,500 when Elon bought them, so they had more than doubled their headcount and they hadn’t quite doubled their revenue, so 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, you would not have turned a profit in the seven or eight years post Twitter being a public company until Elon bid $54.20 cents a share. So it was just not a good experience for shareholders.
And Elon comes in and I think he basically said, “I’m going to eliminate half the workforce,” like a Thanos snap. Half a year, you’re going to go away. So I guess 3,700 was the number he was solving for. He tweeted about a week ago that there’s been a lot of attrition and voluntary attrition and people just not wanting to work for the company where you’re going to have to work 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 2,300 employees left. So I guess that means about 70% headcount reduction from the moment that he took over the company.
The site is still running. Traffic is up over the last three months, not down. The user metrics are all … There’s at least as much activity happening on the site as there was three months ago. Nothing has crashed. Nothing is broken. It seems like the site is working. And I think you have to assume 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 roadmap slowed down much either. They’re innovating. They’re putting out new features. They’re launching and pulling back new features and learning as they go. So it seems like it continues to work.
He said, “Hey, we can cut two-thirds of the workforce and nothing is 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 he has, it’s at least plausible that companies will start taking deeper cuts 10 to 20% now, not the five or 10% we’ve seen so far, but 10 to 20% now to get more efficient. And he’s proving that it’s possible.

Scott:
What do you think is happening there? Is it that these companies get bloated and these folks are actually in the way because there’s more people involved in projects and that actually speeds things up in addition to reducing costs? You’re a seasoned technology executive in the finance world. Walk us through how you make sense of that and maybe if there’s a harsh lesson or something that we should take away from this.

Aman:
Yeah, I can tell you exactly how. I can tell you from personal experience how it happened at PayPal and eBay. The early PayPal team, like 2001, 2002, we had as part of our KPIs, so Peter pushed it to David Sacks, who was my boss, and David pushed it out to the rest of the organization. He was the COO. We were aiming for one million in revenue per employee. This is back in 2001, 2002. So that’s the goal that we were shooting for on every budgeting cycle, and we were able to main 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 all the other stuff that’s like the dollar doesn’t buy now what it did back then. So somehow, they’ve been able to add headcount at a rate that actually means they’re not getting more productive.
So how does that happen? Well, one, as the organizations grow, there’s a tendency for scope creep and bloat. I remember back in 2009, ’10 in eBay, we looked at a whole workforce plan because we had to cut costs in that recession. We ended up downsizing by 30% 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. We had a US team looking at the P&L one way. They included certain metrics and excluded certain metrics and it made sense, but it was the US way of doing it. So I fly to Europe and they pitched me a whole different presentation about their team and the metrics don’t tie. If I add US and Europe and Asia, it doesn’t add to what we’re reporting to Wall Street. I’m like, “How come this doesn’t tied to what we’re reporting to Wall Street? It doesn’t make sense.” I have three different geographies, not more than three. They should all add to a number that I can recognize.
So the Europeans tell me, “Well, 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 we think it makes sense for our business.” “It’s the exact same business like 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 a US based team. Who reports the metrics in Europe? It’s a European team. They’re doing the exact same work, but they have different processes and methodology so they’re just duplicating the effort. And so there’s a team in Prague dealing with the team in San Jose, who’s 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 headcount in half.” And because now the metrics tie and I don’t have to make sense of this gibberish, I’m actually much more efficient in the job that I’m doing. And I figure there are tons of examples at Twitter that are just duplicative teams doing work. This empire building, people coming in and they hire people and it just becomes 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. 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 this stuff out. And so I think they’ve just put 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 how they can double headcount without doubling revenue.

Scott:
How do you then justify the incredible compensation achieved by the very short-lived Twitter CEO prior to Musk? I think his name was Parag Agrawal.

Aman:
Yes. I can’t. I don’t want to. I actually think it’s obscene. I think what those payouts look like and the general counsel, I think those are just incredibly obscene payouts that there’s no real justification for it other than they negotiated that as part of their contracts, I guess, and so more power to them. But as a Twitter shareholder, that should just incent Twitter shareholders.

Scott:
So I’m an employee at one of these companies and Aman has come in as the CFO. I’m worried because this guy is going to right size the business or whatever this is, potentially, if I’m ever at risk. How do I think about it at my level if I’m making decisions about my wellbeing, is my division adding value and is my role … because I can’t see that as a frontline employer or an engineer at Twitter, whether I’m directly correlated with business outcomes or whatever. What are some ways to get your Spidey senses tingling and recognize whether those risks are apparent in your role, in your division? How can you stand out?

Aman:
Yeah, it’s a great question. I think it’s really incumbent on … It’s tough to ask a, I guess in your words, a frontline employee or someone who is junior in the organization to understand what the value add is without really clear direction from the top. And if it’s confusing or if the deliverables or the metrics aren’t clear, I think 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, like in my job coming in, if I had to send that message about efficiency, what I would try to do is with the management team, we have 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 we cascade that through all of our employees.
And 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 I think you, as an employee, you feel like, okay, I’m useful. I’m doing what I’m supposed to be doing. This feels right. Now, the reality is companies change strategy all the time and so those goals change and in some cases, the employee is going to get caught as collateral damage.
But I think at Twitter, the message from Elon was very clear. You’re going to work a lot harder than you were before. We’re going to have clear metrics and deliverables. This whole work from home thing is probably not going to happen anymore so there’s going to be an emphasis on coming into the office. And he’s also said, “I’m here because I want free speech. So if you’re the person who’s really rooting for censorship and the elimination of hate speech and you want to kick off the sitting President of the United States because he said something offensive, but you want to keep the Chinese Communist Party. If you want to engage in all those debates and interactions about who gets to engage in free speech, this is probably not going to be a good culture fit for you.” So if your Spidey sense is like, oh, this doesn’t seem like the direction of the company. I’m not sure I want to work more than 40 hours a week. I’m pretty happy working from home. If that’s you, your Spidey sense should be up, up, up.
But if you seem like I can dig what Elon is saying, I get what the deliverables are, they’re clear, I’m excited about working at a site that really makes a difference and stands for something like being a free speech platform, then I would imagine those employees would want to double down. I think we saw a self-selecting process where a lot of those employees stayed and a lot of them just, they got a severance package, which is very generous and they left and 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 still centered primarily in the San Francisco, Palo Alto, San Jose area. All of these people, they may have been working from home and that home may have moved while they were 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, and it’s not even the whole workforce. Apple hasn’t even announced any cuts yet.

Aman:
Yeah.

Mindy:
But are you seeing any economic impact locally with these cuts?

Aman:
Yeah, I think so, but it does feel local. By the way, I don’t think we’ll see anything from Apple. Well, Apple runs a very tight ship. During that whole three-year period where Meta added 94% and Google and Microsoft were adding 50%, Apple added only 20% to their workforce, and I think they did that just because they’re a consumer hardware business. They know about business cycles. They didn’t benefit like the other companies. At the early part of the pandemic, actually, they had lockdowns in China that affected inventory and had to sell. All the stores had to close. So I think they took some hard actions early on and they’ve actually come out of it really well.
The other tech companies, you’re right, it’s a local effect. So San Francisco, if you go there today, it just feels like a little bit of a, I don’t know, The Walking Dead or something. The vacancies in commercial buildings is something like 30% in San Francisco. It hasn’t come down post the pandemic. Buildings are empty. Employees aren’t coming in. School budgets are being cut just because the number of students have gone down and the budgets are tied to the number of students. So budgets are coming down here in Palo Alto where I live. The public schools were flat or up 2% year over year. Two percent is not a lot when inflation is at 7% and parents were kicking and screaming about why are we paying higher taxes and inflation is up? And the teachers obviously want more, but there just isn’t the money to go around. So it’s affecting the Bay Area a little bit.
The unemployment rate here is still 5%, so it’s still a really strong economy overall, the tech layoffs aside. The unemployment rate in the country is three and a half percent. It’s been unbelievable. The last six months, there have just been record low unemployment rates like 50-year lows in the unemployment rate. So the overall economy seems to be doing fine, and I think the affected workers are being absorbed in other industries. So I don’t worry for the rest of the country, particularly the Sunbelt, but I do feel like California and maybe New York and maybe Illinois are seeing some more localized slowdowns and you’re seeing that in some of their employment rates and where people choose to live now.

Mindy:
Do leader operations because any risks like worker burnout, security risks, etc.?

Aman:
I think they can if not managed properly. I think in my experience, some of the best times I had was PayPal. Early on, it was just a lean but very aligned team, and we all knew what we were doing. I remember David had a rule. If there are more than four people in a meeting, you shouldn’t be here. We shouldn’t have meetings of more than four people so let’s just end it. And they are totally fine if you want to leave the meeting and go do work because we shouldn’t have too many people in these meetings.
I moved to over to eBay, and we routinely had 12-person meetings. My calendar was booked every half hour increments by my executive assistant from 8:30 in the morning to 6 PM and every meeting was 12 people or more. Everyone wanted to be in, I guess, these broader conversations and representing their otherwise siloed business unit. And that’s demoralizing too.
So I think just being around organizations that have too many people and aren’t productive has its own form of toll. So I think the opportunity is to be leaner and more focused and that could be more satisfying, but it’s hard to manage and managers have never done that before. We’ll have to learn how to do it. And so I think there is a risk that some of these organizations will have this fatigue and burnout, and as employees opt out and your friends leave, that’s always at least temporarily demoralizing.

Scott:
So walk us through how this impacts the venture capital world. In the last year or so, transaction volume, investment activity has dropped off a cliff from the first part of 2022 and 2021. 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 lean and well run, but what specifically has changed, growth at all costs versus profitability?

Aman:
That’s exactly it. I think in 2021 in a lot of categories, the availability of financing made it easy for companies that were burning cash to raise a lot of money, keep burning, invest in growth. And so there were a lot of exciting but high growth startups and a lot of companies, especially in more speculative categories like crypto and Web 3.0 generally were favorite categories just because they seemed exciting. There’s a possibility of a long-term payoff. When money is free, you can plan five years ahead, borrow at really low interest rates and spring 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 firm, but I think across the board, it’s just a harder conversation for venture capital firms to raise money. So money is not free anymore.
And startups that were in these speculative categories have just seen their evaluations get not sideways. And now, I think as we’re financing now, we’re much more focused on 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 make that trade off. Focus more 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 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 makes sense in the long run.
And founders who can’t do that are essentially getting eliminated. Every quarter, we’re seeing more and more startups not being able to make the cut. So I think the good news is it’s creating better founders because they have to manage the end of the downturn. They have to figure out how to make these trade-offs and manage their burn. And the surviving companies are higher quality than everyone else, so that’s creating, I think, a positive selection bias. But weathering the next year or so, having weathered the last year and having to weather the next year just means that there’s going to be some continued attrition, and so we’re just being selective. We’re focusing on unit economics. We’re going after categories that make money that can generate revenue like SaaS 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 like EBITDA, the creation of cash flow in these businesses or is it a valuation compression due to rising interest rates that’s forcing the toughness that needs to come in selection bias as you put?

Aman:
Yeah, it’s a bit of both. The conversation I have with the founders as always, just focus on the first thing you said, cash flow and can you make money? It doesn’t have to be EBITDA, but it has to be profitability at the customer or cohort level. But then everyone is like, “Oh, okay, that sounds hard.” Yeah, that’s running a business. And everyone gets worried about valuation, and the valuations are definitely like they’ve been cut in half in the private sector, and very few people want to take that medicine and they feel bad about the valuations.
But I had the benefit of having a … Maybe this is where the Peter Thiel story pays dividends. My Wall Street background has made me savvy to the ways of finance, and so I know about how valuations get set. I keep telling these founders that a lot of this is stuff you can’t control. Think about when Facebook went public, their valuation was 45 share price. They were trying to go public at a hundred billion dollars. I don’t know why. A hundred billion is like a nice round number.

Scott:
Nice round number. It feels nice.

Aman:
And so they pushed the valuation up, up, up, and they got out and that was great. But then within the next two weeks, they were down to 18 bucks a share, so they were cut in half, more than cut in half. It’s the exact same company. The exact same company that went public three weeks ago went from a hundred billion valuation to 50 billion. Today they’re up to 400 billion. I’ll just check the ticker. Yeah, 400 billion today. They were at trillion dollars, then they came down. You think, 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 a hundred million dollars, don’t sweat it. It’s a short-term thing. Tomorrow will be different. You can’t control it. What you can control is am I going to build a successful business with the revenue, unit economics that lead to profitability and do the right thing for my customers and shareholders? If you do those things, the rest will take care of itself. I think it’s psychology. Those people get worried about stickers and sticker prices and valuations. It is tougher to challenge … It is tougher to imagine now in a downturn because making money is harder. You can’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 trade-offs for unit economics. You have to make tough decisions to not hire as much as you would a year ago. And that means focusing and prioritizing. So it’s hard work, and that’s really where the bulk of the battle ought to be and should be, and that’s where it’s going to be when you’re lost.

Scott:
So could you give us some practical examples then of the changes that are happening in realtime in the last year that are in aligned with what you just said, folks shifting from growth at all costs to unit economics? What’s the specific example of this?

Aman:
Yeah. I think it comes down to when you could raise money every year, it’s easy to throw money to 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 work so they pay back within two years. That’s okay. A lot of founders think that’s really good.
If I look at the last 75 companies that have gone public that were unprofitable, that are SaaS companies, their median payback is one and a half years. So I tell the founders, “You got to get from two years to one and a half, so you got to optimize what you’re spending, which means you got to know what works and what doesn’t. You got to experiment. You were throwing money at Facebook and TikTok and throwing money at Instagram. You got to be disciplined about your test results. You’re going to have to be tough on sales comp. You’re going to have to really think about quotas and how you’re managing the sales team with the right kinds of incentives. And if you’re not, you can’t waste money.” So a lot of companies are located here in Palo Alto, and I don’t really know why companies that are starting up would want to spend money on Palo Alto real estate.
I live in Palo Alto, and I just had this conversation with my ex-wife. We have a very amicable relationship and she wants to move from Palo Alto. She’s like, “Oh.” And by agreement, we have kids, and so anytime one of us wants to move, we want to have a handshake agreement to be in sync with who’s going to live where, not to veto the other but just so we can support the kids. And I’m like, “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 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 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 1,200 bucks a month?”
I’m like, that’s a great idea. In fact, I should tell all my founders, just move to Redwood City. You don’t have to be in Palo Alto, Stanford campus, Sandhill Road. 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 freaking Arizona and working from home. You guys have a distributed workforce. You can hire people in India. You can hire people in different geographies to cut costs and have really good … I was just Armenia for a business trip last week. Talk about great developers a 10th of the price, and they’re dying to have people come and Silicon Valley companies come and hire there.
If we do a little bit of that work, you can build these distributed teams in a much lower cost footprint. Now, companies have to figure that out, which is I think a really positive thing because it’ll help them in the long run. So those are all real specific examples in the past week where we’ve helped companies to manage and cut their costs by just thinking about geography, location, marketing spend and 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, not at the IPO but shortly thereafter, what should I be looking for when I’m evaluating these companies?

Aman:
So into the public markets, you mean?

Mindy:
In the public markets. I don’t have VC money, so I have to wait until they go public.

Aman:
Yeah, I think 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 public I think in the next six or 12 months as the markets reopen with really strong franchises. And the SaaS companies that we like are typically growing at more than 50% year over year, so you’re looking for, I think, growth. You’re looking for a company that has a retention rate with their customers that’s really, really high. Over a hundred percent is excellent. And then you don’t have to worry about profitability that much. But if the company is growing and the retention rate is over a hundred percent, typically those companies have done really well. If you had just systematically invested in those companies over the past 10 years, you would’ve probably made 20% a year in the public markets.
I think it’s good to be you don’t have to be very selective. As the companies become public, if you don’t really know the space well, you don’t know much about the markets and what they do, 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 SaaS 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.
On this question of what do you invest in, in public markets? One of my favorite investors is Warren Buffett. He was not the biggest tech fan, although I think he is a very good and thoughtful … I’d like to hear what he has to say and I follow a lot of his disciplines. And then of course, I have my own. But he was telling this wonderful story about the first stock he bought as a kid in 1942, and I can’t remember the name of the stock, but he was nine years old or something, and he was following it in the Wall Street Journal or in the trades or whatever at the time. And he bought the stock at $39. And he was telling the story about how excited he was because he had researched the company and he liked it and he knew what it 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. I came home from school and I was crestfallen. And then it went up to $42 and I sold it and I made three bucks a share.”
Do you think the story is going to end with, oh, and I was hooked because I made money, so I was really happy and for the rest of my life, I was into stocks. He was like, “You know what? I shouldn’t have sold at 42 bucks a share because a year later, it was 200 bucks a share.” And he bought these shares in 1942. He showed the headlines for the New York Times in 1942, and it was three months after Pearl Harbor and the markets were tanking and all the bad news about these, all the experts were saying you should sell this company, that company. And I think deep down, he was like, “I just fundamentally thought America was going to win. We’re going to win the war. We’re going to win this generation. Our companies are 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 number in your head. The answer is $51 million. You would have 51 million if all you had 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 stockbroker about the latest hot stock.
So the lesson is, yes, we buy companies and we’re very good at evaluating great businesses, but if all you do is just systematically bet on America, it’s been a winning strategy for 80 years at least, probably since 1776. It’s a 250-year strategy in rising.
And I think with SaaS and tech, a lot of this too, is that you can be clever and you can pick and choose your winners, but systematically, if you just think technology is going to be a great force in the next 10 years for progress and economic wins, the valuations in tech have been really badly beaten up in the last year. And we are trading at a PE ratio or at a SaaS multiples that are 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, I think just go for it and just put a little bit of money in and diversify. Don’t worry about the stock price the next day. Don’t worry about the next Pearl Harbor. Well, maybe you should worry about the next Pearl Harbor, but don’t get too worried about the minutiae and the day-to-day transactions. Just think about what do the next 10 years look like and find companies that you think are at reasonable multiples that fit that SaaS or growth mindset and you should do fine.

Scott:
I love that mentality. I think that’s fantastic. I think that’s a great nugget here. And by the way, without getting into a whole geopolitical discussion, I think there’s a lot of reasons to think that America has poised, again, for the next 30, 50 years as one of the strongest countries, the strongest developed nations in the world. We’ve got a lot of population, all that good stuff, demographic trends that are relatively less bad as one way to put it than the other developed countries in the world.

Aman:
That’s right.

Scott:
I would love to chat about what you look for in a specific investment as it relates to the management team and the founder or CEO. What specific qualities as you looking for there in addition to, of course, the growth and the unit economics that you’re looking for?

Aman:
Oh, that’s a great question. So it depends a lot on the stage. Do you have a stage in mind or are you just asking for a-

Scott:
Yeah. 70 employees, middle market business size, that growth profile.

Aman:
No selfish interest. It sounds like a self-serving question, but the 70 companies are still early. So those are still companies where they should definitely have a product market fit. And I think the best things are a manager or a CEO who I think at that stage is probably, so let’s see, they’ve probably got, I don’t know, six to 10 direct reports. Everyone is different and there’s no right answer. But if I go back to the GE, Jack Welch mindset, which has a lot of merit, and I think the Valley can learn a lot from, I think he was arguing that six, nine direct reports are the right number. More than that is too much. And so at 70 employees, maybe all your directs have a direct, so the CEO probably knows everyone at that stage. Now you’re about to tip into the territory where the CEO doesn’t know anyone past 70 to a hundred people, and so you 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 only have so much impact at this level now.
So the company, I think, is hopefully in a place where it’s got a solid business, it has product market fit, it’s growing. They know who their customers are. And the CEO is very focused on the customer, and then has done a really good job at communicating to the next level and the next level what the priorities are. And I would look for how do you hold people accountable? What are the metrics that they talk to you about in every quarter? Whenever you meet them for your performance review, what are your conversations like? If it feels tight and crisp, that’s a really good sign. If it feels loosey goosey or if it feels like they’re micromanaging or jumping into a lot of conversations, that’s 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 holds are on the team. Usually at that stage, if a company has got 70 to a hundred employees, they’ve probably got 50 to a hundred million in revenue, and you can tell from the business results, the growth rate and the unit economics and profitability, what they’re tracking, what they’re measuring, whether they have momentum or not. I think in this environment, we’re looking for companies that are doubling year over year. If you’re not doubling from 50 to a hundred to 200, it’s going to be tough to raise in this environment. And the companies that are succeeding right now are able to deliver those kinds of results.
Depending on the category, we’d look for the recurring revenue SaaS business. We’re looking for what kind of contracts do you have? What customers do you have? What’s your customer retention rate? Those are all things that 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, didn’t have the PayPal. So there, it’s much more about customer metrics. Do customers like you or not? Do they keep coming back for more because they give you a favorable rating, a high net promoter score, stuff like that? If the CEO isn’t measuring that stuff, if they’re not aware of their customer metrics, that’s another red flag. So we have a little bit of a diligence checklist that goes down those things, but those are some of the things we look for in our diligence.

Scott:
Awesome. Well, Aman, this has been fantastic. Do you have any parting thoughts for us about the tech layoffs, their impact on the economy or anything else that you’d like to share before we unwind here?

Aman:
Yeah, I think the only other thing I’d share is that there’s a silver lining I think with respect to the embrace of efficiency and the tech community, and that is the rest of the economy outside of tech is extremely short-staffed. For the first time that I can remember, America is facing just a huge labor shortage. This wasn’t the case in the ’70s and ’80s when it seemed like we had enough people to do what we needed to get done. Every business now is screaming for employees. I don’t exactly know what happened, to be honest. 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. The last six years, I’ve just seen 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. Some of that might be the aging of the population. Some of that seems to be kids staying in school longer and learning stuff, which I guess is fine, but not working as much, which is not fine. The number of people working their way through college … I’m right across from Stanford University. None of those kids are working their way through college. I don’t understand how that’s possible. I did. My parents sure did. Somehow, these kids are graduating with a debt, and I don’t know how they … We just can’t get enough people to wait tables and do stuff.
So I actually think that as these tech companies rationalize and consolidate, which is not a bad thing if it’s done right, it will actually free up people to work in other industries where it’s really needed. And I think that’s a really positive outcome in this economy. This is an efficient reallocation of labor. So we can focus on the negatives, which is that tech companies are laying off people, but I think the positives are the rest of the economy needs people and they’re going to get them. We have a huge labor force shortage. This is just nature’s way of, I guess, resetting and pushing people to where they’re needed. So I think the long term is going to be really good as a result of this.

Scott:
Yeah. I just want to chime in there on a couple of points. One, we’ve got 10,000 boomers retiring every single day. I talked about how America is relatively less bad. It’s because that problem is exacerbated in China, in Japan and all these other economies where the population is even older, and we do have so many more immigrants than many of these other highly developed nations. So that’s one thing.
We’ve got this whole FIRE, financial independence, retire early community that we’re a part of with those, as Mindy has said, those loser FIRE people who don’t want to work and leave the workforce. And I think you’ve got some good points there as well.
I do also think that the pandemic was a really efficient reallocation of capital for both … or labor for both businesses and employees because if you’re in Chattanooga, Tennessee and you’re a really good software developer, you can now make income that is higher than that, for example. 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 in the other direction. But I think it’s a very efficient allocation 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 as employers maybe get more power in Redwood Forest, for example. You got to come into work here. But I do think there’s some questions and lots to think about here. So any reaction to that little monologue there?

Aman:
Yeah, that’s interesting. Elon I think is of the exception of where he’s like, even with Tesla, he’s like, “You got to come into the office and you got to put in a 40-hour week, dude. I put in 80 hours. You guys, you got to do 40.” If my daughter ever told me I’m going to … I may be old-fashioned like Elon. If my daughter ever told me, she’s 11 so this conversation is going to happen 10 years or something, but if she was like, “I got this great job, daddy.” I’m like, “Oh, tell me about it.” And she’s like, “Well, the number one benefit is I don’t have to go into the office,” I’d be like, “What? Are you nuts? That’s the stupidest thing. Go get a job. Go meet the CEO, have a sit and talk and work with the people next to you because that’s how I learned from Peter Thiel 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 a real benefit I think to being in a close community, but that’s me and Elon. I think there are a lot of CEOs who are like, “Hey, you want to come in two days a week, three days? It’s fine. We can accommodate all sorts. Chattanooga, 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 just have some protocol around 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 the hybrid models, and I think that maybe supports what you’re saying. There’s the efficient reallocation of work and effort 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 some point. I’m a Canadian. I grew up in Canada, so I feel very strongly there are a lot of immigrants who want to come to America. 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 an engineering degree, give that person a diploma and give that person a visa. When you graduate, here’s your visa and you can just work. Now, you can’t vote. Okay, you can’t get welfare benefits. You can’t take from all the social services that are expensive to provide. And if you break the law and shoot someone, you’re gone the next day. Okay, I get putting some springs on this, but the fact to make it so difficult for qualified Stanford, MIT graduates, PhDs and data science, they have to apply through a whole two-year process to get a visa to work here.
And both political parties agree on this. 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 running the Kansas City Chiefs, the best football team in the world, what do I want to do? Don’t I want to recruit the best players? 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 at 60 yards, just come play for my team. We’ll figure out the visa process later.”
That should be our mentality. Let’s recruit the A team to America. If we open 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 and not take welfare. China can’t do that. If China throws over the doors tomorrow, how many people will move to China? Zero. 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. 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 half the political well to just say, okay, let’s just recruit the A team. And if we just do that, 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 optimist in me that says America will do fine. China, I’m not as convinced. Europe, I feel I’m not as convinced. Africa has a lot of potential. 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 economist for you. If you’re interested in learning more, Peter Zeihan, he’s got a great hour and a half long talk. I watched the YouTube video at the University of Iowa. It has a great handle on this particular issue, the best I’ve seen. So for anyone listening, that’s a great topic. We’ll link to that in the show notes here. So this has been fantastic. We usually don’t talk about immigration policy and other things that touch into politics, but we’re going to leave this one in because I completely agree with you and so does Mindy on this.
And by the way, as bad as we are about immigration policy and visas and all that stuff, we’re again the least bad at that in the world. All the other folks that we’re competing with are even worse at dealing with those things.

Mindy:
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.

Aman:
Yeah, I agree with you. I’m self-serving, but 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’ve wanted to recruit me, but I chose America and I did it because I thought that it afforded me and my kids the best opportunity to assimilate, to be a part of this team, to be part of this country, and it spoke the language. And I love everything about this country. I watched Super Bowl yesterday. So I feel like we can win and we can be the shining city on a hill. We don’t have to be the least bad. That’s it. I’ll take least bad if that’s where we’re at, but I think we can do better.

Mindy:
Yes, I absolutely agree. 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 am thankful for you sharing your time with us.

Aman:
Thank you, Mindy. Thank you, Scott.

Mindy:
Have a good day, Aman. 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?

Aman:
They can go to our website. It’s practicalvc.com. They can go there, they can meet us on our website and learn all about us.

Mindy:
Practicalvc.com. Awesome. Thank you, Aman, and we will talk to you soon.

Aman:
Thanks.

Mindy:
All right. That was Amman Verjee, and that was 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 and coming companies. That was a really exciting conversation. Scott, what do you think?

Scott:
I think that we’re unlikely to have Aman back on for a Finance Friday episode.

Mindy:
Yes, I definitely agree with you. He is not going to come on needing any help with his finances.

Scott:
What a brilliant guy, right? What I appreciated about Aman is that as a technology CFO, 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, but for someone in his profession, it’s just straight business. This is how it’s done and why we do it and it’s matter of fact. I think it was a reminder in a practical note, he didn’t have to say anything. It just came across clear as day that this is a business and this is the reality of it and every dollar of costs needs to be aligned with financial and business outcomes for businesses. And that has to take place with good management, alignment up and down the company’s stack. And if it’s not there, then layoffs are going to happen and big changes are going to happen, and that’s just how it is. I really appreciated that frank, straightforward, 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. 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 dividend producing stocks and 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 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 get a second, third, fourth, fifth, sixth source of income so that you aren’t shocked when a layoff happens.

Scott:
Completely agree. And in the cases that we’re talking about, many, not all, but many of these employees are making six figures, 100,000, 150,000, 200, 250, 500,000. Some of the folks that maybe have been impacted by these layoffs will laugh at the numbers that I just threw out there. And look, that’s the deal. This is a competitive professional environment. Every job is that way, but in particular, technology and some of those big professions. And the solution, Mindy, I completely agree with you, is pursue financial independence. Save 50%, if you can, of these really high incomes and build assets 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. 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 build your own business. You hate Robert Kiyosaki, but the Rich Dad motto is mind your own business. That’s what you got to do. You got to be building this portfolio on the side, real estate stocks, whatever it is, emergency fund, so that 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 gap. 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 BiggerPockets Money podcast. He is Scott Trench, and I am Mindy Jensen, saying give me a hug, ladybug. BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Caitlin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.