E80: Recession deep dive: VC psychology, macro risks, Tiger Global, predictions and more

May 13, 2022

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0:00 Bestie catchup and Friedberg intros! 4:40 Breaking down current macro risks, Great Recession comparisons 31:55 How a historically large amount of dry powder is impacting VC firms as the market shifts, problems with mega funds 41:31 Tiger Global's...

Transcript

when are you coming

to Miami? Are you

there ready? I'm here. And I just

got here. Oh cool. From

tomorrow, we'll have a big weekend.

I mean you get to ride on someone else's plane.

Mine's been

repossessed. I'll have mine

for at least another couple

of weeks. I

love, I love my commercial. You know, I left

my commercial.

Every fan of

all in this week in startups stops

me and takes a

selfie. I cannot tell you the

love in Miami. I sat down to have a meal outside

where you buy yourself

Or your myself. It's 11:30. I was like, Hey, everything's closed. There was this one little place that's open. I kid you not. I sit

down to guys come over, we

love the pod and I'm trying to eat my meal and they're asking me questions and they want to know where's Friedberg Introduction.

And

I'm like, it's so bad. Well, I showed them the video And they were in stitches. I was like, guys, there's only like five people

have seen this video and

now it's youth too. So there's seven people like they were so over the moon. We should never have cut that Well, we could play it now. It was good. Thank you. It was incredible. I say we just, we just

throw to it right now.

Is that a good plan maybe. And here we go. and three

two,

this is like the nerd olympics for Freeburg. He's like nerd stretching. He's having a nerd uh freak out right now. You know what? I'm most excited

about that. I don't have to listen to

Jason centros. Oh my God, you're on like nerd

role. That's like

nerd Adderall. Take it easy. Dungeon master. This guy hasn't been so happy since he rolled a 30 on the 30 sided die. Jesus. Oh my God, I've got a plus seven broads that come

from. What? From dungeons I've never played. Oh,

really? You're playing legal

legends.

Okay, I'm going to just apologize in advance for the

audience. Okay, Here we go.

No interruptions. Please thank you in the voice of J. K.

L. Hold on,

is there a frog in your throat? What's going on there?

He's

super loud and has nothing to say but we keep him around because he

has a producer. We don't have to

pay one good investment in his 30 year career,

but he wrote a book about it and tells all the

VCS to kiss his

rear.

He's one of a kind

will always come to your rescue when you're in a bind. He calls himself mr Calacanis, but we all just call him an

anus Jason

Calacanis. Everyone

Jason, Welcome to the show. Great to be here. Great to be here. Thanks for the kind intro. Good to have

you.

His words are incendiary and divisive, but only if

you identify as a gender fluid,

progressive otherwise to you,

He's a scholarly God, fighting the Great War against the rise of the Woke Mob Paypal. It's the 17th

most important guy from

Paypal. He's back with the same political

speaking tracks. The

one and only. Mr David

sacks. David,

welcome to the show. Thank you. Thank you. I think we need to work with some of your rhymes. But yeah,

we might need to tighten that

up. A workshop.

Yeah,

keep going.

Maybe it gets better.

He contradicts himself

twice a week, but we're still in raptured because his mixed

sweaters are so sleek.

His

monologues last most of the show, but

he never talks anymore about I. P. 02 point Oh, as

he'll tell you over and over,

he drinks the world's greatest wine. But commenting on other topics as a bit below his line. He's Silicon Valley's most renowned dictator. Our friend, the verbal masturbator. Jamal polly hot

potato. Jamal.

Welcome to the

show. Great to have you

here.

God, I'm not done. We're an increasingly

Notorious wack pack litigated by David Sacks. Emceed by an investor hack and soon to be canceled because of the performance of latest back. We are the all in pod and you'll never get this 90 minutes back. I'm the Sultan of Science

With an i. q. of 10

three. I'm taking the throne as this

podcast.

New EMC.

Thank you everyone. I'm

Gonna have to man. I don't want to read the YouTube comments on this one. Alright.

We'll scrap it.

No no no no

no no no no

you can't spike

this commentary. Well, I mean it felt a little bit scorched earth to me. Yeah, I thought mine was fine but I think these other guys are a little bit shell shocked right now.

I went a little hard.

I actually wrote this for your, for your

birthday

and then I decided to throw it in. Okay, well I guess maybe we save

it for your birthday.

Yeah, you may want to do something funnier for my birthday. I'll be back

next week with

some actually funny

intro material. Apologies

to the audience. Let your winners lied. Alright,

alright. Listen stocks and crypto have plummeted tiger coin base. Shopify employees are sus meme stocks, it's all gone, everybody the world's over.

Uh

So

uh

where do we start? You guys want to start with crypto stocks. Where do we even begin?

Should we talk about what happened when rates

went to zero

and how financial assets inflated? And I think we talked about

this during the pandemic,

right? When the pandemic

was starting tomorrow.

I remember an early show we did where you and I talked about how it

felt like we

were going into like the roaring rapids right at like magic mountain or Disneyland.

I kind of described it like that.

Like it feels like you're going to a rushing river and there was just all this capital

flowing so

fast like overnight. There were, it was like all of a sudden we went from this like Covid standstill

two,

Oh my God, this rush of

capital and you could feel it

right. all the businesses were all involved in started getting term sheets and

doing deals and there were

specks and transactions,

it was an

incredible

rush of capital.

And so when you know the central bank

made interest rates

zero and

then banks could lend

Out money at close to zero and still make money

and then people could lever

up assets and then those asset values inflated and

they could borrow more

and keep, you know investing in more and buying more. Ultimately, you know, we had bubble after bubble and we saw a lot of things that um you know, may not

have necessarily been

valued based on a historical set of multiples or comparables or cash flow. But really

it was just about, hey if I invest X.

Dollars and someone else is

willing to pay Y dollars

for this asset tomorrow I'm going to make money and you know, suddenly

the friggin

vacuum came out which was like let's take all that money back. And so when

interest rates got hiked it was like

all that money is coming back out of the system and it was like this wishing

sound like

the airlock got opened and all the cash

came back out and

as a result the bubbles just all deflated. And it happened so quickly that it's what

was crazy to me was

that for so long everyone's been talking about how everything feels so overvalued. So everyone was just waiting for the moment when the whooshing sound began and then everyone laid off all

the risk and it

happened so fast and it's still happening, people are still trying to unwind the things where they're, you know in huge positions, but you

know, I think it really is

just but it really is this this kind of incredible moment where you see all the money get pumped in, it all gets rushed out just as fast.

Um And I think we're all kind of like, you know, in

awe of how quickly the response has been. So maybe some

context is helpful

From 2018

up until the beginning

or not really the beginning of this year, but probably

Q. Four

of last year.

You could have calculated an incredibly tight correlation between the stock market and the Fed money printer. So the Fed is in control of

how they can introduce

dollars into the economy. How do they do

that? They

literally manifest money, They don't actually technically print it.

But let's just assume for these purposes that they actually do print

it and they

literally take that money and they enter the market

and they buy things

with it and they're giving you this newly created money that they just created out of thin

air from 19 from 2000

and 18 up until about Q4 of last year, there was

a 0.92 correlation between that and the S

& p. 500 going

up, what does that mean? So if you look at a negative one correlation, that means that if something goes up, this thing goes down, Dollar for dollar, that would be perfectly negatively correlated. If you look at something that has a zero correlation, that

means it's just random

whether whether one thing goes up and down has no influence on the other, but

A .92

correlation effectively means that for every

dollar the Fed created,

the stock market

was going up by

that same dollar. And that

is literally what we had up until

november of

2020

one since the beginning

of this year until about

yesterday. So I think the

number is still going up

probably by at least by a trillion

dollars. We have

destroyed

collectively as a society.

Um $35 trillion dollars in global market value. Now to give you a sense of

that, that's 14

percent of

all global wealth.

That has been destroyed

In basically five months.

and for reference in 2008 when we went

through, you know, a cataclysmic shock to

the system that

threatened the banking infrastructure of

America and a

potential contagion to the world That destroyed 19

of the world's global

wealth at that point. So, you know, we're

approaching some

really crazy

heady moments in time

where in terms of

the market correction and the value destruction,

the difference

here

is that the last time around,

it was really

about the handful of financial

institutions

and some very

specific assets,

right?

Mortgage backed

securities. Um

you know, some parts of the of the

credit market. And then a

bunch of financial

stocks and that was largely it this time

around. As you just said,

free burke, it's literally

everything that's getting

smoked. There is not a place that you can effectively hide

that has

been safe. Crypto smoked the credit markets totally

frozen

the equity markets. NASDAQ is in a bear market, the S. And

P. Is basically flirting with

the bear market now and I don't really see any end in sight. Meanwhile, we're waiting for C.

P. I. To downtick inflation

hasn't really done that. It looks like

consumer price index, how much stuff costs.

So that's taking a lot longer than we

thought to sort of roll over

separately. Jobless claims are

now starting to tick up, which means that

companies are beginning

to affect layoffs because

they feel this pressure. So now you're going to see an

unemployment rate that

starts to go up and then meanwhile, were fighting a proxy war in the Ukraine

against Russia to the tune of about

You know, $40 billion dollars every sort of month or so when we

open the paper and decide

to read about it. So you put all these things together, it's not clear that there is

the

momentum to create a market bottom

real estate. If

you look at it

Was a major compression in 2008 real estate held up is holding up, seems to be holding a little bit, I don't know how long that's gonna last with

mortgages going up.

So when you were talking about all the different categories, I was like that's the one category that I guess hasn't fallen

yet. That's

what you're taking on this. Yeah,

I mean look, we're in a stock

market crash that

I think over the last week sort of became a panic. I mean I think now there's panic selling going on. That's not to say that it's all

oversold, but

certainly there are names now that are starting to become screaming buys but

nobody has the capital

to to buy. I

mean it's easy to

say, you know, in theory that you should be greedy when others are fearful and fearful when others are greedy. The problem is that everyone

is already fully deployed and then when the stock market crashes, they got no cash

to buy up new names. And you

know that's one of the things

that you've noticed in this downturn. And I'd say especially with crypto

is with all the other

crypto downturns,

there were always,

you know the crypto accounts saying huddle or buy the dip or

you know, they had the

laser eyes going, I

don't see any of that right now. Like you know. Exactly. Yeah, exactly.

So this is just

a route across the board, I agree it's every asset class, I think

home prices that's

coming Jason because like you said, mortgages are going up,

inventory is going up.

So

that's a leading

indicator. People

can't afford

the same mortgage they did before because rates are going up very

fast.

So you know,

seller's gonna have to drop

prices and until

they're willing to do that,

the inventories go up,

that's a little dance that happens in

real estate as the sellers don't

want to accept reality

and they don't have to sell because they're living in it as opposed to their crypto holdings, which they're not living in

and they're not getting value from.

And frankly, I think the consumer

in general, that's the next shoe to drop here because

right now it's

been, you had this sort

of financial correction,

you had this massive asset

inflation

and now that, that's sort of the, the air has come out of the balloon. But the

consumer has generally been

holding up pretty well. Obviously we had unemployment, You know, near 3% very low, although the

labor participation wasn't great,

but the

consumer was doing fine. It was sort

of holding up the economy. Now, I think you've got a bunch of different factors are going to really hurt the consumer over the next several months, Like you said,

interest rates

going up means that home

loans become more expensive

car loans, any other, uh, you know, uh, personal consumption loans go

up, credit card

debt now has all of a sudden skyrocketed. So there's an article in Axios on this, that the amount of consumer debt

is

surging and uh, to

this highest level of increase in over a decade. So

consumers are turning to

plastic to cover the soaring cost

of everything.

And then because of inflation

that

wages in real

terms fell

2.6

over the past year. So

because of inflation

and inflation. So if you

look at wages in real terms, people are actually

making less money.

You give somebody a 10% raise, 8% inflation. It nets

out to two. Well

No, you're giving them a 6% raise or, or like like a 5.6% raise

or something like that against

8% inflation

and net net

They're down 2.6% purchasing power.

Exactly

in spending

power. Saxons point

is like, I mean the number

was 60 billion of new consumer credit

last month, which is like

something we haven't seen

in a very

long time as consumers trying

to bridge this gap to afford the things

that they've gotten used to spending

money on to jump up. Like that

just indicates that

we may be in the beginning of a

consumer credit bubble

now, which is scary right? This is,

this is the question is, what are the next shoes to

drop? So, so

you think about like what's happened

in the market so

so far it's mainly been multiple, multiple compression, like earning season. It was pretty

good. I mean it was hit or

miss for some folks. So that the stocks that got hammered were generally the Covid stocks, it was the peloton is the netflix zoom. You know, you could like coin base and Robin Hood with the day traders because that was people are laying off that stuff. So, but so basically the Covid stocks have been hammered. But the B to B stocks actually had really good results and yet you know the SAS index is

down like

80%, you know, the average sas multiple, it was over 15 times, you know, last year in the on the public comps and now it's down to 5.6. So the SAS companies have been hammered despite having great earnings. So well we don't know how their B two B. They don't, they, they're a little bit insulated from the consumer. But what we don't know is what happens over the next six months

if we go

into a deep recession Then do even the B2B companies start

being impacted. That

would look like sex. Just to be clear. You know, people maybe start canceling their netflix or they don't take that vacation. That's the consumer getting hit first. A business that's laying off 10 or 25% of their employees which are starting to see that contagion. They might also pull out their SAS bill and say here's 12 SAS

products were playing for

let's consolidate down to eight, right? I've got a SAS startup that sells

You know six and 7 figure deals into enterprises

and they closed their deal with Uber the day before

Doris memo came out saying we

gotta be really focused on cost

cutting. What Wall Street wants now is

free cash flow. We got to really sharpen our pencils, they were like shoot good thing, we got this across the finish line. If it had been like two days later, it just would have been much tougher process. So first you're right, the companies that get impact are the ones with exposure to the consumer, but then those companies start sharpening their pencils and buying less. So the question is how much our earnings now going to be impacted In the B two B

space And

What sort of recession do we have? I think like recession now is just inevitable. You humans point you can't have 14% of global wealth wiped out practically overnight and not have that translate into a big recession, monetary velocity is going to

slow dramatically.

The money circulating around is

you can feel

the breaks happen, you can feel the tightening

people are just way poorer

than they were six months

ago. Guys, Just to

be clear, we actually haven't started to remove the money

in the system. So

the process of quantitative tightening,

which is the feds

mechanism of removing liquidity is going to start

now to the tune of

About $90 billion dollars a month. But to run off

all the money that they printed

Will still take three

years, right? So we

have to take

About $3 trillion dollars of excess capital out of the

economy.

And so if you add that three trillion as well, that's just going to disappear

to the

14 trillion. We've already, you know, or the 14%, the 35 trillion. Sorry.

You know,

you're, you're starting to touch numbers that

are, you know, as bad as the

GFC in terms of global wealth

destruction. And again,

you're referring

to the great financial crisis

When you say GFC 2000 and unlike the GFC, this wealth destruction is touching a

lot of normal

everyday folks

in very

broad based ways.

And that wasn't

necessarily the case. There were a

lot of people that unfortunately

lost their

home. But even that was still relatively contained

to the hundreds of thousands here,

we're talking about tens of millions of people owning every kind of imaginable

asset class

who's seen wealth destruction, you

Know, somewhere between 20

5 - 90%. And that's

very hard. Yeah, But I just want to make the case like people keep using

this term wealth destruction

and it was only wealth that was accumulated in the last few

quarters since we

had Covid and we released all this capital

and made interest rates at

zero and flooded the market

with money. So

everyone kind of gets the money and then they're like, hey, I'm worth a lot more. And then all of a sudden

the free money is taken back

and you're like, oh my gosh, I'm worth less, I've been destroyed.

It's, you know, it's,

it's crazy. The reality is

this was meant to stimulate

the economy. Money was released and the idea when you release

capital from a central

bank is that, that capital flows its way

into productive

assets, meaning businesses

that can employ

people that can create products that people want to consume.

And ultimately

it's very hard to

manage that when you're

only mechanism is to raise or lower interest rates and make capital available or buy

bonds

at the end of the day,

a lot of that capital

flowed into financial assets

and inflated the

value of those

assets, the value of stocks, the value of crypto, the value of

bonds that we own, the value

of startups that we all own and all

of those assets, the

value of the stock

went up, but the capital didn't necessarily flow into creating new jobs,

creating new businesses and

creating new products, I want to

finish this one because I think it's really important. And at the end of the day,

if that capital

didn't really go into

create value and it comes

back out and all that

happened was we had this kind of inflationary

moment in terms of

asset prices

and we didn't actually create new jobs and didn't

actually stimulate the real productive economy, that's where we have a problem

with stagflation and where we

are inevitably going

to run into a recession. And I

think the biggest concern I have a recession right now, this is the second biggest concern. The biggest concern I have, as I mentioned earlier is this consumer credit

problem. A

lot of consumers got used to

the free money over the

past two years

and people took that money and they went and bought new cars

or they bought

crypto or they

bought one thing or another N. F. T.

S. And a lot of people got used to living a lifestyle

that allowed them to

spend in a way that they otherwise would not have been able to spend. And then all

of a sudden

the rug got pulled out and now everyone's like, well I want to keep living this lifestyle, I want to keep spending this

money, I want to, I

had all this stuff taken away from me, shoot, what am I going to do? And then they take on credit

and the

Credit markets haven't tightened enough yet. On the consumer side that we may find ourselves in a really ugly consumer credit bubble. Here's a crazy statistic for you guys in the 2008 financial crisis. The median home price to median income in the United States was five X. Today,

it's seven X.

So people

today own homes that are significantly more expensive relative to their income and earnings than was the case during the financial crisis that

caused a massive housing

bubble. You're missing a bunch of important

data points here. The most

important thing that happened was we changed the way that we are allowed to capitalize

mortgages and

the borrow rates.

So that

fundamentally is what

drove that. Okay, so for example,

you are not allowed, for example to have

a qualifying mortgage be

Over $1 million dollars at the end of

last year. We changed those

rules. So if you accept those

effects that allow

the F. D. I. C. And all of

these, you know, Fannie Mae and Freddie

Mac and all of this financial gobbledygook acronym infrastructure that props up the

U. S. Economy. If you

factor in those rules,

I don't think it's as

extreme as you're describing.

What do you mean, consumers have more deaths per

relative to the value of their home

uh sorry debt

relative to their

Income than they did during the 2008

financial crisis? That's a fact

has nothing to do with

the structural way the

market works. But like what I'm saying is

the market allows you

to to be that level without actually getting foreclosed on or you know, you're allowed to get the bar

weights that allow you to do that. All I'm saying is it's not like

um excess credit

is being built up in

the system

abnormally by consumers. It's just that these products again are being

structured in a way

that that gets people down.

And real estate is a very

unique category because you

have i buyers taking stuff off the market, you have regulation not letting people build more. So I would be very

reticent to

extrapolate what's happening in real estate. I

don't think we have like

a

an issue in real

estate, to be completely honest with you. I

I think that we may

have a looming

credit crisis, but the

practical issue today is

I think asset wealth

destruction in the financial

markets whenever that happens,

generally

tends to lead to what

Saxe said, which is belt

tightening by companies

focus on

maximizing short term free cash flow,

which unfortunately

the way to cut that is by cutting Capex and the

way that you cut off

X. Is by unfortunately

spending less on

goods and services, which affects other companies and firing employees.

And I think what

you're going to start to see

or a bunch of

those things where these companies make these short term optimizations,

then how that

unfortunately

impacts the consumer is what

Friedberg said, which

is that if the consumer was

already living,

you know, sort of at

the knife's edge and

using a lot of credit

to basically allow them to live a lifestyle that wasn't sustainable. Whether that meant not

having a job or

whether that meant, you know, vacationing and staying in

Airbnb s, all of

that will come to an end. Now

you can say, what is the canary

in the coal mine

and

let me just give you

one thing that

hit the wire this

morning which will show you

how bad the credit market is.

So there

was an article in Bloomberg that came out that said

instead of Ellen

taking margin loans

to fund his

acquisition of twitter,

there is

an idea being floated

by morgan Stanley

to use convertible

debt. Now

I love this

idea because I think it's an excellent mechanism. This was the You know when Ellen had convertible debt on Tesla that was you know of one big escape velocity moment

for me and my career in

2016. So I believe in these products, I believe that they

work.

But the reason I'm bringing this

up is that

the what it said is I'll just read this to you. The preferred equity

May have a 20 year

maturity and include a feature

allowing interest to be

paid in kind at a rate of 14% a

year if the single greatest

Investors cost of capital for debt in today's market is 14%.

I think you have to

really start to question what the credit markets really look like for market clearing prices because

if that's the price

for a risk bearing asset run by the greatest entrepreneur of our generation,

there's a bunch of stuff rebirth to your point

that's pretty mispriced. I think one

thing that's a silver lining here is we did

build up 11

million job

openings, labor

participation is

really low right now,

even post

pandemic people,

if you ask this question,

I think

How are people going to get out of two

Freeburg point? The lifestyle issue

like they wanna live is a pretty easy

solution. Go back to

work, get a second

job, start working again.

We we peaked, you know, in

the nineties with

Something around 67% labor force participation and

then we're

Now, you know, just right around 62, this is a large number of people who could go back to work.

Now, you

mentioned that slight tick up ever so

slight in

unemployment claims, we'll see if that goes up. But I think the potential way out

here is

that it's baden

meaning like if you look now the last three or four unemployment claims readings in a row have largely showed that it's floored

and it looks

like in the last couple of readings that it's

Starting to tick up well with three

percent unemployment, we're kind

of on the floor, you can't possibly have

less unemployment,

unemployment is going up. I think

employment has

peaked unemployment is going up and that's exactly what thomas said. Look,

all of us in our board means the last several months

really since the beginning of the year, have been

warning founders that the environment is

changing. Don't

assume

that we're always gonna have a boom and

the cash is always gonna be there. However,

well

because there's been resistance,

because people don't want to

believe it? And then in addition, it's always like, well, how do you know, it's

not going to bounce back,

Right?

And now I think

after what's happened

really since

april and really in

the last week or

two, I think

No 1's really saying that

anymore, everyone

understands that we're in a new environment

and they just don't,

they either have experience

with how bad it's gonna

be or they don't, but everyone understands

things have changed.

So every

company that's, that's acting sensibly is

freezing their hiring, putting a

brake on the growth.

Um, you know, slowing

down their plans and that will absolutely translate

into, um,

you know, less job creation.

Yeah, we've, we've

really pushed

that

exact plan. I used to sit down with our founders and in these board meetings, what we would talk about is the base case and then we would always talk about a blue sky case and a really bold case.

Right?

So three flavors

of kind of like

kind of go and do what you're doing,

Actually

put a little bit more gas on it and you know, press the gas and then really go

for it. I stopped

all of that.

You know, these last five

months have been me and my founders basically saying, okay guys, what's the extreme bear case, what's the bear

case

and then what's the base case and what we are trying to figure out is

how do we make

sure that we can optimize

for a contribution margin

for profitability for cash flow and when that's not possible, how do we minimize burns so that we can extend our runway as long as possible and show technical validation so that we can raise money on reasonable terms, not even great terms.

And

if the boards of these private companies haven't been doing that for the last five or six months and the, and the burn hasn't dramatically changed. I think that they are,

they've

been a little derelict in their duty. It's a, it's a, it's, you're not doing a very good job as a board

member or investor.

If you haven't forced these conversations with

your Ceo and

you shouldn't expect the

Ceo to bring this to

you in many ways because it's

very hard for them with the, with the focus that they have every day to put this front of mine. But

as Sachs said, you

have to do it as

a director if you're

worth assault at all, you have to do it. Well, it's been quite the opposite.

We saw with fast dot

com co was the opposite. Right?

People were just not

even considering it,

it's just survival

risk is on the table.

You really have to act differently.

It's kind of like the difference

between a poker tournament and a cash game,

you know, like players

behave very differently in a poker poker tournament, the players are much more conservative

why? Because once you're out you're

out. So if you lose the

wrong hand, you're busted out of the tournament.

Whereas in a cash game you can just read by,

well we've gone

from basically being in a cash

game where people can just re by

maybe they won't, you

know, they can go out and raise more money. Maybe it's not the valuation they

want, maybe it's not as much as they want,

but you know, in a boom, you can always just go raise more money now if there's no more money

available

to keep funding your plan, if

it's not working,

you really have to think about

survival

and you have to be more

conservative, you can't let

yourself bust out of the

tournament. By the way, I'll

Say two things on that

one. what you're

describing is

exactly the condition

that is now led to the

Fact that roughly 1/3 of public

biotech stocks are trading below cash. So they're they're

entity yeah,

so they're entity value the biotech industry

as a whole. Sin bio

in particular. But really

biotech, about a

3rd of companies now

trade below their cash balance. I'll send you guys some some links on this nick, I'll add it to the show notes afterwards, And the reason is you have 40

percent of them

Have less than 20 months of cash. Um

60%

of them have less than