Not Boring by Packy McCormick

Welcome to the 225 newly Not Boring people who have joined us since last Thursday (Substack confirmed they dropped some)! Join 46,444 smart, curious folks by subscribing here:Today’s Not Boring, the whole thing, is brought to you by … TrueworkRead on to learn how Truework is building the verified identity layer of the internet.Hi friends 👋 ,Happy Thursday!I met Ryan Sandler, Truework’s CEO, via an introduction from Ramp co-founder and CTO Karim Atiyeh. Aside from running NYC’s fastest ever unicorn, Karim is also a top angel investor. One mutual friend told me that no one is better at identifying strong engineering teams than Karim. So when he told me I needed to look into Truework, my ears perked up. Karim was right. Truework reminds me a lot of Ramp, a Not Boring favorite: Rabois-backed, fintech, Harvard founders, going after an absolutely enormous market led by a too-comfortable incumbent, strong technology chops, and a long-term, worldbuilding strategy starting with a smart wedge.It’s different than Ramp, too. First, it’s not starting with a product that the end-user touches. It built a platform and API used mostly by employers and verifiers. It’s intentionally unsexy. Second, it has a different ambition, which required it to act differently, more quietly, in the beginning. (Until now. That’s why we’re here.) And third, Truework is a privacy-first company. Truework’s story has lessons for founders, investors, anyone who works in regulated industries, and even incumbents. It’s a masterclass in Worldbuilding.This essay is a Sponsored Deep Dive on Truework. For those who are new around here, that means that Truework is paying me to write about their business, but that I would have written about it anyway. You can read more about how I pick and work with partners here.Let’s get to it. Truework: A True Strategy MasterclassThis is a story about strategy. It’s also about privacy, identity, income verification, credit bureaus, breaches, regulations, and owning your data. It’s about worldbuilding and unsexiness. It’s about the ability to fill out a mortgage application simply by clicking “login.” But mostly, it’s about strategy. Truework launched in late 2017 with a vision: empower people to own and control their personal information. That’s one of those “much easier said than done” visions. Others have tried and failed. To succeed, you need a strong wedge, and a master plan. Truework has both, and is executing on one of the most patient and ambitious worldbuilding strategies I’ve seen, backed by Keith Rabois at Founders Fund, Alfred Lin at Sequoia, and Steve Sarracino at Activant. You don’t assemble that board if you’re fucking around. Its master plan starts with employment and income verification, a process that touches all of us. If you want a house, a job, or a car, your lender or employer needs to confirm where you work and what you make. It’s a $5+ billion market with one dominant incumbent, a bunch of small players, and a lot of pen, paper, emails, and faxes. It’s broken, unsecure, and slow. But employment and income verification is a wedge into a much bigger opportunity: to become the verified identity layer for the internet, giving people control of which data they share, and where, and speeding up transactions that require trust. Truework’s journey thus far, and it’s plan for the next half-decade, is a case study on how tech startups can win huge markets controlled by dominant incumbents without using low-end disruption. Let’s study: * Meet Truework* How to Win a Legacy Industry * Regulatory Counter-Positioning* The Verified Identity LayerMeet Truework In 2017, after product managing LinkedIn Salary (a Glassdoor competitor) to launch, Ryan Sandler left LinkedIn and linked up with his Harvard roommate, Ethan Winchell, and fellow LinkedIn-er, engineer Victor Kabdebon, to explore ideas for their own thing. Having gotten interested in data ethics in college, Sandler knew that he wanted to start a company in the data privacy space, but he didn’t know exactly what the idea was. He did know which boxes it needed to check: * Unsexy * Overlooked by Silicon Valley * Lots of data* Large marketOnce they identified spaces that met their criteria, they cold emailed companies to pick their brains, narrowed the list down, and started talking to customers to validate the top ideas. After speaking with mortgage lenders, they chose employment and income verification. Sandler told The Venture Brief they chose the category because of: How overlooked it was, yet such a big market, and so important in the economy. Every time someone gets a loan, apartment, a new job, there’s sensitive information that needs to be verified about them. Most prominently, their income, employment, assets, credit, other pieces of their identity. And consumers have no idea that this information is being verified and being shared with a ton of third parties.Employment and income verification checks all the boxes. * Privacy has been a huge issue, despite the sensitivity of the data. ✅* It’s unsexy. ✅* It’s overlooked by Silicon Valley (quick, name your favorite employment and income verification startup). ✅* There’s a ton of data: the product is all about collecting and sharing data, fast and securely. ✅* It’s a massive market. ✅In 2020, the industry leader did nearly $1.5 billion in revenue, up 51% YoY. Income is one of the best measures for underwriting; verifying that income is the glue that holds lending together. Dodd-Frank, the consumer protection legislation that came out of the housing crash in 2008, even mandates that lenders verify the data before approving a mortgage. Verification of employment (VOE) and income (VOI) is so critical that even after a data breach that exposed over 145 million Americans’ data, Morningstar analyst Brett Horn told CNN, “I think, frankly, it’s not in the interest of the industry or even regulators to shut down [a credit bureau involved in the leak]. They provide an essential service for consumer lending.” Until 2017, the industry and regulators didn’t have much of a choice. Enter Truework. Starting with employment and income verification, Truework is building a digital-first credit bureau that makes it faster for consumers to apply to loans, apartments, jobs, and more, while maintaining privacy. It’s a three-sided network: * Verifiers: Lenders, landlords, employers, and others need to verify your data in order to give you a loan, rental, or job. They’re the payers in the network, paying each time they need to verify information. * Employers: Employment and income data lives, unsurprisingly, in HR and Payroll systems. Truework works directly with companies, and with payroll providers like Gusto, to access that data directly. * Consumers: The people whose data is being accessed and shared are typically overlooked in this network. They often don’t even know that Employers, Verifiers, and credit bureaus are sharing their information behind the scenes. Truework brings Consumers into the loop. Employers provide data to Truework, but Truework never shares that data with Verifiers without digital consent each time the data is shared. That seems like it’s obviously the right move, but it’s not the way it works today. To make the process smooth, fast, and easy for Verifiers, who are the paying customers, Truework has three products that roll up into a one-stop solution for income verification.The bread and butter is the Instant product. This is what lenders and other Verifiers care about most: with the Consumer’s consent, data is returned cleanly and instantly, without any user friction to cause drop-off. Truework has spent the first 3.5 years of its life building up partnerships with companies and HR and Payroll providers like Gusto, Zenefits, and Paylocity to create a database of 35 million employees. It’s already the second-largest network, and it’s growing quickly (100x in the past year alone).Truework recently added Credentials to its waterfall. There are a number of players now attacking this part of the waterfall, including Payroll scraping APIs, and Truework partners with them. This is an important piece of the waterfall, but not a full solution by itself and not as preferred as Instant. Payroll scraping APIs have high drop-off rates (think of the number of times you’ve dropped off when asked to provide your banking credentials in Plaid, and multiply that by how hard it is to remember your payroll system password). That’s why it’s just a fallback for Truework, albeit an important one. For everyone who isn’t covered into those two buckets, Truework has an automated Smart Outreach system backed by a team of employees using proprietary technology to get in contact with HR teams quickly. The difference between the current, fax-heavy process and Truework’s is the difference between dealing with customer service at a bank and at a startup, plus a lot of automation and machine learning to route thousands of requests per day to the right person at hundreds of thousands of HR departments.The magic of this approach is that Truework is the only one stop solution for Verifiers. They realized early on that until they have all of the data on one network, they needed to become an aggregator, not in the Thompsonian sense, but in the more traditional sense: aggregate access to the data, whether first-party or third-party, via a single, easy-to-use access point in one place. Because of that, Truework is able to verify any applicant, through the waterfall described above: Instant, then Credentials, then Smart Outreach. In order to make sure they have complete coverage, they even work with other credit bureaus and payroll scraper APIs on the backend to fill in gaps. The one-stop approach is working. Truework now works with over 15,000 SMB lenders using its self-serve product, and the largest mortgage providers in the country now use Truework’s API.But for Truework to hit its massive vision, it’s going to need to grow its Instant network from 35 million people to over 100 million. To do that, it’s going to need to transform the credit bureau market itself. How to Win a Legacy IndustrySome startups create new markets. Others come into established markets and compete with entrenched incumbents. Often, they do it via low-end disruption: find an overserved segment of the market, build a pared down, good enough, cheaper product, and then move upmarket. Truework is competing in a legacy market without low-end disruption, by building a better, consumer-first experience and playing the long game.  To date, the traditional credit bureaus have reigned supreme in identity, including the employment and income verification space. The largest player still covers 80-100 million people compared with Truework’s 35 million. These credit bureaus are so entrenched in verticals like identity that even after multiple massive data breaches, nothing changed. The major credit bureaus almost seem like quasi-governmental institutions, beyond reproach. (That said, the Biden Administration is contemplating creating a governmental credit reporting agency to compete with, and potentially replace, the existing big three - but it will be an uphill battle.) That’s why no one’s been able to take them head-on, and why Truework’s market checked the “overlooked by Silicon Valley” bucket. It’s why payroll scraper APIs try to go around the credit bureaus instead of competing directly. But Truework is going head-to-head. This is where this becomes a story about strategy. Start with the why now. What’s changed? First, technology. On the Employer side, HR and Payroll platforms recently launched open APIs that make it easy for employers to connect data with Truework. On the Verifier side, more and more lending is going digital, with companies like Roostify, Blend, Better, SoFi, Rocket Mortgage taking a greater share of the market. That created an opening for a tech-first solution like Truework that connects the two sides seamlessly, securely, and instantly. Credit bureaus, on the other hand, are not known for the quality of their APIs. Second, privacy. Since the Cambridge Analytica scandal, online privacy has become a louder part of the global conversation. Europe passed GDPR and California passed CCPA. Both regulations require consent before sharing employee data. When hackers breached one of the major credit bureaus in 2017, they shone a light on the previously shadowy verification industry, and consumers didn’t love what they saw. It’s a tough time to be a company that shares data without consent. But privacy is one of those things that people say they care about without opening up their wallets to prove it. The startup graveyard is littered with companies whose main value prop was privacy. Instead, Truework needed to compete by building a better product with internet-native distribution that also happened to have privacy baked in. It needed to play the long game. It needed to be a Worldbuilder. In Two Ways to Predict the Future, I wrote that there are two ways that companies go after big markets. “Shotcallers find an obviously big market, guarantee that they’re going to transform it, and try to spend their way into making that happen.” Worldbuilders, on the other hand: * Predict something non-obvious about the way the world is moving before others see it and before the market is ready for their ultimate vision.* Create a wedge into the market and leverage it into a much larger opportunity. The public often ridicules or dismisses the initial wedge product. * They timestamp their vision, whether in public announcements or confidential documents. Obvious Worldbuilders include Musk and Bezos. This video is classic Worldbuilder:* Predict something non-obvious: Commerce on the internet is going to be massive. * Create a wedge: Books were not the biggest category, but they benefited the most from the internet’s capabilities, and were the right category in which to build the muscle.* Timestamp the vision: Bezos never said books are the end-all-be-all. He said that they were the “first and best product” to sell online. Truework is a Worldbuilder, too. * Predict something non-obvious: As HR systems and lending move online, there’s an opportunity to build a privacy-first identity layer across the internet. * Create a wedge: Employment and income verification is a vertical of identity that everyone needs that has the least digital competition; it allows Truework to build up its most important asset: data. * Timestamp the vision: The team shared with me a 10-year vision that they set out to accomplish in 2017. They’re executing on it almost perfectly so far, and have big ambitions for the next six years.Truework found a market with a non-technical incumbent with an approach that was non-obvious to other startups. It had to lay two foundational pieces down before executing on its master plan. Its first decision, which is common among startups, was to be product-and-engineering first. The incumbent had a distribution advantage -- it worked with most of the large enterprise companies -- so Truework had to win on product. It built a team of top product, engineering, security, and marketing talent from Airbnb, Coinbase, Stripe, Gusto, LinkedIn, Patreon, and Facebook. From that base, Truework has executed against a master plan to grow its Instant network. Get more Verifiers on the platform to attract more Employers, use more employers to attract more Verifiers, use those Verifiers to attract HR and Payroll Platforms, and so on. It’s Truework’s Flywheel, and its network effect.It starts with SEO. SEOBeing technical and internet-native gave Truework the seeds of a distribution edge, as well. Search Engine Optimization (SEO) for employment and income verification was wide open. So, as Sandler told Harry Stebbings, “When you look at how we built our product, it was really with SEO in mind rather than building a product and then trying to send traffic to it, if that makes sense.” When they entered the market, thousands of relevant search terms were wide open.There are two types of search terms: head terms and tail terms. For employment and income verification, the head term, the thing that most people search for, is “employment verification.” Go search it. It’s littered with ads, and Truework doesn’t even try to compete there. Instead, it focused on the tail terms, which, like it sounds, are the long tail of search terms related to the main topic. In Truework’s case, that’s “[company] employment verification” or “employment verification [company].” Try it. Go search “employment verification [your company].” Chances are, Truework comes up first. That’s free marketing, and for the first three years, Truework didn’t spend any money on paid acquisition. 95% of submissions came from organic channels. To compete, any incumbent would need to re-architect its system for tail SEO and play catchup to Truework’s 3+ year head-start. It’s too late. This advantage will compound. Mid-MarketWith the early product and SEO infrastructure built, Truework picked a wedge within a wedge to kickstart the market: it decided to go after the HR departments at mid-market companies. Sandler told Stebbings:People often want to go start at the smallest of SMBs and work their way up. But what a really small, 10 person company, 50 person company, what they want is very different than an enterprise. So, what a mid-market company wants, a company with 500, 2,000 employees, is much more similar to what an enterprise wants. And the sales cycle is much faster. There may be less security requirements. You can actually close these quite large companies in the early days of your company.Plus, most enterprises already worked with the big incumbent, while most mid-market companies still used manual processes. They had a greater need. As Verifiers needed to verify employees at mid-market companies, they needed to use Truework, bringing demand onto the network. Verify Any EmployeeBy 2018, Truework was getting traction in the mid-market. It raised a $2.9 million seed round from Miami CEO Keith Rabois (then a partner at Khosla Ventures). Rabois laid out a framework in 2017 that Truework followed:While the incumbent dominated the enterprise portion of the market, the overall market was still largely fragmented. There was no one place to go to verify any employee. The incumbent only really verified employees on its network. There were 10-20 smaller, industry-specific players. Truework needed to be the one place where a Verifier could verify any employee, something that’s only feasible for a tech-first company that can easily plug into other systems and automate manual processes. Still, working with third-parties and automated-but-still-manual processes was lower margin and slower than getting employees on network. Luckily, attracting Verifiers with a one-stop solution let Truework leg up into the next part of its plan. Embed into HR PlatformsTruework started by selling to mid-market companies. It went door-to-door, signing up one company at a time. 1,000 employees here, 4,500 employees there. It grew quickly enough to raise $12 million from Sequoia’s Alfred Lin (who had a pretty good day on December 9th last year when two of his companies, Airbnb and DoorDash IPO’d on the same day). It was time for the next step: exclusive distribution through HR and Payroll platforms. HR and Payroll platforms, like ADP, Gusto, Paylocity, Zenefits, Bamboo HR, and more, each work with thousands of Employers and millions of Consumers. They want to work with the employment verification companies that work with the most Verifiers, partly because they get a small cut of every verification transaction, but most importantly, they want to work with consumer-first partners because their own customers are HR professionals tasked with protecting their employees. As Truework used mid-market sales and SEO to attract more Verifiers, HR and Payroll platforms signed up. In April, Truework announced an exclusive partnership with Gusto, bringing over 100,000 small businesses and their employees into Truework’s network in the click of a Docusign. Gusto chose Truework because the two companies share the belief that employees should control their own data, and because it makes their customers’ -- Employers’ -- lives easier. With Gusto and other payroll platforms onboard, Truework now has 35 million employees in its network, up from 300 thousand just twelve months ago. Importantly, because partnerships like the one with Gusto are exclusive, Gusto will only work with Truework, and not its competitors. Verifier API More Verifiers meant more Employers, either directly or via HR and Payroll Platforms. More Employers meant bigger Verifiers. In 2020, Truework achieved a few big milestones: * SOC2 and ISO20071 Certified. As I wrote about in Secureframe, SOC2 and ISO20071 are a prerequisite for working with enterprise companies.  * Launch an API. In March 2020, Truework launched a Verifier API that lets big lenders put Truework verification right in their workflows and to easily handle large volumes of verifications. * Series B Led by Activant. Truework raised a $30 million Series B, led by Activant, a B2B2C-focused venture firm, which fits perfectly with Truework’s B2B2C strategy. Just a little over three years in, Truework has laddered up from one-off Employers and small, self-serve Verifiers to work with some of the largest lenders and HR platforms in the country. It has over 35 million employees in-network, ready to be verified instantly, covers all out-of-network employees, and works with 86k users across 15k financial institutions to verify employment and income information. As it grows and unlocks new partnerships, it’s building up a secure database of employee information that puts employees in control, and which it can use to expand into other parts of the verified identity stack. That’s a hell of a start, the result of a smart strategy executed well. But we haven’t even gotten to the part that I find to be the most fascinating.  The most brilliant and unique weapon in Truework’s arsenal is its use of regulation. Regulatory Counter-PositioningOff the top of your head, how many startups can you think of that send regulators letters asking them to strengthen regulation in their industry?Some crypto startups, like Coinbase, work with regulators because many institutions need more regulatory clarity before investing. Crowdfunding platforms, like Republic, embrace regulators and work with them to help implement more common sense regulation, of which they are the beneficiaries. Big incumbents, like Facebook, often pretend that they don’t want to be overly regulated, but as Ben Thompson has pointed out many times, regulation typically favors the big, rich incumbent at the expense of the startup. Zuck is Brer Rabbit: pleading not to be thrown into the regulatory briar patch so that he ends up there. But for most startups, the dominant model over the past decade has looked something like Uber’s under Travis Kalanick: ask for forgiveness, not permission. Move fast and break things. Startups have huge growth goals and limited resources and regulation can slow them down and waste money.That’s why it was notable when Truework wrote a letter to the Consumer Financial Protection Bureau asking it to hold Truework and its competitors to higher standards as it makes rules related to Dodd-Frank Section 1033.  Why would they do that? Its biggest competitor has so much more money, and so many more lawyers. You’d think that more regulation would favor the incumbent. It typically does. In 7 Powers, Hamilton Helmer writes about regulatory capture as one of the ways to achieve the Cornered Resource power. Flo Crivello calls it, “A particularly vicious form of cornered resource,” which is fair, because it’s what happens when a regulatory body is corrupted to serve the interest of the group it’s supposed to be regulating. When regulatory capture occurs, it’s typically the incumbents who benefit, because they have the advantage of the time in market, money, and lobbying power it takes to flip regulators.  But in this case, because Truework’s interests are aligned with the Consumers they built the company to protect, and because Truework is nimble enough to build product to fit any new regulation, regulators can help Truework by helping consumers! Check out the recommendations Truework is making in its letter to the CPFB: In case you don’t want to read it, Truework is arguing that consumers should have meaningful control over their data and that trust is a precondition to consumers wanting to exercise that control. The beauty is in the details though. Truework is recommending common sense things that would clearly be better for consumers, and that are so much easier for a tech company to implement than, say, a large, non-technical incumbent. Aside from the technical stuff, its recommendations fly in the face of the way that credit bureaus work today: use-case specific instead of broad sweeping access, accurate data and the obligation to correct inaccurate data, direct responsibility for API functionality and security. This isn’t regulatory capture. It’s Regulatory Counter-Positioning. It’s Jiu Jitsu. It reminds me of the scene in ~half of 80s movies in which the 5th grader bullies the 3rd grader, but then the 3rd grader calls in his much bigger 8th grade brother. Or something like this:That’s the best part of building a business that’s truly aligned with consumers’ in a space in which that hasn’t always been the case. You can do well by doing good, and tie your competitors in knots in the process. So where are we? 3.5 years in, Truework has executed on every step of the plan it laid out in 2017, on schedule:* It’s legged up on each side of the three-sided network, and has reached enough scale that regulators now have to take it seriously. * If the CPFB takes its recommendations, it will be in a particularly good position relative to its biggest competitor. * It’s doing all of this while creating an employment and income verification product with a Customer Satisfaction (CSAT) score of 90+. * Plus, it’s sneaking privacy into a product experience that is good enough to stand on its own, and making headway towards letting consumers control their own data. It’s well on its way towards building the verified identity layer for the internet.The Verified Identity LayerThe thing you need to understand about great API-first companies is this: they don’t seem very sexy at all, until they do. The best ones are often Worldbuilders. They start with a small, non-obvious wedge, and work their way towards a bold long-term vision. For Truework, that bold long-term vision is to empower people to own and control their information. As we’ve learned at this point, that’s harder than it sounds. The incumbents make a lot of money owning and controlling that information currently. Given Truework’s consistent execution against its 2017 10-year plan, though, I wouldn’t bet against them. So what does that master plan look like going forward? This year, Truework is focused on “broadening the waterfall.” That’s right...That means more ways to verify from the API to increase the coverage of instant requests. That will bring more big Verifiers onto the system. Meanwhile, it will continue to add new HR and Payroll platform partners and Employers, and continue to improve the consumer experience and gain their trust. All of this is in service of the larger goal of winning identity, which Truework believes takes three things: * Source of Truth Data: first-party data on 100 million or more Consumers* Large Network of Verifiers: Truework needs to be a trusted source for anyone giving mortgages, loans, or jobs. * Consumer Experience and Trust: While Consumers have thus far played a more passive role, approving when and with whom their data is shared, the next parts of the plan are more Consumer-focused. Next year, the Consumer is front and center as Truework goes after more of the $100+ billion Identity Verification market. Employment and income verification is important for large, infrequent transactions like mortgages and apartment rentals, but identity verification more broadly, including credit, assets, education, criminal record, driving history, address history, and SSN/DOB, is used in all sorts of places: marketplaces, ecommerce, payments, gig economy onboarding, bank account applications, and more. The average Consumer has their identity verified 300 times per year.Starting with smaller transactions, like rentals or account creation, anyone verified on Truework will be able to send a Truework profile instead of paperwork or a credit pull. By 2023, you’ll be able to Login with True on any site that requires verified identity and information, and can choose which information to share with whom. You can create fake Facebook profiles or burner Gmail addresses; your True identity will have all of the verified information, bridging your online and offline identities. Renting an Airbnb? Prove that you are who you say you are. Applying for a job. Log into Indeed with True. Angel investing? Show your accreditation by logging into AngelList with True. Want to trade crypto? Never take another picture of your ID, and then retake it when it inevitably doesn’t work, ever again. The possibilities are endless, because many of the experiences that can be built on top of the True API wouldn’t be possible without it. Stripe, Twilio, Plaid, Agora, and the rest of the API-first companies enabled previously impossible or prohibitively expensive use cases. New technology originated lending classes like Buy Now, Pay Later (BNPL). True will make it fast and cheap to verify that you are who you say you are, expanding the possibilities for existing lending classes and making entirely new ones possible. As Consumers take back ownership of their data, they may even be able to sell it for money or trade it for access or experiences themselves. That’s what Facebook, Google, the credit bureaus, and anyone who “owns” your data today already do. Why not you?How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading and see you on Monday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the ??? newly Not Boring people who have joined us since last Monday - on Thursday, Substack suddenly cut my subscriber count by ~1,200 and I’m not sure why. But onwards: join 46,123 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotifyor Apple PodcastsToday’s Not Boring is presented by… MasterworksIn January I wrote about Masterworks. As a refresher, Masterworks is the first and only platform that lets regular folks (like me) invest in blue-chip artworks at a fraction of the entry price. At the time I had invested in three Masterworks offerings. Since then I have added three more pieces to my portfolio: a Haring, a Bradford, and another Basquiat. Fancy. Not only do I think it’s prudent to have real asset exposure to hedge against inflation (thanks J Pow 😉 ), but I also love learning about these artists and their markets, and Masterworks brings some intense data analysis to the table.Art can make sense in everyone’s portfolio. Contemporary art returned 13.6% from 1995-2020 with a low loss rate and virtually no correlation to equities. Plus, unlike other collectables or even BTC, supply is constantly decreasing. It’s kind of like ETH … ultrasound art 🦇🔊I teamed up with Masterworks to let you skip their 11,500 person waitlist. Try it.**See important infoHi friends 👋 ,Happy Monday! Mario Gabriele is one of my favorite writers. Read the opening paragraphs in this essay and you’ll understand why. He somehow makes business writing beautiful. Between his briefings, Startup Ideas, and The S-1 Club, Mario’s The Generalist is can’t miss content. If you like Not Boring, you’ll like The Generalist. Aside from a general business nerdiness, Mario and I share a few things in common:* A fascination with conglomerates. * Large Indian readerships. This week, with India’s COVID crisis continuing to escalate to frightening heights, we decided to team up to explore the past, present, and future of one of India’s most beloved companies, and one of the leaders in the fight against COVID: Tata Group.In addition to bringing awareness, Mario and I have both made donations to organizations aiding India's fight against the coronavirus. We'd encourage those of you that can to do the same. Both New York Magazine and the New York Times have lists of reputable NGOs putting funds to good use. If you’re in India, my friends at Pesto put together a website with resources including ICU beds and oxygen supplies.Let’s get to it. Transforming TataA message to all the tycoons out there: beware of your grandchild. Though the Bible advances the parable of the prodigal son — the wasteful offspring that fritters a father’s money — statistically, it is the third generation that marks the end of a family fortune. One American study indicated that 90% of wealth evaporates by that point, the casualty of frivolous investments, generational dilution, and dwindling determination. Even the colossal wealth of Cornelius Vanderbilt — worth $227 billion when adjusted for inflation, giving him a cool $96 billion edge over Bezos — dissolved in his expanding gene pool. All of which is to say: that Tata is here at all is remarkable. Four generations and more than 150 years after its founding, Tata is not only still standing but essential. Just this week, the company aided in India’s coronavirus response, agreeing to contribute 800 tonnes of oxygen per day to health facilities in need. Far from an isolated example, such civic-mindedness is at the heart of Tata’s history, no doubt part of the reason one Twitter commentator referred to it as India’s “parallel government.” Over a century and a half, the conglomerate has supported (and commercialized) Indian life, unlike any other company. In the process, Tata has constructed a dizzying tessellate of over 100 businesses, from automobiles to apparel, steel production to tea. And yet, there’s the sense that despite its durability, Tata’s may be in decline. With infighting beleaguering the founding families and legacy businesses struggling to adapt to a digital world, Tata will need to work hard to ensure it remains a potent force. To do so, the company will need to shed legacy baggage, embrace the opportunities the tech sector presents, and lean into the essence of what makes Tata an enduring brand. In today’s piece, we’ll explore: * Tata’s rich history, beginning with the opium trade* The complexion of a messy conglomerate* The necessary moves to perpetuate the dynastyHistoryThe story of Tata Group is the story of modern India. The conglomerate’s creation and ascent both influenced and responded to seismic changes in the country beginning under colonialist rule, adapting under socialist independence, and flourishing in an open economy. It all begins in 1822 in a city on India’s Western Coast. Nusserwanji: Zoroastrianism and family businessEvery company is defined by its culture. On that count, Tata can lay claim to an especially ancient heritage: the religion of Zoroastrianism. Founded in the 6th century BC, Zoroastrianism is defined by a stark delineation between good and evil, and a gentler gospel of kindness. As noted in the excellent The Tata Group book, adherents believe to attain happiness you must help others, and that salvation is achieved by “Humata, Hukhta, Hvarshta” or “good thoughts, good words, good deeds.” Hundreds of years later, those three words were inscribed on the mausoleum of Tata’s Chairman, emphasizing how Tata’s civic and philanthropic orientation is inextricably linked with the religion. Nusserwanji Tata must have been something of a rebel. Born in 1822 in India’s Gujarat region, Nusserwanji was the first family member in over fifteen generations to eschew the call of Zoroastrian priesthood and enter the private sector. He learned the ropes by training with a Hindu banker before setting out on his own, founding an export firm with a focus on opium, and other less scandalous commodities. As the firm grew, Nusserwanji began to rely more on his son, Jamsetji, bringing him into the fold in 1859. Educated at the English-influenced Elphinstone College, Jamsetji had the privilege of a more global worldview than his father, fostered by business trips to London and Manchester. The latter city, seething with industrial energy, was believed to have made a particularly strong impact, with the young Jamsetji simultaneously enraptured by Manchester’s industry and disgusted by the “medieval vision of hell” in which workers toiled. But amidst the smoke and chaos, he saw promise. It was time to build a “Manchester in the East” with a humanity that would put India’s colonists to shame.  Jamsetji: Founding Tata GroupIn 1868, Jamsetji officially founded Tata Group, beginning with an investment of 21,000 rupees. Over the succeeding 36 years, he would establish a generational business and set in motion a series of ambitious infrastructure plans, earning the nickname of “the man who saw tomorrow.” That growth would be achieved while treating workers with uncommon dignity and respect. It started with the acquisition of a decrepit oil mill. Jamsetji promptly transformed it into a cotton production facility before selling for a quick profit. (Let’s get that IRR, Jamsetji.) Aided by a fact-finding trip to Lancashire and the recruitment of English specialists, Jamsetji parlayed that win into the creation of Empress Mills — a new cotton facility that drew on global knowledge. Two additional mills followed. Those four cotton mills set the financial groundwork for Tata’s later expansion, as well as pioneering the company’s legendary culture and care for its employees. Among other innovations, Jamsetji took pains to ensure workers had access to filtered water, sanitary facilities, low-cost grain, credit, a library, a pension fund, accident compensation, and much more. All of this at a time when the notion of managerial benevolence was effectively non-existent among Western industrialists. Decades later Upton Sinclair’s The Jungle would show American manufacturing was a theatre of callous peril.Jamsetji was savvy enough to realize that these investments also paid off, aiding recruitment and drastically lowering attrition. It was not uncommon for absenteeism to reach 20% in textile production; Tata’s was essentially 0%. As Jamsetji’s wealth grew, his sights widened. With travel to both Europe and Japan sharpening his worldview, he became increasingly nationalistic. The second half of his career focused on four critical initiatives designed to elevate his homeland:  * Patriating the manufacturing of iron and steel* Empowering science and technological education in India* Growing the national tourism industry through the construction of hotels* Bringing low-cost, safe electrical power to his beloved city of BombayJamsetji saw the first two of these as essential if India was to gain independence, noting: Freedom without the strength to support it and, if need be, defend it, would be a cruel delusion. And the strength to defend freedom can itself only come from widespread industrialization and the infusion of modern science and technology into the country’s economic life. Of these four goals, Jamsetji would live to see only one brought to full fruition. In 1903, he opened the iconic Taj Hotel in Bombay. Not only did it feature air conditioning, a rarity at that time, but it was the first building in the city to boast electric lighting. Jamsetji would make serious strides with regard to his other goals, but he would need his son Dorabji to turn them into a reality. In 1904, at the age of 65, Jamsetji passed away. Among his last words were these, directed to a family member:  Do not let things slide. Go on doing my work and increasing it, but if you cannot, do not lose what we have already done.Dorabji: Manifesting the visionA keen sportsman in his youth who began his career as a journalist, Dorabji stepped into his father’s shoes after his death and in a blockbuster three-year span brought Jamsetji’s dreams to fruition, launching a hydroelectric power division, a best-in-class technological university, and a steel business. In 1910, more than three decades after his father had been bewitched by a visit to Niagara Falls, Dorabji launched the Tata Hydroelectric Company, bringing clean energy to Bombay. It represented a titanic achievement that was, once again, aided by knowhow from overseas. From The Tata Group: An army of 7,000 workers installed pipelines from Germany, waterwheels from Switzerland, generators from America and cables from England on the steepest slopes and roughest terrains of Lonavala and Khandala. Showing frankly ludicrous foresight, Dorabji recognized (as his father had) the dangerous climatic potential of Bombay’s smoke-spewing coal-powered textile mills, taking the time to educate local owners and offering to buy back the steam engines they used to help make a transition to sustainable power. Dorabji followed up that success with the 1911 opening of The Indian Institute of Science (IISc). Bringing the project to fruition required significant political savvy with first Jamsetji and then Dorabji lobbying the office of the British Raj over the years. Since its inception, IISc has become one of India’s finest institutes of higher learning, training a steady stream of scientists and technologists. The final piece of Jamsetji’s dream arrived in 1912 and in many ways, it has proven to be the most enduring: The Tata Iron and Steel Company (TISCO). That Dorabji succeeded at all was proof of a political shift in India. Rebutted by British investors, Tata sought to finance the project in India, floating shares in 1907. With the Swadeshi movement — the push for self-rule — growing, Tata’s offering was met with huge interest. Investors hounded management and even showed up at the company’s headquarters to try and make their case. Within a matter of weeks, the requisite capital was secured — the largest raise of its kind in India, in the industrial sector. Beyond executing Jamsetji’s wishes, Dorabji also added to the Tata empire, starting a cement manufacturing division, a construction business, a life insurance line, as well as making forays into consumer staples like sugar and toiletries. Not all of these extensions would last; with World War I artificially inflating the demand for many of Tata’s industrial products. The company’s financial state reached such tenuous levels that Dorabji had to put up his personal capital (and his wife’s jewelry) to secure the loan that would save TISCO from dissolution. That maneuver — a show of impressive dedication and a willingness to take risks — has been referred to as “the finest hour of Dorabji’s leadership.” JRD: Expansion and decentralizationJehangir Ratanji Dadabhoy, better known as JRD, was a cosmopolitan man. Born in Paris to a French mother and Indian father, he was educated in the French capital, London, Tokyo, and Bombay. Fittingly, he boasted the elegance and good looks of a matinee idol, sporting a refined moustache for much of his life. As his name suggests, JRD was a member of the Tata family, but he wasn’t a direct descendant of Jamsetji. Rather he was a cousin-once-removed, chosen to step into a leadership position because of the relative dearth of available grandchildren (Dorabji had no children, his brother adopted one), his notable intellect, and a strength of character that brought to mind Jamsetji himself. Throughout his life, JRD would prove to be someone that played by the rules when it mattered — he was famous for ensuring Tata employees never took bribes — but was willing to push the boundaries.In 1938, after an interregnum in which a cousin presided over the business, JRD ascended to Tata Group’s hot seat. When he arrived, the conglomerate managed 14 businesses; by the time he left, there would be 95. Critical additions included: * 1939, Tata Chemicals. * 1945, Tata Engineering and Locomotive Company (TELCO). * 1948, Air India. * 1949, National Radio and Engineering Company (NELCO). * 1952, Lakmé, a cosmetics business. * 1954, Voltas, an air conditioning business. * 1960, Tata Exports. * 1963, Tata Tea, grown through the acquisition of Finlay tea. * 1968, Tata Consulting Services (TCS), the basis for the now-dominant tech practice.These were just the tip of the iceberg, of course. Dozens of others — from palm oil to precision machinery — peppered JRD’s period of innovation. Just as impressively, this growth was managed during a period of extreme political instability and change as India regained its independence and responded to the demands of different political parties. For example, under Nehru, both Air India and Tata’s life insurance business were nationalized. Losing control of the former was a particular tragedy for JRD who had a love for aviation that traced back to his father’s friendship with Louis Blériot, the first man to fly across the English channel. JRD was actually the first person to receive a pilot’s license in India. (JRD also loved fast cars; he met his wife when got caught for racing his Bugatti down a Bombay boulevard and needed a lawyer. The lawyer’s daughter became his betrothed.)But Nehru giveth as well as taketh away. After banning non-essential imports, the Indian government found itself pressured by a surprising group: “the elite women of Delhi.” Without a native cosmetics supplier, women were left without make-up; to amend the problem, Nehru asked Tata to enter the space, leading to the creation of Lakmé. Indira Gandhi’s tenure required yet another adjustment with legislation forcing each of Tata’s subsidiaries to operate independently, governed by a board of directors. Though there were plenty of nuances to the change, the upshot was profound: the parent company couldn’t directly control its component pieces. Thankfully, JRD didn’t need to rule by force. His natural magnetism and the steps he had already taken to push more responsibility down to individual companies, advancing a decentralized approach, was repaid. Even with Gandhi’s new rules, the conglomerate’s strategy was still defined at the top, with individual chiefs happy to follow JRD’s lead. At the age of 87, JRD finally stepped down from his role as Chairman. He had turned Tata from a strong national player into the country’s defining enterprise. He turned to a younger face to take the company forward. Ratan: Collaboration and controlLike JRD, Ratan Tata had spent some of his formative years abroad, completing high school at Riverdale Country in New York. After graduating, he completed a degree in architecture from Cornell — a qualification that some suggested encapsulated Ratan’s well-roundedness: he was methodical, certainly, but creative, too. After illustrating his business acumen in turning around NELCO, Tata’s radio division, Ratan was tapped by JRD to take his place. In 1991, he officially became Tata’s chairman, a position he held until 2012 (and again as interim chair between 2016 and 2017). Tata’s current incarnation owes much to his vision. During his tenure, Ratan focused on two critical initiatives: more tightly controlling the conglomerate, and positioning Tata as a global collaborator and dealmaker. What looks like a masterful move in one context can look limiting in another. If JRD showed dexterity in pursuing a decentralized approach under socialist rule, his successor was just as wise to reverse the strategy in later years. Operating in an open, global economic market, Ratan concluded that Tata Group needed to own a greater share in its constituent companies and foster closer collaboration. Between 1992 and 2002, Ratan meaningfully increased the parent company’s stake in key units, growing its holding in Tata Steel from 8% to 26% and expanding a 17% position in Tata Motors to 32%. At the same time, Ratan instituted stronger central governance, codifying core values, and setting up both a policy board and quality management group. This final initiative ensured best practices were distributed between different units, in addition to facilitating meetings between leaders. As noted in The Tata Group: Meetings across group companies marked the change in the Tata Group culture from independent identities to a unified Tata family.While Ratan clearly saw an open market as something of a threat, he was quick to recognize it as an opportunity, too. While Ratan sunsetted or sold under-performing business lines (including Lakmé) he also expanded Tata’s purview through partnerships.Just as Tencent now serves as the ferryman to China (think Roblox with Luobulesi), Tata has often played the same role with India, collaborating with Daimler to manufacture Mercedes-Benz in the country, delivering insurance alongside behemoth AIG, and partnering with Starbucks to offer coffee from Kargil to Kochi. (You: Did they just look up the northernmost and southernmost Indian towns with a hard “C” sound? Us, intellectuals: Tumhari himmat kaise hui?)Ratan also bolstered Tata’s existing positions through M&A. Among his key purchases: * 2000, Tetley Group for $450 million* 2004, a unit of Daewoo for $102 million* 2005, NatSteel, Singapore’s largest steel provider, for $365 million* 2006, the Ritz-Carlton in Boston for $170 million* 2007, Cronus, a steelmaker, for $11.3 billion* 2008, Jaguar and Land Rover for $2.3 billion* 2008, General Chemical Industrial Products for $1 billionStill, a key figure, Ratan’s reign served to consolidate Tata’s operations and modernize it. Immediately followed by Cyrus Mistry (more below), Ratan found a truer success in Natarajan Chandrasekaran (“Chandra”). For an empire so steeped in the tenets of Zoroastrianism, it was a significant appointment: Chandra was the first non-Parsi executive to take the helm. Tata Today“You would not probably look at the Tata Group as a modern conglomerate. The most important [thing] is to define themselves.”-- Anonymous source close to Tata Group, Financial Times, April 2021Today, despite its first outside Chairman, Tata’s corporate structure reflects its history. Ordered chaos. Juxtaposition of rich and poor. Proud legacy transitioning to tech-led future. Layers of new structures built on top of old. It looks more like India itself than like other conglomerates. Most of the world’s largest conglomerates are structured in a couple of ways: * Publicly traded parent company with wholly-owned subsidiaries or investments. (Tencent, Reliance, Alibaba, Berkshire Hathaway, Constellation)* Private all the way down. (Koch)Tata is built different. First, the parent company, Tata Sons, is a Private Limited Company. It has just 28 shareholders, who fall into four buckets: Tata Trusts, Mistry Family (via Shapoorji Pallonji Group), Individuals (mainly Tata family members), and Subsidiaries. Tata is unique among multi-hundred billion dollar companies in that it is majority owned by charitable trusts. Corporate social responsibility is a buzzphrase for most companies; for Tata, it’s structural. That structure has allowed the company to support India through COVID, with more than token gestures. While we noted that this week saw Tata step up its oxygen contributions, the firm has also donated $200 million to relief efforts, spent heavily on bringing supplies to India, and helped improve rapid testing capabilities. The Tatas and their trusts are in the process of consolidating their ownership even further. After a falling out related to Ratan Tata’s removal of Cyrus Mistry as Tata Group Chairman in 2016, and a March Indian Supreme Court ruling against Mistry’s claim that the ouster was illegal, the two families are negotiating the Tatas’ purchase of the Mistrys’ 18.4% stake. As Tata Sons cleans up its ownership, it’s cleaning up the entities it controls as well. In 2019, under now-Chairman Natarajan Chandra, Tata reorganized its 30 listed companies and their roughly 1,000 subsidiaries into ten verticals. The reorganization was part of Chandra’s process of simplifying, synergizing, and scaling (3S). Starting under Ratan and continuing under Chandra, Tata Sons is working to take advantage of its combined resources and expertise. That’s no small task given the ownership structure and the fact that each company has its own Board of Directors. It requires a light touch, sharing best practices instead of dictating. Ravi Arora, Tata’s VP of Innovation, described that loose influence on the Stretch Thinking podcast:Every company in the TATA Group impacts others in the group because we are one family, although every company is independent. But we do influence each other, and we also learn from each other.That’s hardly the top-down decision-making you’d expect from a company like Reliance, but it seems to be working. Tata’s seventeen public holdings combined are now worth more than Reliance, making Tata India’s largest conglomerate.To be sure, Reliance Industries, helmed by Mukesh Ambani, is still cleaner. Invest in Reliance, get everything that it owns. The company is complex -- it has 158 subsidiaries and seven associate entities across six business lines -- but it’s all wrapped up in one publicly traded stock. It’s the most valuable publicly traded Indian conglomerate with a market cap of $176 billion. And it’s more nimble, a point we’ll return to shortly. Tata, on the other hand, isn’t publicly traded. Instead, it owns stakes in thirty-one companies, 17 of which are publicly traded, across ten verticals. Many of the subsidiaries use the Tata name, which the parent company licenses to them under Brand Equity and Business Promotion agreements. The Tata brand alone is the most valuable in India, with an estimated value of $20 billion. Each company operates independently under its own board of directors. As of March 31, 2020, in the early throes of the pandemic, Tata said the combined market cap of its companies was $123 billion. Today, the combined market cap of its 17 publicly traded subsidiaries has nearly doubled to $234 billion, $58 billion higher than Reliance’s market cap. (For a live tracker of all 17 companies’ market caps, check out: Tata Subsidiaries Market Cap)That said, because of the company’s long history, through good economic times and bad, the Group only holds partial stakes in most of its companies. In some cases, that’s because it sold off stakes to raise cash. In others, as with Titan, of which it only owns 25%, that’s because it decided to let its executives start the business on the condition that they could raise the capital themselves. This chart gives an outdated but directionally-correct overview of Tata Sons’ ownership. That presents challenges, chief among them that it’s much harder for Tata to force its affiliated companies to do anything. Instead, it needs to provide guidance, share best practices, and try to use its heft as the largest shareholder to shape outcomes. It also means that while Tata Sons doesn’t get all of the upside from their companies, its name allows them to lever up, creating a heavy debt load on its businesses. It’s all a bit of a mess. But there’s a bright spot: Tata Consultancy Services (TCS).Tata Consultancy ServicesA key indicator of the company’s importance is the fact that Chandra, the first Tata Chairman not born into the Tata or Mistry families, served as TCS’ CEO before ascending to the top spot. TCS is a monster. It employs 488,000 people, counts Microsoft, GE, SAP, and Thomson Reuters among its global clients, and offers the full range of IT services, consulting, and digital transformation, from cloud to AI to cybersecurity and even blockchain. It is the largest IT services and consulting company in India, and does battle with Accenture and IBM for the crown of world #1. TCS benefited from companies around the globe’s COVID-fueled race to digitize. TCS is worth 40% more than it was at the beginning of 2020, and is up 85% from March 2020 lows. Now, TCS is worth twice as much in the public markets as all of Tata’s other companies combined, and worth nearly as much as all of Reliance Industries on its own. Just as the football team at a large state school funds all of the athletic programs, TCS funds Tata Sons. In 2019-2020, the company spit off ₹73 per share in dividends, of which Tata Sons, as 72.19% owner, received $3.1 billion at today’s exchange rates. TCS regularly generates over 70% of all dividends paid to the parent company. That makes sense. In a recent article, FT pointed out that while Tata Motors is Tata Group’s biggest revenue driver (pun intended), TCS generates most of its profits. Those charts highlight TCS’ relative importance, but they’re also a flashing neon sign pointing to Tata’s biggest challenge today: Tata is carrying a lot of dead weight. Tata’s Dead WeightTata Consultancy Services contributes 70-90% of Tata Sons’ revenue in the form of dividends. It’s one of very few Tata Group companies, along with Titan, Tata’s watches, jewelry, and accessories maker, that has actually grown profits over the past few years. Many of Tata’s other companies are dead weight. According to BusinessToday and annual report analysis:  * Tata Steel generated $2 billion in 2019-2020 profits, but has net debts of $11.6 billion  and is dragged down by the performance of its European units, which it has been trying to sell. It will need to refocus on the Indian market, where it is hugely profitable because of captive iron ore mines.* Tata Power saw its profits cut in half from $351 million in 2019 to $177 million in 2020, and has net debts of $4.9 billion. It did decrease its net debt to EBITDA ratio from 6.2x to 5.2x between 2019 and 2020, but will need to further pay down debt and transition to renewables in the coming years. * Tata Motors, including Jaguar Land Rover, brought in a whopping $35 billion in FY2020 revenue, but generated negative $1.2 billion of free cash flow. It also carries $7.4 billion in net debt. While motors is one of Tata’s sexiest and most well-known businesses, it has a ton of work to do to transition its lineup to electric, and is paring down its offerings to focus on Indian passenger cars, commercial vehicles, and Jaguar Land Rover. At home, it’s under pressure from an increase in foreign car sales. These are just a few examples across Tata’s sprawling portfolio. Over the years, the Group leveraged its brand trust to acquire or launch new products and raise debt to fuel expansion. Some, like Jaguar Land Rover, were the result of overeager and misguided acquisitions. Many were the result of a strategy that once made sense but no longer does. For a while, particularly before imports came to India in a meaningful way, it worked. Packy’s father-in-law told him that Tata introduced many products to the Indian market for the first time. When you have consumer trust, and consumers have no other options, going wide makes sense. You can sell them anything.But today, faced with best-in-class products from across the world, many of Tata’s companies are overextended and uncompetitive. Ratan’s early aughts buying spree only exacerbated the problem. When he took over as Chairman in 2017, Chandra’s goal was to right a lot of his predecessor’s mistakes. He used a corporate-friendly tagline: “simplification and synergies.” He’s working to bring order to the chaos, and focus the Tata companies on the right things:* Combined Tata Chemicals and Tata Global Beverages into Tata Consumer Products. * Reorganized Tata Steel into four separate businesses and has transitioned production from majority-European to majority-Indian as it looks to sell off European units.* Moving Tata Powers’ renewable power assets, and their debt, into an infrastructure investment trust (InvIT) and is selling a stake to private equity to pay down debt. Tata Power is also looking to sell African and Indonesian assets.* Considered selling stakes in some of the company’s financial services units.* Disposed of some of Tata’s more random assets, like a chain of car dealerships. It’s a start, but if Tata wants to win the future, it needs to go further. Even after simplifying and synergizing, Tata still follows an extreme version of the Pareto principle, with more than 80% of its profits coming from less than 20% of its efforts. TCS is still the Group’s engine, and most of the other companies are too sprawling, disconnected, minimally (or un-) profitable, debt-heavy, and backward-looking to help Tata build a modern conglomerate that wins the next century and brings India along with it. What is a Modern Conglomerate?When you think of the word “conglomerate,” you probably think of something that looks a lot like Tata does. Inspired by In Search of Excellence, many companies that generated a lot of cash by focusing on one thing and doing it really well decided to diversify. Good at selling concrete? Buy a chain of pizza restaurants. Made your money in telecoms? Get into defense contracting. That method of conglomerate building has fallen out of favor. It didn’t really work. Surprise surprise: being good at one thing doesn’t mean you’ll be good at doing another. In fact, there’s probably some Dunning-Kreuger effect at play: you know just enough to get overconfident and make bad decisions. But that doesn’t mean that conglomerates are dead. Both of us are fascinated by the new breed of modern conglomerates. Mario has written about IAC, Constellation Software, and LVMH. Packy has written about Tencent, Alibaba, FEMSA, and Reliance. The difference between those conglomerates and Tata is that those conglomerates have a thing.* IAC has a playbook for winning on the internet: Identify, Accumulate, and Spin-Off. * Tencent has a Traffic + Capital Flywheel -- find hot companies on WeChat, invest in them, and give them a distribution advantage. * Alibaba started with ecommerce, and expanded into fintech to serve its core. * Reliance leveraged cashflows from legacy businesses into Jio and Retail, its farm-bets on the future, and serves as the Gateway of India for foreign tech giants. * FEMSA has a chain of Oxxo convenience stores, close to its customers, that serve as a physical version of the internet in Mexico and a jumping off point into a digital wallet.* LVMH buys heritage luxury brands and empowers creatives to drive their vision, unfettered.* Constellation Software acquires vertical market software companies, and lets them operate independently. The Bobs from Office Space would have a field day with Tata, though. What would you say you do here? Tata does a little bit of everything. Cars, steel, hotels, watches, tea, consulting, power, communications infrastructure, TV. Called a “parallel government,” Tata purchased some of its former colonizer’s crown jewels -- Tetley, Jaguar Land Rover -- and looks a bit more like an Indian heritage museum than a modern business. For much of its recent history, Tata has looked backwards. Whereas other conglomerates milk their cash cows to fund the next big thing, Tata uses its own to support a central office that tries to infuse modern best practices into its loose constellation of old and decaying businesses. Five years ago, Reliance was in a similar situation. The company made its fortune in oil and petrochemicals, and to this day, generates the vast majority of its revenue (69%) and profits (63%) in the Oil-to-Chemicals (O2C) business. But it recognized that those businesses are the past, and tech is the future. As Packy wrote in Reliance: Gateway of India, Mukesh Ambani’s company sold 49% of its fuel retailing business to BP for $1 billion, and is in talks to sell 20% of its O2C business to Saudi Aramco for $15 billion. Meanwhile, it used the cash that that business spit off, and a mountain of debt, to undertake one of the most aggressive balance sheet investments in corporate history, plowing $32 billion into Jio’s national 4G network before recently selling stakes to a global who’s who of tech and investing giants. Those investments, plus the asset sales, moved Reliance back to zero net debt, ahead of schedule. Reliance’s transformation is one of the two ways to create a modern conglomerate:* Tech-first: Start fresh, with technology at your core, like Tencent, IAC, or Constellation. * Reinvented: Use the cash and unique assets at your disposal to transform yourself into a tech-first company, and sell whatever you need to make it happen, like Reliance or FEMSA.  Either way, there’s no escaping it: modern conglomerates combine technology and focus on a unique thing. Diversified conglomerates are out; focused conglomerates are in. Transforming Tata So what’s Tata’s thing?Start with the brand: after TCS, Tata’s brand, valued at $20 billion, is its most valuable asset. After 152 years, Indian consumers trust Tata, and that’s likely to be even more true after the group used its heft to support the fight against COVID. The second piece is India itself. Tata’s brand carries the most weight in one of the world’s largest and fastest-growing markets, one full of tech talent and an internet population that’s expected to reach 1 billion people by 2030. Next comes Tata’s distribution, which touches nearly every Indian consumer and business in a market in which distribution is a particularly hard problem to solve. Finally, there’s TCS. It’s not just that the company drives ~90% of Tata Sons’ revenue, but how it drives that revenue. TCS is an IT services and consulting business whose revenues increasingly come from digital transformation work.So how do you leverage those strengths into one thing, one offering that makes sense to the market? How do you make it easy for people to complete the sentence, “Tata does…..?”You undergo a digital transformation of your own. In August 2019, Tata launched Tata Digital, a startup incubator inside the 152-year-old behemoth. The logo screams this is not your great great grandfather’s Tata. To launch the group, Tata tapped homegrown talent, former TCS Global Head of Retail, Travel, Hospitality, and CPG, Pratik Pal. It’s the kind of move we’d normally dismiss: big company taps consultant to lead digital center of excellence. But somehow, it fits. Reinvention is what Tata does. Tata Digital is tasked with executing the third part of the 3S plan Chandra’s been executing all along: scale. It will build or acquire digital products for Tata Group, and scale them up to internet size. On the B2B side, the obvious place to start is with TCS itself. Tata should double down on TCS’ dominance and try to disrupt itself from within. Tata Digital and TCS can work together to create products that extend monetization beyond the initial engagement. It might build or buy Robotic Process Automation (RPA) or intelligent automation capabilities that it can sell through its existing global distribution channel. That would add valuable licensing and SaaS revenue to TCS’ already monster business. It might also build products to enhance the capabilities of many of the Tata Group companies that survive further paring down. Tata Power is going renewable, Tata Motors is embracing the EV revolution, and Indian Hotels will need to better compete with a new class of internet-native competitors like Airbnb. Tata Digital has the potential to support and embolden all of these initiatives (and many more) by providing the right resources and making smart acquisitions.  If Tata manages everything we’ve just mentioned, it would be a meaningfully different and more modern conglomerate. But Chandra has bigger ambitions. He wants Tata to build a  Super App. Super Apps, which bring a wide array of services into one app, are not a new concept. Think WhatsApp meets Uber meets Venmo meets Instacart meets DoorDash (and on and on and on). In China, Tencent’s WeChat and Alibaba’s Alipay are battling for the top spot, along with Tencent-backed Meituan Dianping. In Singapore, it’s Grab. In Indonesia, it’s Gojek. In Latin America, Colombia’s Rappi and Argentina’s MercadoLibre are leading contenders. Super Apps aren’t even new to India. Alibaba-backed PayTM has a publicly stated mission to become the country’s first Super App, and recently expanded from payments into gaming. Reliance is entering the fray, too, with a powerful partner. Facebook’s $5.7 billion investment last summer was the dowry in an arranged Super App marriage between Reliance’s Jio and Facebook’s WhatsApp. WhatsApp has 400 million users in India, and PayTM had 350 million as of 2019. Those are massive, bigger-than-the-whole-US-population headstarts. It seems like a me-too, too-late idea. We both dismissed it at first as the kind of thing two ex-consultants, Chandra and Pal, would cook up in a whiteboarding-fever dream. But the more we thought about it, the more we saw the vision. A Super App would leverage Tata’s unique assets -- brand, distribution, India, and TCS (via Tata Digital) -- and provide a clear focal point for the business. Plus, the Group already has a strong portfolio of retail assets and brands that it can plug in from Day 1. The pieces are starting to come together: * Retail: Tata subsidiary Trent ( the name is a portmanteau for Tata Retail Enterprises) signed an agreement to list all of its brand apps, most importantly Westside, on the Super App. Trent sells fashion, books, music, and more. Online shopping in India is tracking ~8 years behind China, after growing from 1% penetration in 2012 to 11% in 2019. It’s a huge growth opportunity. * Healthcare: Tata is in the final stages of acquiring online pharmacy 1mg. Tata’s ability to roll out the first CRISPR-based COVID test, along with its relief efforts, should give it some credibility in the medical space among Indian consumers. India still only spends 3.6% of GDP on healthcare, lagging the US (16.9%), Germany (11.3%), and China (5%). * Finance: Aside from payments, an important missing piece, Tata has an Ant-lite suite of financial offerings, from mutual funds to insurance products.* Groceries: Tata Digital invested around $200 million into BigBasket, India’s largest online grocery platform, as part of a plan to acquire a 60% stake in the company for $1.2 billion. It will buy out Alibaba’s share as part of the deal. It’s making the acquisition despite the fact that BigBasket is competitive with Trent’s Starquik service. That last point is sneaky huge, and almost Tencent-like. It turns one of Tata’s biggest weaknesses -- it’s decentralized, non-controlling corporate structure -- into an advantage. Verticalization and integration are in Reliance’s DNA. Decentralization and loose control are in Tata’s. Whereas Reliance will push its own products and services through its Super App, even when they’re not the best on the market (as they’re not in many categories), Tata has publicly stated that it wants to take a more open, partnership-driven approach to its own offering. That should be Tata’s thing: a decentralized constellation of products and services, delivered by a trusted brand, that make Indian consumers’ lives simpler and more convenient.Intriguingly, while that no longer works so well for a modern conglomerate of capital intensive companies competing with global alternatives, it works perfectly for Super Apps. These next-gen omni-killers compete domestically based on the breadth and quality of their offerings. Reliance’s strategy was smart: be the Gateway of India for two of the world’s leading tech companies -- Facebook and Google -- and build or acquire products that serve all of the Indian consumer’s needs. Tata can counterposition against them by working with everyone else. Internationally, that means serving as a more open entry-point for the rest of the world’s tech companies. Domestically, it means using some of those sweet, sweet TCS dividends to invest in and support Indian startups. The country is becoming a unicorn factory: last month, six Indian companies became unicorns in four days. Tata should lean in if Reliance won’t.There will be challenges -- Tata doesn’t do messaging, social, or payments, all glue that hold a Super App together. But that lack of homegrown solution offers opportunities, too. After listening to Balaji Srinivasan on the Tim Ferriss Show, for example, we wonder if Tata won’t lean into its decentralization thing even further. What would it look like if Tata used its brand trust to help India, and its people, take advantage of the opportunity to use crypto to become the world’s third superpower?While that may sound faintly ludicrous, and out of keeping with a tech consulting and industrial company, it’s exactly the kind of visionary move on which Tata was founded. Jamsetji himself would be proud.How did you like the Not Boring x The Generalist collab? Loved | Great | Good | Meh | BadThanks for reading, and see you on Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 867 newly Not Boring people who have joined us since last Thursday! If you aren’t subscribed, join 45,133 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify or Apple PodcastsHi friends 👋 ,Happy Thursday!Startup stock options are one of those things that startup employees should know a ton about but just don’t. There’s a never-ending debate in tech around whether stock options make sense for employees, or whether they’re just a way for companies to pay less cash. Even when things seemingly go really well for a company, employees’ situations are often murkier than it seems. That’s why I was so pumped when Shanna Leonard, who runs marketing at Secfi, reached out about working together. I’ve been wanting to write about this forever. This essay is a Sponsored Deep Dive on Secfi. For those who are new around here, that means that Secfi is paying me to write about their business. You can read more about how I pick and work with partners here.This one is a little bit different though. The Secfi team really just wants more startup employees to know what their options are, make a plan, and not leave millions of dollars on the table. Each person I’ve spoken to there has their own personal startup equity horror story, and they want to make sure that you don’t go through the same thing. I, too, gave up cash for equity, and it was a terrible financial decision. This one is personal.Obviously, if Secfi can help you make smarter decisions, that’s a win-win, but more thoughtfulness around employee equity is a win in itself. So we’re going to go deep on how equity works, why people don’t exercise, and what happens when they don’t. (One note: I wanted to call this post ESOP’s Fables, but ESOPs are a public company thing more than a private company thing. But I thought it was clever, so I couldn’t not share.)Let’s get to it. Startup Stock Options Options with SecfiIn 2020, startup employees left $4.9 billion on the table by not exercising their pre-IPO options. Not exercising pre-IPO means employees missed out in two major ways:* They let the typical 90 day window pass after leaving and forfeited unexercised options, either all of their options or a portion. * They stayed at the company through IPO, but didn’t exercise before the IPO and had to pay short-term capital gains or ordinary income instead of long-term capital gains because of “cashless exercising.” Costs can soar post-IPO.That combination cost employees four point nine billion dollars. $4,900,000,000. 4,900 million. At Snowflake alone, ex-employees left 72 million options worth $1.27 billion unexercised. Ouch. Those numbers are so big as to feel kind of meaningless, but they represent years of blood, sweat, tears, uncertainty, and financial trade-offs down the drain. Most people who work for early stage startups take less cash compensation than they’d be able to get at a more mature company in exchange for a few things: a more fun work environment, the chance to change the world, more responsibility than they’d get elsewhere, and a host of soft benefits, but mainly, they do it for the employee stock options. Employee stock options are the lifeblood of a startup. Options are the main way startups compete on comp with big companies like Google and Goldman that can afford to pay infinity times more cash. They offer the promise of millions and millions of dollars if things go really, really well. When I left Bank of America Merrill Lynch and went to Breather, I took a 70% pay cut on the cash side, but I got options worth 1% of the company in exchange. Even coming from finance, I didn’t fully understand my options. I just did some hyperoptimistic expected value math (1% * $1 billion = $10 million!) and that was good enough for me. I’m certainly not alone. Most startup employees don’t understand their options. Some don’t even know they need to exercise them or put out money at all. Because options feel like lottery tickets at the early stage, employees don’t think all that much about things like the tax implications of when they exercise, what happens if they leave the company, and all of the little details that can mean hundreds of thousands or even millions of dollars. Which is crazy, because those options can often represent, on paper, a huge percentage of their net worth. For a group of ostensibly intelligent people, startup employees put surprisingly little thought into managing their options. These are builders. They get so immersed in their day-to-day and building great things that they lose sight of their own personal gain at times. Plus, it’s kind of taboo to talk about maximizing the value of your options when there’s real work to be done. And most companies don’t do much to help. It’s (generally) not because they don’t want to, but because this stuff is really complicated, and so far in the future, and startups have dozens of more pressing fires to put out at any given time. In the Eisenhower Decision Matrix, employee options fall into the “important, not urgent” bucket...UNTIL all of a sudden, your company is all over the news. It’s going to IPO. Everyone is talking about it. You did it. Finally! But, wait, what the hell happens to your options? It costs HOW much to buy them and you owe WHAT in taxes? Now, it becomes personal. And urgent. A lot of startup employees are going through that emotional arc right now. 2021 looks like it’s going to be even more painful for ex-employees who didn’t exercise their options (and even for current employees who will pay higher taxes if they haven’t planned properly, but it’s hard to feel too bad for them). The year is less than four months old, and there have already been 429 IPOs on US exchanges. This time last year, there were 40. That’s a 10x increase. To be fair, a lot of the new IPOs are SPACs -- 308 SPACs have raised $99 billion via IPO already this year versus $83 billion in 248 IPOs all of last year -- but there have been some major tech IPOs already this year: That’s an incomplete list, plus those 308 SPACs and many of last year’s 248 are lurking with bags full of money that they need to spend on taking companies public within two years. For people who own equity in those startups, this is going to be an amazing year. Thousands of people will become millionaires for the first time, some will generate multi-generational wealth, and a few will even become billionaires. But each of those companies also has tons of former employees consumed by regret at not having purchased their options, and many others who will end up giving the government nearly as much as they take home. Secfi wants to change that, starting by helping you get smarter on startup equity: * How Startup Equity Works* Why Employees Don’t Exercise * Options Exercise Options * Meet Secfi* The CAC Arbitrage* Secfi’s VisionThe best time to start thinking about how to handle your options was when you got your offer letter. The next best time is now. Secfi can help. I could (and will) nerd out on this problem for hours, but Secfi is paying me and I want to make sure you check them out, so I’ll introduce you to Secfi now, then we’ll come back to them later. Secfi is a team of equity experts 100% focused on helping startup employees understand, maximize and unlock the value of their stock options and shares. If you’re an employee at a startup, Secfi wants to make sure you’re on the right track. Really. I badly want this piece to go viral mainly because the team genuinely cares so much about helping startup employees. So here’s an ask: if you know an employee at a unicorn startup, share this essay with them to make sure they’re thinking through things properly.Secfi has educational resources, tools (including tax calculators), and real live people who can help you think through your equity. Secfi’s equity strategists have deep experience as financial advisors, wealth managers, investment managers and analysts, and tax professionals, and have worked with employees at the vast majority of US unicorns. They can help you. If you have options, stop reading, check them out, and then come back:Welcome back. Let’s learn why startup equity is great, but not as simple as it seems. How Startup Equity WorksFirst things first, stock options are pretty great. A century ago, even a couple decades ago, the idea of an employee sharing in the upside with the owners of a business would have sounded absurd. When we spoke, Secfi’s CEO Frederik Mijnhardt pointed out that startup employees owning 20% of their businesses on average is a great step (but only a first step) towards minimizing wealth disparity.Silicon Valley is built on the back of stock options. They represent a chance for employees to become capital instead of just labor. They reward people for early belief in an idea, and the hard work it takes to make that idea a reality. Without options, it would be hard for cash-poor early stage companies to attract the top talent it needs to succeed. Goldman and Google will always be able to pay more cash than any startup. But ~*options*~ are a Golden Ticket. A major part of the allure of joining a startup is the chance to work really hard for a few years and make millions. Join a startup when it’s young, get shares in the company, help it grow into the next big thing, exit, and retire rich. It sounds simple, but it’s so much more complex.First, you don’t just get equity in the company. If you work at a company long enough, you earn the right to buy equity in the company. Those are called options. Just like options on public equities, they give the owner the right, but not the obligation, to buy shares in the company at a certain price. If you’re really early, that price might be $0.01 per share or $0.10 per share or some other very low number, meaning it’s mostly upside. But either way, options do not mean that you own shares in the company. You need to actively buy them.  Plus, you don’t earn them all upfront. Typically, if you stay for a year, you earn a quarter of your options, and then you earn a little bit more every month for the next three years. That’s called vesting, and this particular case is the most common: four year vesting with a one-year cliff.As those options vest, employees have the right to exercise them, or to keep them as options. Exercising means plopping down cash upfront for shares that may or may not be worth something, but it also means potential tax benefits down the line. While you’re employed, you have the option and some time to figure it out. Once you leave, you don’t.If you leave at any point -- whether you’re fired or leave voluntarily -- you typically have 90 days to decide whether you want to exercise the portion of your options that have vested aka buy equity in the company. Some companies offer longer time periods, but after 90 days, Incentive Stock Options (ISOs) convert to Non-Qualifying Stock Options (NSOs), which come with higher taxes. Exercising has a direct cost -- if you own 50,000 options that give you the right to buy shares at $1 per share, you have to pay $50,000. That’s a lot of cash to plop down, and if you have meaningful equity, the number may be much higher than that. Worse, you often have to pay taxes based on the delta between your strike price (the $1 per share number) and the company’s most recent valuation (talk to a tax professional or Secfi about your specific case). This is based off something called a 409a valuation, in which an outside firm analyzes the business based on comps and ballparks what the company is worth. The better your company is doing, the higher your tax bill is going to be when you exercise, even though you might not be able to sell your shares and make any actual money for years.Up until an actual exit, either via an IPO or an acquisition, most employees don’t know how to turn their valuable equity into cash. Even if things are looking good, they can all fall apart. Most startups fail. Many once-hot startups end for selling for less than they raised. In those cases, employees typically get nothing for their options, even if they exercised, or worse. When WeWork filed to go public, many employees took out loans against their options to buy houses; when the IPO imploded, they were stuck with mountains of debt backed by equity whose value had collapsed 80% and many were fired from their job. If your company is one of the lucky few that does have a successful exit, you’ve won the lottery. If you still work for the company, or left and exercised your options (bought the shares), you stand to make life-changing amounts of money. But the $4.9 billion number we started this piece with represents the fact that there are thousands of employees who left companies that ended up having successful exits but didn’t exercise, or simply never exercised pre-IPO. They had the golden ticket, and they gave it away, either completely or in chunks to Uncle Sam. Why would they ever do that? Why Employees Don’t ExerciseThere are two ways to think about exercising options: * You can exercise your options as they vest while you’re still employed. * If you leave, voluntarily or involuntarily, you typically have 90 days to exercise. There are different consequences for each. * Not exercising while remaining employed can mean tax consequences later, through a higher delta between your strike and current valuation and through the difference between short-term and long-term capital gains. But you still hold onto the right to exercise and to benefit from a liquidity event like an IPO or acquisition. * Not exercising after you leave means forfeiting the right to buy shares in the company, and means missing out on all of the upside in the case of a liquidity event. That sucks. While both cases are very different -- the former means an unbelievably amazing exit becomes slightly less unbelievably amazing, the latter means a lifetime of regret -- they both have the same root causes. * Lack of awareness* Uncertainty about the company’s prospects * High costs of exercisingWe’ll take each in turn: Lack of Awareness Most startup employees simply don’t think deeply about managing their options. They often make lower salaries than they would at other jobs, savings are tight, and they don’t save up money to exercise. They often don’t even realize that exercising while employed is even an option, and don’t understand why it might be beneficial. Even while Breather was growing quickly, from a $20 million valuation to $250 million while I was there, I never once thought about exercising my options. I didn’t even realize it was a thing. (In retrospect, thank god.) Consider yourself aware. You need to think about this. Might I suggest Secfi’s Equity Academy and Options Exercise Tax Calculator as starting points? Uncertainty About the Company’s ProspectsSometimes, you’re at a startup and you’re just not sure it’s going to work, or how much it’s going to work. While you’re employed, you’re willing to pay higher taxes in the future so you don’t have to spend your hard-earned money today on an uncertain bet. They’re called options for a reason.When you leave, you need to make a hard choice: spend my money to buy these shares now and hope that there’s a good liquidity event in the future, or forfeit most of the on-paper comp earned through years of hard work. It’s never easy to give away those options, and many people just buy so that they don’t feel regret if things do go well. But it’s expensive. Sometimes, employees even leave, exercise their options, and then sell when given the opportunity because they think the buyer believes in the company more than they do. If you haven’t listened to my podcast with my friend Brett, he was the first employee at Drizly and sold most of his shares in the secondary market when he got the chance. He thought he was real smart, until Uber recently acquired Drizly for $1.1 billion dollars. For a raw take on what it feels like to miss out on all of that upside, give it a listen: High Costs of ExercisingIt can be really, really expensive to exercise your options. That’s because there are two costs when it comes to exercising: the direct cost and the tax bill. The direct cost is straightforward. You own 50k options at $1, you pay $50k for the shares. That’s a lot of money, but ideally you’re doing it because you believe that what you’re buying is worth a lot more. Let’s say, for example, that the company was recently valued at $100 per share Nice! Free money! Well… that’s where the tax bill comes in. According to Secfi’s research across 69 late-stage unicorn companies (companies valued at more than $1 billion), taxes make up 85% of the cost of exercising stock options. 🤮Since most people are unaware they’re going to have to pay taxes, Secfi calls it the surprise factor. They call the overall expense the unaffordability factor. I’ve seen this firsthand (unfortunately, I haven’t felt it firsthand, but close enough).At Breather, I worked with an ex-Uber employee who needed to exercise his options within 90 days of leaving Uber to join Breather. He was early at Uber and left when they were worth $10s of billions of dollars. Pretty amazing, right? Not so fast. Exercising meant he owed hundreds of thousands of dollars in taxes, even though Uber wouldn’t IPO for another two years. He couldn’t sleep because of the tax bill hanging over his head. He spent the better portion of a few months on calls with people he was trying to sell shares to in order to generate the cash he needed to buy his options. He asked me if I had any friends who might want to buy. Finally, he was able to find some people to buy some of his shares in the secondary market and used the proceeds to pay off the tax bill, but that meant giving up his hard-earned upside after months of stress. It’s easy to dismiss that as a Champagne problem, but it really sucks. Upside is what your startup promised you, and why you took a pay cut in the first place. Try choosing between owing the IRS hundreds of thousands or giving up equity you earned from years of grueling work. Uber was not known for its work/life balance. Luckily, he was able to figure it out, and he did really well when Uber IPO’d (as did the people who bought his secondary). Selling some of your shares to cover the tax bill is just one way to exercise options. Let’s go over the full menu.Options Exercise OptionsIf you have options, you have some options. Secfi not only didn’t ask me not to list other options, they actively encourage you to shop around and figure out what works best for you. Remember, the #1 takeaway here is to be educated and have a plan. So what are the options?Don’t Exercise. This is always an option. Particularly if you think your options are at an inflated strike price, that the company will struggle to exit, or will fail altogether, not exercising is certainly an option, and maybe the best one. I didn’t exercise when I left Breather. Pay Out-of-Pocket. If you’ve planned ahead or happen to have enough money saved up, you can pay to exercise your options out of pocket. That’s great because it means not selling shares or owing anyone anything. Unfortunately, this option makes the most sense before the company has grown its value too significantly, and gets harder as the company gets more valuable, and therefore as the likelihood of a liquidity event increases. Borrow From Friends and Family. Like paying out-of-pocket, borrowing from friends and family means that you don’t need to sell shares or owe money to anyone who would repossess your home. That said, it comes with the social pressure to make sure you don’t lose your friends’ and family’s money. Sell Secondary to Outside Parties. Like my ex-Uber friend, one way to raise the money to exercise is to sell some of your shares to other people. There are funds set up to do this, and platforms like Forge and EquityZen that will collect pools of secondary shares and match them with buyers. Or, if you own shares in Stripe or Epic, please give me a call and let’s work something out. One limitation here is that companies often limit whether or how much employees can sell on the secondary markets, another is that selling triggers capital gains tax.Tender Offers. Sometimes, typically at Series C and beyond, companies orchestrate tender offers in which (often existing) investors make an offer to buy shares from employees to give them a little liquidity. Sounds great, but tender offers are historically underpriced. Sacra wrote a thorough piece on how and why this happens, but the long and short of it is that tender offers are typically priced at the last round’s valuation, which gets stale as hypergrowth companies grow. The longer from the last round the offer comes in, the more mispriced it is. As a result, tender offers typically only get 37% participation.Take a Loan from a Hedge Fund or Bank Against Your Shares. There are plenty of funds out there, and even some banks, willing to lend you money to exercise your options if you’re at a later stage company with good prospects. As happened with WeWork employees, these can potentially get you into trouble if the company never gets liquidity or takes a long time to reach a liquidity event. Of course, there’s a better way… Meet SecfiI remember sitting in my office and texting my friends Nick, Tucker, and Tommy the day that Secfi announced its first funding in 2018, led by Howard Lindzon’s Social Leverage. It seemed like such a good idea. We all knew (or were) people who’d been killed on their startup options in some way or another, and we were all kicking ourselves over text for not thinking of the idea first. So what does Secfi do? Secfi is the first “pre-wealth management platform” for startup employees. They work with late stage startup employees who are in high growth mode on path to exit by doing a few things: * Educate them on what their options really mean* Help understand what it would cost to exercise them* Scenario plan* Offer non-recourse financing This last piece is the bread and butter of Secfi’s product. Secfi will give startup employees non-recourse financing to exercise their options. It’s not a loan, but you can think of it in the same way you’d think about a loan, except that if your company never exits, you don’t owe Secfi anything. Even if your company IPOs and it doesn’t do well, and your shares are worth less than Secfi financed, you only owe the lesser amount. It’s really no-risk financing.It starts with figuring out where your options stand, and what your options are: * Sign up for Secfi and enter information about your company and some personal details.* Access a set of tools to help you figure out the value of your shares and the costs to buy them (including taxes). They’re sophisticated. They’ll even help determine the different costs for exercising now versus waiting until an exit event. It’s fun. I sadly do not hold employee options in any unicorns, but I pretended that I did a few times. You can (and should) do those things if you’re at all curious about the real value of your equity. If you want to secure financing to cover those costs, submit a request and they’ll get back to you with next steps. They currently work with over 80% of US unicorns, and if you work for one of those companies, 1) congrats, and 2) the process can be fast... like a few days. Here’s how that works:* Secfi determines how much financing you’re eligible for (if you have $1 million worth of options, you might be eligible for something like $250k in financing) and at what rate. * Secfi doesn’t take the risk itself. Instead, it acts as an intermediary between capital providers and employees. Last January, Secfi raised $550 million in financing from Serengeti Asset Management.* You never pay cash interest - it compounds and is taken out of your profits in the case of a liquidity event. You may pay an equity share which allows the investor to share in the upside of your equity in the case of a liquidity event.* When your company goes public or gets acquired, you pay the financing back along with the accrued fees and keep the rest of the upside yourself.That’s it. Compared to other options, Secfi is preferable to:  * Selling secondary: you keep the upside, don’t trigger capital gains, and keep your Qualified Small Business Stock (QSBS) tax treatment. * A loan in that you’re not on the hook in case things don’t go well. * Not exercising your options: you retain your chance at upside while Secfi and its capital partners take the risk. That said, Secfi encourages startup employees to shop around and do their homework. For early employees at unicorn companies, exercising options ranks as one of the top lifetime expenses. If anything, Secfi just wants people to treat their options with the same amount of thought and care with which they treat which car to drive or which house to buy. After shopping, many employees decide to go with Secfi. They work with employees at 80% of US unicorns and host $13 billion worth of equity options on the platform. Check out the case studies from anonymized employees at three of last years’ biggest IPOs: Airbnb, DoorDash, and Snowflake. Once your company is worth a few hundred million dollars, you should start talking to Secfi (and you should read the resources in their blog and Equity Academy before you even sign your stock option grant, or today if you’ve already signed). Secfi almost seems too nice, and too riskless. Even I, the optimist, was a little skeptical. But that desire to help startup employees comes from two places: where Secfi comes from, and where it’s going. Secfi was born after one of its founders got burned himself. He left his company and discovered that to exercise his $50k worth of options he would need to pay $1.8 million in taxes. He had to walk away from the options. He built a company to make sure that his experience didn’t happen to other startup employees. In talking to Secfi’s teams and investors during this process, that mission rings loud and clear. And it’s genuine, because it’s an issue most of them went through themselves. * Frederik told me that he “had to learn the hard way that startup equity can’t just be neglected, that I couldn’t just wait to figure it out later.”  * Shanna Leonard, who now runs marketing at Secfi, sold shares on the secondary market, her CPA messed up the tax calcs, and she ended up in a messy tax situation. * Martin Malloy, who runs content at Secfi, recently joined Secfi from a newly-IPO’d company after realizing that he and so many of his co-workers were unprepared to go public. He had to scramble at the last minute to avoid a massive tax bill, ended up working with Secfi to exercise his options, and then decided to join the company.That shared experience comes through. When I asked Howard Lindzon, who led Secfi’s seed, the most underappreciated thing about Secfi, he told me: “It’s really employee-centric.” Unprompted, on a separate call, Rucker Park’s Wes Tang-Wymer, who led the A with the biggest check his fund has ever written, said “The company is incredibly employee-centric.”Part of that comes from the Secfi’s history and its employees’ past experiences, and some of that comes from the company’s vision. In this business, being employee-centric is good business.The CAC ArbitrageSecfi wants to build a modern wealth management platform that serves startup employees from pre-wealth through post-IPO riches. They feel that options financing isn’t the end of the journey, but the beginning. From that perspective, one way to look at the non-recourse financing and employee education that Secfi offers is as a customer acquisition channel that becomes profitable on the first transaction. It’s part of a newer generation of fintech startups that do well by doing good.Broadly, there have been two waves of fintech from a customer acquisition perspective: * Companies built modern versions of old financial products and spent a ton of money to acquire customers. One very smart person told me that the problem with a lot of fintech companies is that you’re competing for customers with whoever is able to build the most optimistic Lifetime Value model. Google and Facebook are the real winners here. * Companies give benefits directly to customers upfront to acquire them more cheaply, and then add on additional services over time. Customers are the winners here. This new model is structurally better for customers and businesses. A lot of ideas that you hear and ask “what’s the catch?” might fall into this category. The catch is that they’re paying less to Google and Facebook to acquire you. This is the holy grail in fintech (and really any business): low CAC, high LTV. Acquire a specific customer segment cheaply by owning a specific niche channel or offering highly-relevant products, and then sell them other financial products they need.I’ve written about a few companies that work this way before: * BlockFi uses high-interest crypto deposits to acquire crypto-wealthy and crypto-curious customers, and is adding on new products like credit cards to increase LTV. * CashApp uses viral mechanics and influencer-led giveaways to acquire lower-income customers cheaply (CACs were under $5 last year) and has added products like rewards (Boost), stock trading, Bitcoin, direct deposits, business accounts, and Cash Card.* TrueAccord actually has companies send them customers for free so TrueAccord can help collect debts, and can layer on additional services that on-ramp them to the financial system. * MainStreet gets small businesses and startups the money the government owes them, and will roll out financial products that help them grow. * Ramp helps businesses save money so that they stay in business longer, grow faster, use more Ramp products, and spend more money with Ramp. The beautiful thing with these businesses is that they’re actually incentivized to be good actors. I specifically called out how nice the Ramp and MainStreet teams are in my posts on them; at the time, I didn’t realize the connection. There’s even theory to back it up.  Game theoretically, these companies are playing infinitely repeated games. Unlike single shot games, in which the preferred strategy is often to defect, to maximize for yourself in the short-term, in infinitely repeated games, the preferred strategy is cooperation. These companies are often profitable early in the relationship because of low CACs, but they’re incentivized to keep customers happy so that they can increase their literal wallet share over time. If they mistreat customers at any point early in the journey, they would miss out on selling them the whole universe of other products on the roadmap. That description fits Secfi to a T.Secfi’s VisionIn Secfi’s case, they acquire a very specific set of high-value customers -- employees at valuable startups -- by educating them and offering them the best product on the market for a very acute need. There’s no better way to engender goodwill than saving or making people hundreds of thousands or even millions of dollars. Plus, increasing the number of wealthy startup employees, and minimizing the taxes they need to pay, directly increases Secfi’s total addressable market (TAM). So far, Secfi has focused on this pre-IPO stage, on making sure that employees are smart about their options and offering non-recourse financing that lets them minimize taxes while retaining upside. That’s been a three-year Phase I. Secfi is in this for the long-haul, and it plans to support startup employees from pre-IPO to post-IPO. Since it works with so many startup employees across 80% of US unicorns, it will focus on adding new products to help them manage their newfound wealth. Rucker Park’s Tang-Wymer pointed out that there’s no good solution for people with between ~$3 million and $10 million in wealth -- they’re tweeners. That’s too much to just plop in Wealthfront or Robinhood, but not enough that high-end wealth managers like Citi Private Bank want to work with them. For that band of people, the tech is insanely behind. Wealth managers who serve the ultra-wealthy never built modern tech to serve them because older high-net worth people expect white glove treatment. Without software, it’s not easy for them to come down-market and retain their margins. By building solutions that combine software and experts, Secfi can not only serve more clients at better margins, more importantly, it can serve them in the way that they expect to be served. These are people who made their fortunes in tech; they expect to manage their wealth in a similar fashion. That may mean all sorts of things: diversification (many of these peoples’ wealth will be highly-concentrated in one stock), angel investing, charitable giving, mortgage lending, cash management, and more. Think of all the things you’d want if you woke up with $5 million in your bank account, and you have a pretty good sense of Secfi’s product roadmap. Secfi won’t build all of this in-house; they’ll partner with companies like AngelList or AltoIRA or Wealthfront or any of the number of companies that provide specific solutions, while building where no good products exist today. They can serve as the glue between all of these products and give wealthy startup employees comprehensive tools, advice, and insights on how their whole portfolio fits together, and the tax implications of all of it. One obvious question about Secfi is: what happens in a downturn? What happens in a world in which there’s not a multi-billion dollar IPO every week, or if companies worth billions in the private market now come back down to earth? Won’t Secfi get stuck holding the bag? That was actually the question that Nick, Tucker, Tommy, and I had on that first text chain about Secfi. There are a couple of answers, one technical and one more broad. Technically, Secfi’s capital partners take the underwriting risk. If they were to offer financing to too many companies that failed to exit, they could face losses. They’re compensated for that risk with interest rates and stock fees.  More broadly, though, Secfi’s bet is that the largest group of wealthy people in the coming decade will be the startup employees who took pay cuts to take a chance on early ideas, and poured their blood, sweat, and tears into making them realities. While there will certainly be cyclical downturns, the secular trend is towards more ownership in the hands of the people creating the value, and Secfi exists to serve those people. There’s over $200 billion of wealth in non-founder startup equity in the US alone, and Secfi wants to make sure that those employees keep it and manage it well. Ultimately, Secfi’s north star is to help startup employees build wealth. That’s the catch: the better startup employees do, the better Secfi does.If you’re a startup employee, you should make a plan today: * Educate yourself on your options* Ask your company to give you more education and resources * Run your situation through planning tools* Talk to Secfi* Secure the bag 💰How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading and see you on Monday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 974 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 44,858 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify or Apple Podcasts (in ~30 mins)Hi friends 👋 ,Happy Monday! We have a special one for you today. Back in January, I wrote a piece about Alibaba. Lillian Li, whose writing on Chinese tech I’d read and respected, but who I’d never met, DUNKED on it on Twitter. She said that “the piece missed local context.” Which, fair. She also wrote a more complete response on her Substack, Alibaba: from growth to value.I loved getting Lillian’s perspective -- one of the reasons I write is so people who are smarter on a particular topic share their knowledge. And when it comes to China tech, Lillian, who worked as a VC in Europe but is now based in China, is as smart as it gets. She writes a great newsletter called Chinese Characteristics. You should subscribe if you’re interested in China tech, and you should be interested in China tech: Lillian and I got to know each other after that exchange. We decided to team up. Reprise the ol’ bull and bear schtick, but together this time. In other words, we shifted our debate method to Real-Time Engagement (I promise, this will make sense /maybe be funny in a minute).Let’s get to it. Today's Not Boring is brought to you by PublicAs you read above, the fastest way to get smarter about investing is to put your ideas out there and get dunked on by … errr... have a conversation with other smart investors. That's why I use Public. Public is an investing app AND a social network for talking about business trends, and the social features make it fun and easy to share ideas. I'll be discussing today's piece on Public. Hit the link below and follow me @packym to join the conversation. Btw, if you’re looking to transfer your account from somewhere else, they’ll even cover the fees.*Valid for U.S. residents 18+ and subject to account approval. Transfer fees covered for portfolios valued at or over $150. See Public.com/disclosures/Agora: Bull & BearIn 1997, two Chinese engineers joined the founding team at early video conferencing startup WebEx. A decade and a half later, each started his own company.One, Eric Yuan, founded a company you’re all too familiar with: Zoom. The other, Bin “Tony” Zhao, founded Agora. If you’ve joined a conversation on Clubhouse , attended a virtual event on RunTheWorld, or binged livestreams on Bilibili you’ve experienced Agora. It’s been sitting there, in the background, making sure the audio and video come through clearly. Agora builds real-time audio and video capabilities and delivers them as a Software Development Kit (SDK) and Application Programming Interface (API) for app developers. It’s an API-first company that makes it easy for developers to add real-time video and audio into their product. Stripe for Real-Time Voice and Video Engagement, if you will. The company is so API that its ticker is API. Agora is also a great excuse to cover a few different relevant topics:* API-first businesses and business models* Live video streaming and all of its use cases, like telemedicine and education * The audio chat warsBecause Agora sits in the background -- it’s a “picks and shovels” company -- it doesn’t care who wins as long as more people communicate, learn, heal, play, and “live real life online,” in real time. Agora, dual-headquartered out of Shanghai and Santa Clara, went public in June last year. It was relatively quiet for its first six months as a public company, bouncing around the $3-6 billion market cap range, until investors picked up on the Clubhouse connection in January and sent shares soaring. In February, the company topped out over $12 billion before crashing after providing conservative 2021 guidance on its last earnings call. Source: Atom FinanceToday, the company is trading at a $6.5 billion valuation on projected 2021 revenue of $182 million. It’s cheaper, but it’s not cheap. As Packy was browsing atom for its numbers, he was confused when he saw that FY21 consensus Enterprise Value (EV) / EBITDA was 4.06x. Seemed like a steal. Then he looked more closely: that’s 4.06 thousand times EBITDA. It’s less than eight years old and still growing quickly (74% YoY revenue growth) and most of its revenue still comes from China (~80%). It’s young and fast-growing enough that whether you’re bullish or bearish on the company depends less on today’s metrics, and more on how you think about its growth potential and defensibility going forward. There’s a good case to be made on both sides, and we’re going to do just that. Packy’s going to take the bull case, and Lillian’s going to take the bear case. Then we’ll fight it out and let you know where we end up. To get there, we’ll cover: * Agora’s History* $API’s API* China’s Livestreaming Boom* What Agora Looks Like Today* The Bull Case for Agora* The Bear Case Against Agora* Bull or Bear? To kick it off, let’s go back to the granddaddy of online video communication: WebEx. Agora’s History: From WebEx to YY to APIWho knows what video communication on the internet would look like today if WebEx just embarrassed its employees a little less. Eric Yuan explained to Bessemer partner Byron Deeter, “Every time I talked to a WebEx customer, I felt very embarrassed, because I did not speak with a single happy WebEx customer.”After fourteen years at WebEx, the last four under Cisco, which acquired WebEx in 2007, Yuan left to found Zoom in 2011. He set out to build what he couldn’t convince Cisco execs to let him build at WebEx, a new version of the product rebuilt from the ground up with customer happiness in mind. Bin “Tony” Zhao, another WebEx founding engineer had similar feelings. After building and releasing real-time audio sessions, he said on GGV Capital’s Next Billion Podcast, “I started to regret taking that job, because I got a lot of complaints after the first release, and I realized there are some complaints that I believe I cannot solve at that time.”Zhao didn’t have Yuan’s patience. He left in 2004 to start NeoTasks, which he describes on his LinkedIn page as: “P2p streaming technology and service provider for various companies in media, advertising, video sharing industries.”In 2008, Zhao sold NeoTasks to Chinese streaming site YY.com and joined the company as CTO. That experience shaped what he would build at Agora. YY during the early 2010s was China’s Second Life. The documentary called People’s Republic of Desires gives a glimpse into this brave new world where fortunes were made and lost overnight. According to Interconnected’s Kevin Xu, “Is one of the first livestreaming platforms to reach scale in China, if not the world. It is arguably one of the first instances where people were ‘living real life online.’” Like Tencent’s QQ, which was early to new forms of online monetization like avatars and digital gifting, YY was early to gifting and tipping with virtual goods and real money, a behavior that’s now common online. The company also pushed the boundaries on real-time engagement. Xu told TechBuzz China’s Rui Ma that under Zhao, YY could handle 8 million concurrent users, and up to 100k in the same room, back in 2011. That year, it handled 421 billion voice minutes, more than Skype. After working in B2B at WebEx, YY opened Zhao’s eyes to the potential of the consumer internet. He told GGV’s Next Billion Podcast: I start to realize this technology is not going to be only sitting in the conference room, not only serve the purpose for people to negotiate or discuss certain business topics, it actually helped people to live online. Like they can play, they can have a party, they can sing karaoke, they can actually make friends online through video chat, audio chat. I can envision from there, people can actually live online and that’s part of the inspiration that led to Agora as well.In 2013, realizing the opportunity to accelerate the transition to rich online experiences through real-time audio and video, Zhao left YY to start Agora. Unlike Yuan, who wanted to build a better version of the user-facing product the two built at WebEx, Zhao wanted to build products that helped developers build new user-facing products like WebEx and YY. He wanted to build APIs.Like Yuan, Zhao’s track record made fundraising easy. He raised $6 million a couple of months after forming the company, and went on to raise $126 million from top investors including SIG, GGV, and Coatue.Zoom was praised for raising so little -- $146 million -- before going public. Agora raised even less. Zoom took eight years to go public, Agora took less than seven. But while Zoom is a household name, chances are you haven’t heard much about Agora. That’s because of what it builds, and who it builds for. $API’s APIsAgora builds APIs and SDKs for real-time voice and video communication. It’s one of a growing number of Communications Platforms as a Service (CPaaS) companies, along with Twilio and Vonage, and more specifically bills itself as a Real-Time Engagement Platform as a Service (RTE-PaaS). (This is getting out of hand). It provides a Software-Defined Real-Time Network (SD-RTN) solution to deliver high-quality video and audio across a wide range of devices and environments. (OK, I’ll stop.)With the acronyms out of the way, what does Agora actually do? Like any good API-first company, Agora lets developers build some superpower into their products with a few lines of code. Stripe lets companies accept payments. Stytch lets them onboard and authenticates users. Agora lets them embed high-quality real-time audio and video. Agora is not for static video or audio. The next YouTube, Netflix, or Spotify won’t be built on Agora. It’s for interactive, real-time video and audio, like one-to-many livestreams, audio chat rooms, or one-on-one use cases like telemedicine or tutoring. Before Agora, and even occasionally today, companies spun up their own products by building on top of the open source WebRTC standard. WebRTC is built on the public internet, which is a “best-effort network” - it will make the best effort to deliver your data. In many cases, that best effort is not good enough, leading to laggy or glitchy video and audio. If your business relies on video and audio, you need a better solution. That’s what Agora built. According to analyst Richard Chu: Agora builds on this (WebRTC) with over 200 co-located data centers globally, dedicated to processing real-time audio and video data. To further improve performance, Agora uses intelligent algorithms to monitor requests and optimize data transmission paths to ensure low latency (~300ms) and resilience to packet loss (up to 70%) which ultimately translates into a superior end-user experience. This virtual overlay network is called the SD-RTN.Agora does a ton of engineering work and spends a ton of money on co-located data centers behind the scenes to make real-time audio and video just work. The result is that someone on WiFi in Ghana and another person on 4G LTE with spotty signal in Florida can sit in the same Clubhouse room with thousands of other people and hear the conversation crystal clear. In fact, Clubhouse was apparently built in a week on top of Agora’s voice APIs. Because Agora’s product is an SDK and over 200 specific APIs, all of which work seamlessly with a wide range of programming languages and devices, it makes something previously expensive, slow, and complicated, cheap, fast, and easy. In fact, one Agora customer interviewed on a Tegus expert call said that his company tried to spin up its own product using WebRTC, but shifted course when they achieved only 80% reliability internationally. After building on Agora, he said that going back to WebRTC to save money is “probably not a feasible option in a way that we want to focus on what we're good at as a company.”That’s the power of API-first businesses. As Packy wrote in APIs All the Way Down: This is the beauty of API-first companies. They allow customers to focus on the one or two things that differentiate their businesses, while plugging in best-in-class solutions everywhere else.Instead of wasting time trying to re-solve all of the hard technical problems, not to mention setting up 200 co-located data centers around the globe to ensure global reliability, Agora’s customers just write a few lines of code to plug in the best technology on the market, which constantly improves as Agora’s team ships updates. Plus, Agora’s customers pay as they go, making it easy to get started. Agora is free for the first 10,000 minutes each month, and afterwards, it charges per 1,000 minutes, with different rates for different products and quality levels. It applies automatic volume-based discounts: free up to 10k minutes, 5% off from 100k-500k, 7% off from 500k-1mm, and 10% off from 1mm-3mm. Putting that in perspective, assuming that Clubhouse gets the 10% discount and nothing special on top, each hour-long Clubhouse room with the max of 8,000 people in it costs $427.68. The same room in standard video would cost $1,723 per hour, for standard quality. Premium would run you $3,883 per hour. It’s no wonder Clubhouse’s founders have said they want to keep the product-audio-only. Video is expensive! While Agora can serve all sorts of use cases -- one-on-one telemedicine consultations, audio rooms, in-video-game chats, and more -- its bread and butter, and where it makes the most money, is on one-to-many video livestreams.It’s hard for westerners to appreciate the magnitude of the livestreaming opportunity without experiencing it firsthand, but it’s central to the Agora thesis. Luckily, Lillian can give the local perspective. China’s Livestreaming BoomSaying livestreaming is big in China is akin to calling your phone a smartphone. Technically correct but so obvious it’s redundant. Since the advent of 4G and the roll-out of 5G, livestreaming and short videos are the two new mediums of the Chinese internet.As a delivery mechanism, since 2015, livestreaming has come to encompass entertainment, education, socialisation, and, bolstered by COVID-19, commerce. In 2020, 560m people in China watched livestreams -- roughly 39% of China’s population -- and the Chinese market livestreaming e-commerce is estimated to be worth RMB 1.05 trillion ($165bn USD). In China, livestreaming is the metaverse’s manifestation that’s eating the world. A leisurely stroll down the streets of Shanghai shows the donut light of livestreaming as a familiar fixture in boutiques. Occasionally, in particularly touristy or scenic spots, you’ll see livestreamers in the wild, talking to their fans who are flooding them with messages and gifts. In quieter cafes, students stream tutoring courses from superstar teachers. Every other night, Lillian’s mother tunes into her Chinese stock course with her favourite Key Opinion Leader (KOL) along with thousands of others on a WeChat mini-app. Whatever Chinese consumer app Lillian opens these days, be it Taobao or Pinduoduo or JD or Xiaohongshu (China’s closest equivalent to Instagram), the first prompt is to view the current livestreams for different products.In Livestreaming monetisation models, Lillian wrote: Livestreaming as a medium is a conflation of a product as well as as a distribution channel. It exists on a spectrum of being pure entertainment on one-side and a new go-to-market strategy on the other, with different kinds of monetisation models for each side. While western startups have centred around the 'livestreaming as product' theme, China, with its enabling infrastructure in payment and fulfilment, have been quick to adopt livestreaming as a new distribution channel. This June's 618 Shopping Festival, saw Alibaba and JD.com report a combined total of $136.5 billion of livestreaming sales. Kuaishou surpassed 170 million daily active livestreaming shoppers in June and Pinduoduo also wants its ~500m users to start streaming as well. No longer just for small ticket items -- houses, cars, phones have all been sold during the lockdown -- livestreaming is climbing up the value chain.Livestreaming’s journey looks a lot like our familiar Gartner Hype Cycle: The great un-lock for China’s livestreaming industry was monetisation, but since then, it has entered the culture. It has created an entire ecosystem of new livestreamers and the talent agencies (called Multi-Channel Networks) that spot talent and nurture them (or lure unsuspecting folks in to fleece them. New industries are grey areas). Remember this video? That’s a training camp for livestreamers. Everyone is training to be the next Viya - who is essentially Oprah incarnated as a livestreamer. She can command 37m viewers (bigger than the audience for the Oscars or Game of Thrones finale) during a stream. Even Kim Kardashian had to pay a pilgrimage to the Don when she came on to Tmall to sell her KKW branded perfume. With Viya’s support, she sold out all 150,000 bottles in 1 minute. Was this a representation of one of social media’s biggest stars  acknowledging her successor in the dawn of a new medium? At this point, hopefully we’ve convinced you that livestreaming in China is big, and that livestreaming e-commerce is an established distribution channel. We should also highlight that it is also enabled by local factors in China including embedded digital payment system, robust logistics chain for next day delivery and returns, an ecosystem of Multi-Channel Networks (MCNs) cultivating talent, fandom culture which allows for a frictionless checkout and buying experience. A lot of foundational pieces need to fall into place before the flywheel can really take-off for livestreaming e-commerce (which is a very specific form of livestreaming). This means, China’s livestreaming is not so much the future as much as a potential future for the world.What Agora Looks Like TodayLivestreaming, and particularly livestreaming in China, has been Agora’s core focus. It’s the hardest to get right, and no one does it better than Agora for the price. But it’s beginning to diversify. Today, Agora offers the following product lines, all supported by its Real-Time Engagement platform:As more competitors enter the space, we’re seeing an increasing verticalization and internationalisation of their product range. One focus area is education. As education moves online, and superstar teachers livestream to much larger classes than was possible physically, Agora is flexing its muscles to accommodate new needs. At the beginning of the pandemic, the company worked with New Oriental Education, a publicly traded private education company, to bring the school online in a week, supporting classes as large as 20,000 concurrent students. It’s leaned into education heavily since. Later last year, Agora announced the release of flexible classroom, a low-code application targeting education providers. They’re augmenting the education product suite with acquisitions, including Easemob (an instant messaging API provider) and an interactive whiteboard API provider. The company has also been on a roll in obtaining a slew of security clearances such as HIPAA, which allows them to serve the booming telemedicine market, and GDPR, which should give western companies more comfort embedding Chinese tech. The future of product for Agora will be moving towards greater localisation as it tailors their offerings to the requirements of regions outside of China. CustomersIn China, Agora focuses on education, entertainment, gaming, healthcare with emerging categories for finance, IoT, and e-commerce. As it makes an international push, it’s seeing success with customers who share those use cases, including Hallo in education, Clubhouse in entertainment, Unity in Gaming, and talkspace in telehealth. Over the past couple of quarters, non-China revenue has grown from 20% to nearly 30%. Its Nasdaq listing and Clubhouse’s meteoric rise have no doubt helped give western customers more confidence. Together, Agora’s customers now consume 40 billion minutes per month, or nearly half a trillion minutes annually. Those minutes translate directly into top line growth. FinancialsAs its customers consume more minutes, Agora is growing tremendously quickly. Growth naturally slowed from a COVID-charged 166% in Q1 2020, but it still grew 74% YoY last quarter.The company has solid gross margins of 60%, but they’re on a slight downtrend. As gross margins compress and SG&A and R&D expenses increase, Agora dipped back into the red for the past two quarters after being profitable in Q1 and Q2 of 2020. Those two quarters of profitability are a good sign that as top line grows, Agora can generate profits, but it has ramped up spend in R&D to continue to build its lead on the technical side and improve localisation, and SG&A to acquire more international customers. Agora is an API-first business, which means it grows in two ways: * Acquires new customers* Existing customers’ usage expandsIt tries to get into companies early and grow with them as they grow, and it’s working. Agora reported comically high 179% dollar-based net revenue expansion in 2020, meaning that the same customers spent 79% more last year than the year before on average, even accounting for any customers that churned. That’s top percentile stuff, and a testament to Agora’s stickiness.That kind of growth and retention doesn’t come cheap. Based on Public Comps’ data, it’s the sixth most expensive company in the BVP Cloud Index at a 29.5x EV/2021 Revenue multiple. But it’s also the fourth best based on the Rule of 40, a SaaS heuristic that says that companies are strong when their YoY revenue growth plus free cash flow (FCF) adds up to more than 40%. Agora is at 77%, behind only Zoom, Square, and Shopify among BVP Cloud companies, and right ahead of Twilio. Agora is young, expensive, and fast-growing. It’s the only company in the BVP Rule of 40 Top 5 with a market cap under $10 billion. The next closest, Twilio, is 10x more valuable at $65 billion. Each of those companies exist in categories -- video conferencing, ecommerce, and messaging -- that are more mature than livestreaming. Can livestreaming catch up? Agoraphilia: The Bull CaseI’m making my bull case on growth, not price. Agora is certainly expensive today. To be an Agora bull, you need to believe three things: * Livestreaming will continue to grow* Agora has the best product in the market * It’s defensible against bigger incumbents and startups alike. That’s it. Let’s take a look at each. 1. Livestreaming will continue to grow.As Lillian highlighted, livestreaming is massive in China. Livestreaming ecommerce in China alone is a $165 billion market. That’s e-commerce sales via livestreaming. Market Research Future expects the livestreaming market more broadly to reach $247 billion globally by 2027, growing at a 28.1% CAGR between now and then. There are some major catalysts: * 5G: As 5G rolls out, it will be cheaper, faster, and easier to create and consume livestreaming content from anywhere. * Audio Chat: Clubhouse just announced a Series C valuing the company at $4 billion, on the heels of a January Series B at $1 billion. Whether you think that’s ridiculously overvalued or not (I do for the record), it’s a good sign for Agora’s most prominent western customer, and it’s accelerating the adoption of audio chat as a feature. Twitter rolled out Spaces, Spotify acquired Locker Room to build its own Clubhouse competitor, Facebook is of course jumping in, Slack announced its own Clubhouse competitor on Clubhouse, and even fucking LinkedIn is building Clubhouse-like functionality. While these platforms are big enough to roll their own tech, even if they don’t go with Agora, they’re signaling to new companies in Agora’s target market that they, too, should be adding audio chat into their products. If audio chat is a commoditized feature, that’s a good thing for the companies that sell audio chat picks and shovels. * The Verticalization of Zoom. Zoom’s rapid COVID ascent attracted countless startups building products that take live-streaming video for granted, and embed it to create tailored experiences that solve particular user needs. JJ Oslund wrote about this trend in The Verticalization of Zoom.  All of these new video-based products fighting it out for customers is a great thing for Agora and other video APIs. We haven’t even talked about VR, AR, and the Metaverse, but at this point, you know I’m bullish. Zhao has hinted on his ambitions in VR in particular, and Agora is already integrated in some VR education products. There will be no shortage of demand for products that make it easy to embed real-time voice and video into products as the world continues to move online. The question is, will Agora capture that opportunity? 2. Agora has the best product in the marketWe’re going to assume that most of the large players like Facebook and Twitter will build (or acquire) their own video and audio products, but that startups are not going to build for themselves. It’s too costly and time-consuming, and they’re not going to be able to match Agora.  So which product will they use? Agora has become a go-to piece of the tech stack for companies building video streaming products. In Zoom’s Blank Check, Packy wrote: Akarsh Sanghi, who recently launched a video streaming platform for lifestyle creators called Reach.Live out of YC, told me that all the new YC companies are building on the same stack: “React application on the client side, typescript, hasura, Postgres, WebRTC and Agora APIs for the video player.”Agora targets companies with scale ambitions. It’s built for developers and pursues a bottoms-up go-to-market strategy. It gives away 10,000 minutes per month so that builders can try the product, and then retains them with affordable pricing and a quality experience. According to the company itself, its advantages come from the SD-RTN and 200+ global data centers, which minimize latency, its flexibility via a suite of customizable APIs, its ability to scale to millions of users, and compatibility with a multitude of development platforms and devices. Agora is so confident in its product that it’s piloting the XLA (Experience Level Agreement), a play on an SLA that’s based on experience instead of just uptime. Customers shouldn’t have to pay for laggy video or audio just because it technically gets through. That’s a move you make if you believe you have the best experience and want to force competitors to play by your terms.According to multiple customers interviewed on Tegus, all of whom evaluated multiple competitors for their products and whose uses range from video-game audio chat to one-to-many online video education, Agora’s advantage comes down to a combination of price, ease, scalability, and quality. Some competitors do certain things better than Agora -- Dolby.io has more top-end audio functionality, for example -- but the sentiment is that no product works as well across video and audio, for close to the price, as Agora does.  Agora is currently used by some of the biggest livestreaming platforms in China -- YY, Momo, Bilibili, New Oriental Education, and Huya -- and as livestreaming takes off in the west, it’s well-positioned as the safe, scalable, affordable choice. “Nobody ever got fired for buying Agora.”3. It’s defensible against bigger incumbents and startups alike. Agora is not alone. In Unbundling Zoom, Oslund expanded on that trend, highlighting the many players in the “Video API Wars.” First, there is a wave of startups building video APIs. Hopin, one of the fastest-growing startups in history, is built on Mux, as are SoulCycle and Equinox’s streaming and on-demand classes. Not Boring portfolio company Teamflow is built on Daily, and CEO Flo Crivello told me they love it. Daily counts Y Combinator, Icebreaker, and Tandem among its clients, too. Twilio offers solutions more geared towards less price-sensitive enterprise clients who may already use Twilio’s original messaging products. There are more, as seen in the chart above, and more even beyond that. Meanwhile, incumbents and large cloud players like AWS and Tencent Cloud have ambitions to enter the real-time engagement space. But Agora has moats against both, starting with scale economies. Scale economies against startups make sense, and are similar to those enjoyed by any API-first first-mover: Agora’s 200+ data centers are a hard-to-replicate advantage, and it’s able to spread the costs of developing better solutions to edge cases across more customers. When the difference between excellent and terrible performance is measured in milliseconds, the little things matter. Startup competitors will steal particular use cases like 1-1 chat or high-end audio from Agora, but I don’t think they’ll be able to catch Agora’s quality and scalability across the full suite of real-time engagement products. Interestingly, that scale advantage extends to its battle against larger, better-funded cloud giants. One expert, an exec at a competitor, told Tegus that Tencent Cloud and AWS are limited by where their own data centers are because they’re not willing to rent from cloud competitors. Tencent will struggle to compete for customers with global audiences, for example, because it’s not willing to partner with AWS. Agora can rent from anyone, which gives it better global coverage, which gives it lower latency on calls with global participants. Another advantage is switching costs. One customer interviewed on Tegus summed it up: One thing I can tell you is that when it comes to price, if a company is not able to provide a model that is literally twice cheaper than Agora, it would be really hard for me to switch. Like if one of the Chinese companies says, "Hey, I can give you 100% discount from Agora's pricing," like I might consider, but if it's like 50%, like 40%, 30%, even like 20%, like the cost of switching is so high.Finally, there’s Agora’s head-start combined with its focus. While this isn’t a traditional moat, it is an advantage. The competitor exec on Tegus said that even if the cloud giants poured a ton of resources into catching up to Agora, it would take them a year just to get to where Agora is today, by which point Agora would be another year ahead. Outside of Amazon with AWS, where they really created the market, there are no good examples of companies shifting from a customer-facing product to a developer-focused API product and winning. I have doubts that Zoom, which is making a big push on its own APIs, will be able to effectively compete with Agora, either. In fact, I think Zoom should just buy Agora.I’m bullish on Agora. Real-time engagement is exploding, and will become table-stakes in many products. Standalone livestreaming will continue to boom in China, and it’s already beginning to spread to the rest of the world. Agora is best-positioned to capture the opportunity, and it has moats to protect its profits as competitors enter the space. All that, and it’s only worth $6.6 billion.Over to you, Lillian. What am I missing? Agoraphobia: The Bear CaseSo let’s go through each of Packy’s assumptions and unpack-y them. Livestreaming’s revolution will not be global The thrust of the bull case for Agora is that livestreaming will become as ubiquitous in the rest of the world as it has been in China. This glorious future where every dear reader will be half in the metaverse and half out. But what if this livestreaming phenomenon doesn’t become a successful Chinese export like the 2019 scooters and bike co-shares waves, but rather like that of mobile payments? The enablers for livestreaming in China was not just the roll-out of 4G and 5G; but also effective monetisation models and payment infrastructure that made it lucrative for livestreamers, companies and platforms to focus on livestreaming. China’s payment rails and systems have not just leapfrogged their western counterparts, they are built by the tech giants like Alibaba and Tencent themselves. As such they are tech-led rather than finance-led. Will embedding frictionless payment systems within livestreams for the world be as easy as spinning up an instance of Agora? Without a credible monetization model, livestreamers wouldn’t be incentivised to consistently livestream, and platforms wouldn’t achieve content marketplace liquidity. We’ve seen the downfall of Meerkat, Periscope and Facebook Live; why is this time going to be different? Those didn’t fail because the technology wasn’t there, but because other enabling factors were not. But let’s assume, we’ve got 5G, we’ve cracked payment, what else? Sounds strange but the world needs to know to make livestreaming fun. I recently tuned in to Amazon Live, and promptly shut the window after 2 minutes. It was so bland. The livestreamers didn’t know how to engage with the audience; the audience asked bad questions, there were no stickers or mini-games that made it engaging. It was all functional and no fun, and I was not going to waste my precious procrastination hours on there. I’ve noticed a similar thing on Clubhouse: people’s conversations are meandering and not that engaging. Once the shininess of listening to your favourite tech celebrity wears off, the dopamine hits are far and few in between. All of this is to say, livestreaming the technology is here, but livestreaming as a medium is not. That will take time and deliberate UX decisions to cultivate. If not done correctly and soon, people might lose patience for the technology altogether. After all, every form of entertainment will be competing against Fortnite. Also why entertainment as the default format you ask? Because that’s the format that makes money for Agora when you are charging by the minute. “A technology is merely a machine. A medium is the social and intellectual environment a machine creates” - Neil Postman, Amusing Ourselves to Death I’m reminded of Eugene Wei’s seminal Status-as-a-Service blog post. He talked about how dull the early days of Twitter were, with people posting mundane life updates before tighter feedback in the form of status acquisition kicked in. This is where livestreaming is now in the West and it’s got fiercer competition for attention than Twitter had. For China, there were many years of cultural cache and user training built on tipping livestreamers, on livestreamers knowing how to perform for the camera and to engage an audience of thousands. This kind of cultural medium knowledge doesn’t spring up overnight. Fundamentally what I’m pushing back on is saying that a technology will get adoption because it is big in China, when really we should be asking what made it catch on there in the first place. Agora has the best product for specific use cases in the market and their business model is built around thisAgora was born and bred in a Chinese world of one-to-many livestreaming transmissions. Their killer feature revolves around the fast and steady scaling needs when a streamer turns on their camera and talks to thousands of viewers. Even their pricing is aligned to this model, having frequent 1:1 livestreaming convos might not break the 10,000 free minutes a month mark, but a livestreaming with a few thousands concurrent users gets you there fast. Basically, Agora makes a lot of money when they get used for the use cases for which they were built. Other use cases are doable, but it’s not affecting the bottom line as much.  As Packy said above:Startup competitors will steal particular use cases like 1-1 chat or high-end audio from Agora, but I don’t think they’ll be able to catch Agora’s quality and scalability across the full suite of real-time engagement products.But what if we’re in a best-of-breed world for livestreaming and Agora’s market share gets eaten one by one by startup and enterprise competitors? And what if they are left with use cases and verticals that don’t play to their pricing strengths? I can see a world where the Zoom API takes small-scale internal enterprise conferencing, MUX takes enterprise grade quality video that gets recorded in the US, and big tech such as Twitter and Facebook will use their internal video options which they can also white label to others. In a market where you’re competing against best-of-breed, death will come in the form of a thousand cuts. Can Agora be all things to all people in livestreaming? And if they can’t, are they getting into the verticals that allows them to maximise their revenue?Agora’s historical strengths have been in social, gaming and education apps. They got into these apps early in China and grew with the company. Their growth, similar to the growth of other API-first companies, has been scaling with emerging companies. Have they arrived at the right time for that in the rest of the world? How many more Clubhouses can there be for Agora? Customers who churn because they want to do it in-houseChinese tech companies are like western tech companies but more so. By which I mean, they tend to do things by extremes. One thing they particularly love is building things in-house. For a core use case such as livestreaming, once it gets big enough, almost every Chinese tech company will have the conversation of whether to bring it house. One comparative advantage Chinese tech firms hold is that labour is cheaper, and theoretically, the thinking goes, that should lower the total cost of ownership. I am skeptical of whether this trend will play out in the long term for Chinese firms or western firms. Twilio went through the same journey that Agora now is, and customers found the costly piece wasn’t the labour but the on-going maintenance. WhatsApp still pays Twilio hundreds of millions of dollars per year. I don’t think that will stop them from trying in the short term. It’s interesting to note that on the customer page for Agora, heavy hitters such as Bilibili, Meituan, and Huya have disappeared during 2020. While they might come back to Agora in a few years, the churn is still a concern in the short term. The Chinese company spectreThere is a narrative tax on being a Chinese company these days. I’m commenting on the meta-narratives and the baggage associated with China in all fields, but particularly tech.It’s debatable whether it’s warranted but it’s definitely present and it’s not pretty. There’s increasing concerns around being a Chinese affiliated company among your buyers, among your employees and among the population at large. Zoom had to go through it as they exploded during Covid-19. Agora had to go through the public commentary cycle as Clubhouse got big. What we also know is that private conversations are happening behind closed doors on precisely the same topics. It affects buyer’s perception and trust outside of anything that Agora does or doesn’t do (even as it has obtained ISO27001, ISO27017, ISO27018, and SOC2 Type1 certifications and passed third-party GDPR, CCPA and HIPAA compliance testing/ auditing). It’s a shame but also a reflection of our current geo-political climate onto the private economy. How much this will affect Agora’s actual progress is hard to say, but the ambiguity is what makes it tough.Bull or Bear?So which is it? Bull or Bear? Agora is in a tricky spot, full of natural tensions: * It wants to serve the broadest range of real-time engagement use cases well to appeal to the customers who need everything to just work, but faces competition from more geographically and use-case focused competitors. * It wants to expand to the west, but hasn’t made the proactive PR push that Zoom has to appease westerners security concerns.* It wants its customers to get very big, but not so big that they build in-house. If Agora keeps growing at industry-leading rates in China while expanding to the west, the one-to-many thousands use case takes off outside of China, and Agora’s product continues to beat competitors on the combination of price and quality at scale, we might look back on $6 billion as the steal of the century in a few years. Agora is a bet that people will live more of their lives online, and that large scale one-to-many livestreams become more common. The internet rewards the best. Instead of 10 million teachers with ten students each, the hundred best teachers will stream to a million students each. The same dynamic plays out across industries.  If and when that happens, Agora is well-positioned to win. But if competitors out-focus Agora by serving particular use cases better than it can serve those use cases as part of a broader suite, and if Agora’s not able to shake its “Chinese company” label in the West, its growth may be limited and its revenue multiple will be hard to grow into.Ironically, Lillian is actually long $API and Packy doesn’t own any shares. Will we switch positions? And what about you? Bull or bear? Let us know on Twitter @lillianmli & @packym.How did you like this week’s Not Boring? Let me and Lillian know if we should do this again, and who you want to see us cover next:Loved | Great | Good | Meh | BadThanks for reading, and see you on Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 1,091 newly Not Boring people who have joined us since last Thursday! If you aren’t subscribed, join 44,266 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify or Apple PodcastsToday’s Not Boring is brought to you by… BlockFiBlockFi is a new kind of financial institution. With BlockFi, you can use cryptocurrency to earn interest up to 8.6% APY (I’ll explain how below), borrow cash against your crypto holdings, and buy or sell crypto. No minimum balances or hidden fees. Tip: signup is smoother in the mobile app. Set up your BlockFi account today, and get up to $250 in free bitcoin:Hi friends 👋 ,Happy Thursday / Tax Day! Today’s post couldn’t have been timed any better. I’ve been talking to the BlockFi team for a couple of months, and we picked April 15th about a month ago. We didn’t know that Coinbase would be IPO’ing yesterday, or that I’d be so deep down the crypto rabbit hole at this point. It’s fate. This is a Sponsored Deep Dive on a company I’ve been wanting to dig into for a long time. BlockFi offers up to 8.6% APY on deposits, which is obviously tempting and also confounding. I’ve had so many text conversations with friends that go something like, “I want to do this, but it has to be bullshit, right? How does that even work? We need you to do a Not Boring on this.” I’m happy to report that it is not bullshit, and I have the receipts to prove it.Let’s get to it.Is BlockFi the Future of Finance?Coinbase IPO’d yesterday to wild success. After touching $420.69 and going as high as $429.54, it closed at $328.28, up 31% from its reference price of $250. It peaked at a market cap of over $100 billion, and closed at $86 billion. I’m more excited about BlockFi, though, and not because they’re sponsoring this post. It’s a more selfish reason, one that makes the sponsorship money seem like peanuts. See, if BlockFi existed in 2013 instead of Coinbase, I probably wouldn’t even be writing this newsletter. On May 16, 2013, when Coinbase was less than a year old, I set up an account and bought my first bitcoin. I forget why, but I just looked up when Union Square Ventures first invested, and that must have been it: That was good enough for me. I bought 10 BTC on May 16th, another 15 on June 14th, and another 13 on July 12th. That September, after quitting my job in finance, I flew my unemployed ass to Oktoberfest for a fun weekend with a few friends. On September 24th, after ten too many steins, I woke up in my Munich hotel room a little hungover and feeling dumb for spending so much on the trip and the night out... and made the stupidest financial decision of my life. I just sold some of those silly bitcoin I’d bought, and bingo, free Oktoberfest. It felt like such an obviously responsible thing to do that three days later, I sold ten more, then I sold eight in October, five in November, and the last five in May (for a nice little 4x, I might add!). I sold all 38 bitcoins for a total of $7,232. At current prices, those 38 bitcoins are worth $2,450,050. Gulp. If BlockFi had been around at the time, I could have taken out a USD loan against some of those bitcoin and earned interest on the rest while they sat safely in my account. If BlockFi paid interest on bitcoin that whole time, like they do today, I’d have more than 40 bitcoin today, or over $2.6 million. Double gulp.  I’ve told you before that I’m an idiot, and I wasn’t kidding. But that’s enough self-chastising for one day. We’re here to talk about BlockFi.Is BlockFi Legit?BlockFi, which just announced a $350 million Series D led by Bain Capital Ventures, Pomp Investments, Tiger Global, and partners of DST Global, is building a full-fledged financial institution for crypto investors. BlockFi offers four products to retail investors: * BlockFi Interest Account (at rates up to 8.6% APY)* Trading Accounts* Crypto-Backed Loans* Credit CardIt also acts as a prime broker for institutional clients, with custody, financing, execution, and margin. BlockFi is building SoFi plus JP Morgan’s prime broker desk, for crypto. There’s a race going on among everyone in the financial services space -- centralized crypto companies like BlockFi and Coinbase, neobanks like Chime and Monzo, public fintech companies like Square and PayPal/Venmo, and large brokerages and banks -- to become the financial super-app, the place that customers go for loans, credit cards, trading, insurance, cash management, and more. BlockFi has a unique wedge: a growing suite of products that earn clients high interest rates and free crypto.The first question anyone has when they hear about BlockFi is: “What’s the catch? 8.6% APY sounds too good to be true. That can’t be legit.” I went DEEP to understand how they do it, and it’s legit. Essentially, BlockFi arbitrages the fact that traditional finance and crypto don’t like to deal with each other. To understand how it works, we’re going back down the crypto rabbit hole. We’ll cover topics like bitcoin, stablecoins, DeFi, and CeFi, and basis trades. You’ve probably heard the terms, but probably, like me, didn’t fully understand what they mean. We’ll change that. At the very least, we’ll all sound smarter at our next party.There’s so much to dig into here that it’s hard to know where to start, but we’re going to try:* What Does a Bank Do? * What BlockFi Does* Stablecoins and 8.6% APY* Grayscale Bitcoin Trust* The Race to the Finance Super App* The OfferAfter doing the research for this piece, I moved some of my money into stablecoins on BlockFi, and transferred all of my (much, much smaller than 2013) bitcoin holdings to BlockFi from Coinbase. Yesterday, I was on a YouTube livestream with Ben Carlson talking about the Coinbase IPO, and unprompted, he said that he’d done the same. If you want to check it out for yourself, sign up with the Not Boring link to get up to $250 in free bitcoin when you fund your account. If you’re still wondering what BlockFi is and how it pulls off such high rates, keep reading. There’s a lot to learn. Let’s start somewhere obvious… What Does a Bank Do? Banks make money in three main ways: * Net Interest Margin. Customers deposit money. Banks lend that money out to other people and businesses at a certain rate, pay depositors a lower rate, and keep the difference.* Interchange. When you use a credit or debit card at a store, the store pays your bank and its bank, typically as a percentage of the transaction and a small fixed amount. * Fees. Banks charge customers money when they overdraft, take money out of an ATM, and for all sorts of other things. For our purposes, Net Interest Margin is the most important. It’s the spread between what banks pay on deposits and what they earn on loans. Let’s do the math on a mortgage as an example.Right now, the Annual Percentage Yield (APY) on a standard Bank of America bank account is 0.01%. Let’s assume they can lend money to a homebuyer on a 30 year fixed rate mortgage at 3.0%. Bank of America’s Net Interest Margin is 3% - 0.01% = 2.99%. It’s not that banks want to pay next to nothing on deposits. It’s just that with low rates across the board, banks aren’t able to pay much more and make enough net interest margin to pay for overhead and still generate enough profit to keep shareholders happy. When they could lend money at a higher rate (30-year mortgage rates were 18% in the early ‘80s), savings accounts paid higher rates too. Banks would love to pay high interest rates on deposits. Banks compete with all of the different things you can do with your money -- buy a house, stocks, or crypto, pay off loans, travel. The higher the interest rate, the more likely you are to keep your money sitting there. More money sitting there means the banks can lend more means higher income for the banks. Given the low rates they earn from borrowers, they just can’t.BlockFi, however, can. Meet BlockFiFounded by Zac Prince and Flori Marquez in 2017, BlockFi is a crypto-native financial institution. But while BlockFi is for crypto investors, it’s not decentralized. It has over 700 employees, a headquarters in Jersey City, and is regulated. On the spectrum between a traditional financial institution (“TradFi”) and a Decentralized Finance (“DeFi”) protocol, it falls somewhere in the middle. Like Coinbase, it’s what’s known as Centralized Finance (“CeFi”).To a client, BlockFi looks and feels like an online bank. When I set up my account, it felt very much like setting up a regular online bank account. * I signed up, verified my identity, and waited a day for everything to get approved. * Once I was in, I connected to my bank account via Plaid and deposited money via ACH. * The money hit my account instantly and BlockFi converted it to GUSD (a stablecoin). * Without me doing anything special or crypto-y, it’s now earning 8.6% APY. * With Flex, I chose what currency I get interest paid in. So I deposited in USD, converted automatically to stablecoin, and get 8.6% interest paid out in ETH. * Then, I transferred my BTC from Coinbase. It took about two minutes, and now I’m earning 6% APY on that, in bitcoin. (Rates vary by coin deposited)Within two days of starting the process, I now have a meaningful amount of my net worth in BlockFi. I wouldn’t recommend it if I didn’t trust it for myself. And it was easy. That familiar bank feeling with backend crypto superpowers is by design. Early BlockFi clients were crypto natives (they had to be to use a new crypto-based product during crypto winter), but the company is making a push to attract crypto-curious clients, kind of like us. They want to be the on-ramp for millions of people to get involved with crypto. A couple of interesting things happened in the setup process: * It Felt Like a Regular Bank. BlockFi’s on-ramp to crypto feels smooth and familiar. * Crypto Superpowers. I transferred a good chunk of money from Coinbase to BlockFi in minutes, not the hours or days it would take to send a wire or transfer money between accounts. BlockFi thinks that instant settlement gives it a big advantage over traditional financial institutions. That combination of ease and power is working. In early March, BlockFi announced a $350 million Series D that valued the company at $3 billion. Traditional venture/hedge funds Bain Capital Ventures, Tiger Global, and DST Global joined crypto-focused Pomp Investments as co-leads. At the time of the announcement, the company announced some eye-popping stats:* $50 million in monthly revenue, up from $1.5 million a year earlier* $15 billion in assets on the platform, up from $1 billion a year earlier* 0% loss rate across its lending portfolio * 50% month-over month growth $50 million per month is an absurd amount of money for a company that’s less than four years old. It would be a great annual revenue number for a company that age. BlockFi generates revenue in three (soon to be four) ways: * BlockFi Interest Account: Earn up to 8.6% APY on stablecoin deposits, 6% on BTC, and 5.25% on ETH.* Trading Accounts: No fee trading of Bitcoin and other cryptocurrencies* Crypto-Backed Loans: Loans on crypto balances as low as 4.5% APR* Credit Card: Visa credit card with 1.5% bitcoin back on every purchase (coming soon)These look a lot like the ways that banks make money. Let’s break down each, saving the most complex for last. Trading AccountsBlockFi lets clients buy and sell cryptocurrencies. The product is similar to Coinbase in that it’s a centralized and easy-to-use way to buy crypto, but there are a couple key differences. Coinbase Offers More Currencies. Because Coinbase’s business is all about buying and selling crypto, it offers a lot more assets than BlockFi. You can buy nine assets on BlockFi, and 44 on Coinbase. While BlockFi will add more assets over time, it’s not the focus of the business. Trading on BlockFi is really about giving people a way to build up crypto deposits that BlockFi can lend out, and it only offers trading in coins that it lends. BlockFi Has Lower Fees. Coinbase makes most of its money by charging retail traders fees. Coinbase charges normal accounts 3-4% transaction fees per trade, plus a spread on top. That drops to 0.5% plus a spread for Coinbase Pro accounts. It nets out to a 1.25-1.5% take rate on retail trades. Institutions pay much less, around 0.05%.In Coinbase and the cryptoeconomy, Tanay Jaipuria wrote: Over 95% of the revenue that Coinbase generates comes from transaction revenue, i.e., commissions on trades from retail and institutional clients, so let’s focus on that. Digging one level further, Coinbase’s institutional trading volume makes up about 60% of total volume. However, Coinbase makes 95% of its transaction revenue (and 90% of its total revenue) from retail trading volume.BlockFi does not charge transaction fees, but it does take a spread on trades that averages at around 1%. It’s cheaper than Coinbase, but more expensive than exchanges like Binance and FTX that are more powerful but harder to use, particularly for people new to crypto.Importantly, like Coinbase, FTX, Binance, Uniswap, and other exchanges, but unlike non-crypto platforms like Robinhood and PayPal, BlockFi lets you move your coins in and out. At this point, trading is a feature on BlockFi, not a full standalone product. It’s a way to onboard people to crypto and get them earning yield. Bitcoin Rewards Credit CardBlockFi is launching a credit card, with Visa, that feels like a regular credit card in every way -- you can use it everywhere -- except that it gives you 1.5% back in Bitcoin whenever you use it, and up to $750 or more in bonus bitcoin rewards. This one is straightforward. Credit card providers earn an annual fee and interchange, and it’s up to them to use it in a way that attracts customers and strengthens the business. Traditionally, that’s meant points, miles, or cash back. In Ramp’s Double-Unicorn Rounds, I wrote that instead of points: ...it rewards them with better software. Better software drives more usage, which drives more revenue, which drives better software, and so on. The faster the flywheel turns, the further ahead Ramp pulls. The same principle is at play here. Instead of points or cash back, BlockFi gives people bitcoin. It seems like a minor distinction, but it’s potentially massive, for two reasons. One, they’re rewards that can increase in value over time. If you’re bullish on bitcoin, then you believe the rewards you earn will be worth more in the future. You’re getting long bitcoin every time you buy anything. (Of course, they can also go down over time). Two, bitcoin rewards are an on-ramp. There are a lot of people who don’t want to spend their hard-earned cash buying bitcoin, or feel uncomfortable depositing money in an account and trading it for bitcoin. Those same people might be happy to just get free bitcoin for doing something they’d be doing anyway. Once they do, it kicks off BlockFi’s money flywheel: * Earn bitcoin* Bitcoin automatically deposited in BlockFi account, BlockFi lends it out* Client earns 6% on bitcoin holdings in bitcoin, building up the stack* Client can take USD loans against that bitcoin The bitcoin credit card is an on-ramp, a way to get the next 15 million people to dip their toes in crypto. It’s an on-ramp to BlockFi, too, and likely a low CAC one - who doesn’t want free bitcoin? Once clients are in the ecosystem, BlockFi can monetize them in all sorts of ways as it builds out more financial institution functionality. Crypto-Backed LoansThere’s this tension in crypto: thousands of people have made millions of dollars by buying and hodling bitcoin, ETH, and other coins. On-chain, they’re very wealthy. But to actually use that wealth to buy things, they need to sell coins. That’s a problem, because selling triggers capital gains taxes in the US, and because most crypto-wealthy believe bitcoin will only keep going up in value over time. Historically, doing anything but hodling has caused major regret.The internet is littered with cautionary tales. See: my ~$2.5 million Oktoberfest experience, or even more painfully, Bitcoin Pizza. On May 22, 2010, programmer Laszlo Hanyecz bought two pizzas from Papa John’s for 10,000 BTC. At the time, those 10,000 BTC were worth $41. Today, they’d be worth $645 million.  The examples are painful and comical, but it’s a genuine problem: there’s nearly $1.2 trillion in wealth tied up in a currency that people don’t feel comfortable spending. BlockFi solves that by offering USD loans collateralized by bitcoin at rates as low as 4.5% APR. BlockFi is able to offer competitive rates while protecting its downside by holding onto your bitcoin (or ETH, Litecoin, or PAXG) as collateral. Loans start at a 50% Loan to Value (LTV), meaning that you need to put up bitcoin that are worth twice as much as you’re borrowing. If you want a $100k loan, you need to put up 3.12 BTC, currently worth $200k. If the price of bitcoin crashes, that gives BlockFi a 50% cushion. If the price drops below certain thresholds, it will ask borrowers to post more collateral. In the worst case scenario, it can liquidate some of your bitcoin to cover the loan. That said, even in the sharp drawdown in March 2020, it didn’t have to liquidate any clients, while DeFi protocols like Maker did. That’s good, because selling into a massive selloff is typically the worst thing you can do. This highlights an important and obvious distinction between DeFi and CeFi: CeFi companies have teams of real people who can proactively work with clients to get ahead of issues before getting to the point at which a liquidation needs to occur. Protocols have dashboards and warning signs, but not customer support and risk teams whose job it is to avoid catastrophe. Everything is a trade-off. DeFi protocols typically have lower fees and are more open and transparent. Many people believe in “not your keys, not your coins,” the idea that if you keep your coins in a centralized account, you don’t really control them. (Balaji made this point in an excellent Tim Ferriss Show interview.) Plus, one person’s comfort in having people on the other side is another’s discomfort in having people on the other side. For BlockFi’s target customers and institutional partners, though, the trade-off can be worth it. BlockFi has a 0% loss ratio on loans. It’s the lower risk option. BlockFi Interest AccountUp to this point, everything feels pretty normal: no-fee trading, credit cards with 1.5% back, and collateralized loans at 4.5% APR are things we’re used to. BlockFi just does it all with crypto. The BlockFi Interest Account is normally where people start to give me quizzical looks, because BlockFi offers up to 8.6% APY on stablecoins and 6% APY on bitcoin. That’s an insanely high rate, and it makes a huge difference. Over 30 years, $100k at 8.6% APY turns into $1,188,214. At the standard 0.01% APY I earn at Bank of America, it turns into $100,300. Obviously, there is no free lunch, and there is especially no free lunch over thirty years. The biggest risk with BlockFi is that its accounts are not FDIC insured. If BlockFi gets totally wiped out, your money is gone. There’s a trade-off: for accepting more risk, you earn higher interest. BlockFi takes that risk very seriously. Watch this video with the company’s Chief Risk Officer Rene van Kesteren, a former Managing Director in Equity Structured Finance at Bank of America Merrill Lynch, to understand how they think about it. Still… 8.6% is a lot. It beggars belief. I didn’t understand it at all, which is why I wanted to write this piece in the first place, to dive in and see if I could figure it out and explain it. Here goes. Stablecoins and 8.6% APYRemember from earlier that banks want to pay high interest rates. It attracts deposits, which enable more lending, which makes more money. A lot of challenger banks will even pay unsustainably high rates on deposits as a customer acquisition cost (CAC) in the form of a bonus rate on top. Those are typically limited to some period of time, like the first six months, after which you go back to earning normal APY. BlockFi is not a bank (technically, it’s a secured non-bank lender), but it makes money like one. It’s able to offer 8.6% APY on stablecoin deposits and 6% on BTC not as an introductory offer, but because it is able to make a lot more than that on its loans. According to crypto research and media firm The Block, BlockFi was running a 10% average weighted APR on its retail loans in early 2021. That leaves plenty of room for 8.6% APY on stablecoins, especially when blended with lower rates on other assets. These rates are not directly tied to crypto prices; most of BlockFi’s life has been during a bear market. They’re based on the availability of arbitrages. Hedge funds can generate high, nearly-riskless returns on certain trades if they can get leverage, and banks won’t make the loans, so funds are happy to pay BlockFi rates that make 8.6% APY accounts possible. The main arbitrage is something called a basis trade.A basis trade is the purchase of an underlying asset and the sale of a related derivative, like a future. You make money on a basis trade as the price of the underlying asset and the derivative converge. In this case, bitcoin futures, which trade on traditional commodities exchanges like the Chicago Mercantile Exchange (CME) or smaller futures exchanges like Deribit, trade at a significant premium to the “spot” price of bitcoin, which is the price that you’d pay if you went into the market right now and bought bitcoin. When a commodity’s futures price is higher than the spot price, it’s called contango. Typically, contango occurs when investors believe the price of something will be worth more in the future than it is today. In the oil markets, for example, that could happen if people expect a very cold winter in a few months, and want to lock in a price. With normal commodities like oil, you’re OK paying a premium on the futures because owning the futures means you don’t have to take delivery of actual barrels of oil and store them somewhere until the winter. Bitcoin, of course, costs practically nothing to hold, and yet, at the time of writing, June BTC futures are trading at a 46.4% premium to spot on Deribit.A hedge fund can buy bitcoins today at $63k and sell an equal amount of futures contracts for $67.5k, sit there while time passes, and collect the difference. Bloomberg’s Joe Weisenthal gives the example of December futures trading on the CME at $63,000 last Friday while Bitcoin was at $58,300. In either case, the ~45% annualized return comes from rolling 3m futures four times per year.Weisenthal wrote, “What this means is in theory (I stress, *in theory*) you could go long spot bitcoin, while shorting the December future, and if you just wait for the two to converge, that’s an easy 8% in 12 months.” (Note: I think he meant an easy 8% in eight months). That is (again, in theory) free money, a riskless trade. Hedge funds love finding riskless trades. They can borrow tons of money, “lever up,” and make way more than 8%. And the 8% number is relatively low. JP Morgan rate derivatives strategist Josh Younger put out a report last Friday saying that the “June CME contract was offering a 25% annualized yield relative to spot.” Normally, when there’s nearly free money lying around, it doesn’t stick around for too long. It gets “arbitraged away.” In this case, that would mean enough people borrow money to buy bitcoin, and enough people sell the futures contract, that the spread between the two compresses to next to nothing. But in this case, that’s not really happening, for a couple reasons: * What Institutions Can Buy. Some big, traditional financial institutions can’t really go to Binance or even Coinbase to buy large amounts of bitcoin, but they’re very used to buying commodities futures on the CME, so they buy up futures, bidding up the price.* Who Lends Money for Crypto Trades. Arbitrageurs want to borrow to lever up on the trade in a big way, but banks don’t like to lend money for crypto trades. That’s BlockFi’s opportunity. As Matthew Leising wrote in Bloomberg: Some of the largest non-bank firms in cryptocurrency including BitGo, BlockFi, Galaxy Digital and Genesis are stepping up to meet investor demand for dollars amid a long-standing weariness by banks to lend to individuals or companies associated with Bitcoin and other digital assets. In this case, they’re lending to hedge funds that need cash to buy Bitcoin for a trade that is almost guaranteed to pay out at annualized returns that have recently hit 20% to 40%.Banks won’t lend to hedge funds on a free money trade because it stinks of crypto, and neither they nor their shareholders want anything to do with crypto (for now). BlockFi, which is crypto-native and understands the market as well as anyone, is more comfortable with the risk and is very willing to lend hedge funds the money for the basis trade at the right price.Banks won’t lend to BlockFi to turn around and lend to hedge funds to make the basis trade, so where does BlockFi get the money to lend? You guessed it. Deposits. Specifically, stablecoin deposits.Wait, what are stablecoins? Stablecoins are cryptocurrencies that peg their value to some external reference, often USD. They allow funds to dollar denominate trades on the blockchain.  The best explanation I’ve come across is that stablecoins are just tokenized dollars. In the case of one of the most popular, USD Coin, “tokenizing USD into USDC is a three-step process:1) A user sends USD to the token issuer's bank account.2) The issuer uses USDC smart contract to create an equivalent amount of USDC.3) The newly minted USDC are delivered to the user, while the substituted US dollars are held in reserve.”Stablecoins are regular dollars that are compatible with the blockchain, and are typically backed by actual dollars in an account. They’re important here because hedge funds need them to make sure the basis trade is actually delta neutral. If the trade is dollar-denominated, meaning prices are all quoted in dollars, they’re not taking currency risk, or a directional bet on where bitcoin ends up. That’s why BlockFi is able to pay 8.6% on stablecoin deposits. (They automatically turn your USD into stablecoins when you deposit money via ACH). BlockFi lends out stablecoin deposits to hedge funds to lever up on the basis trade. If hedge funds are able to pay BlockFi 15% because they’re making 40%, BlockFi can afford to pay depositors 8.6%. This trade won’t last forever, and the 8.6% rate will likely come down in the long run, although it’s been stable at 8.6% for many months. A few things may happen to tweak the trade in the short-term:* Demand for bitcoin and bitcoin futures may decline. There is historically high bitcoin demand right now, and if that decreases, there will be less premium on the futures, which means less juice to be arbed.* Bitcoin ETFs. Bitcoin ETFs are coming -- there are three in Canada already. That will have opposing impacts on the trade. On the one hand, it will make it easier to run the trade, which would mean more demand for dollar-denominated loans. On the other, it will decrease the demand for futures, which may tighten the spread and make the trade less profitable. It will be interesting to watch where that nets out. * More Lenders Come Into the Space. Over time, assuming crypto keeps getting bigger and more legitimized, new startups, existing competitors, decentralized protocols, and big banks will all compete to lend money against crypto trades. In a low-rate environment, companies don’t just let other companies take all of the juicy yield for themselves. As the supply of dollars available to run the arb increases, rates come down.That said, even if the basis trade goes away, BlockFi is still able to earn more than 8.6% by lending out dollars for crypto-backed loans, and there’s still a massive gap between what people want to borrow to buy crypto and what they’re able to borrow: It will take some time for the basis trade to get arbitraged away, and crypto is still the wild west. New opportunities are popping up all of the time that a crypto-native financial institution like BlockFi is better equipped to understand and move quickly on than traditional ones. Grayscale Bitcoin TrustEven today, the basis trade is just one of the things BlockFi does in order to pay out seemingly-too-good-to-be-true rates. The rates aren’t based on any one specific trade, but on BlockFi’s ability to accumulate and lend crypto assets for which there’s more demand than supply. Stablecoins are the most in-demand because they’re needed to dollar denominate all sorts of trades, but BlockFi offers competitive rates on 10 crypto-assets. Rates are based on how much BlockFi can generate by lending each type of asset out, which is based on supply and demand. Putting one BTC or ETH in if you have them pays out 6%, but it tiers down to a more standard 0.5% from there as you deposit more because there isn’t as much demand to borrow bitcoin or ETH. While stablecoin rates have remained consistent, bitcoin APY’s on BlockFi have come down recently as the most profitable trade -- Grayscale -- went away. There are all sorts of reasons someone might want to borrow bitcoin, including shorting (although there’s not much demand for that today outside of hedging), but the biggest was to arb the Grayscale Bitcoin Trust premium to NAV. The Grayscale Bitcoin Trust (GBTC) is one of the few indirect ways (i.e. not owning bitcoin) for people to get bitcoin exposure. It holds bitcoin in a trust, and then sells shares in the trust in the stock market. Like futures, GBTC traded at a premium to the Net Asset Value (NAV) of bitcoin it held because people could buy it more easily, in ways that they were used to, than bitcoin itself. I can buy shares of GBTC in my Schwab account or 401k. To many, that feels safer, and it comes with tax advantages. (AltoIRA lets you own crypto in your IRA directly, FYI.) As a result, GBTC has traded in a 5% - 30% premium to NAV range over the past couple of years.Institutions took advantage of that premium. The way GBTC works is that people and institutions can put Bitcoin in the Trust, keep it there for six months, and then get GBTC shares which they could turn around and sell to retail buyers at that 5-30% premium. Same story: nearly riskeless trade, borrow bitcoin to exploit it, profit. 5-30% premium in six months meant 10-60% annualized returns, boosted by margin. In order to borrow bitcoin, they turned to BlockFi. BlockFi generated strong yield from the trade, which they gave to depositors in the form of high yields on bitcoin. Over the past couple of months, though, the GBTC premium turned into a discount as buyers got new ways to get bitcoin exposure indirectly: like Tesla and Square, which hold BTC on the balance sheet, Microstrategy, which holds so much bitcoin on its balance sheet it’s essentially a BTC ETF, and three Canadian Bitcoin ETFs, launched in the past couple months, already have $1.3 billion in assets under management. BlockFi itself launched its own Bitcoin Trust. More supply for the same indirect bitcoin demand meant lower GBTC prices. With no premium, and a discount in its place, the demand to borrow bitcoin to put in the trust went away. As a result, BlockFi lowered its bitcoin APY. The Grayscale illustrates two things: that BlockFi’s rates may come down over time, but also that it has a diversified enough business that it’s not reliant on any one trade at a given time. As long as there are new, legitimate trades that investors want to borrow crypto to put on, BlockFi will be able to generate enough yield to pay out above-market interest on deposits. The question is: can it expand from that wedge into the full suite of financial institution services faster than competitors can get comfortable with crypto? The Race to Become the Finance Super AppA smooth and familiar interface, crypto-backed loans, and legit high interest rates have propelled BlockFi to dizzying heights in less than four years: $50 million in monthly revenue with $15 billion in deposits and a $3 billion valuation. According to The Block, BlockFi was already profitable entering 2021. But this is just the early stage of BlockFi’s master plan to reimagine what a modern financial institution looks like on crypto rails. In its report, BlockFi Company Intelligence, The Block wrote: From one perspective, BlockFi can be viewed as one of the world's largest crypto-native neobanks: part non-bank crypto-secured (collateral) lender, part digital asset depository institution. But even that framing provides an incomplete picture.What BlockFi is building, according to its CEO Zac Prince, is a lot like a crypto-native SoFi plus the prime brokerage desk of a large bank like JP Morgan. SoFi started with student loans as its wedge into a young, underserved customer base, and has expanded what it can offer those customers. Today, in addition to student loans, SoFi offers cash management, a credit card, stock and crypto trading, personal loans, home loans, auto loan refinancing, credit tracking, and life insurance. SoFi, which invested in BlockFi’s seed round, recently announced a merger with one of Chamath Palihapitya’s SPACs (IPOE). It’s currently trading around a $13 billion market cap. Similarly, BlockFi started with crypto loans as its wedge to attract a wave of newly wealthy crypto investors who were underserved by the market to make deposits. They’ve added no-fee trading and a credit card, and will continue to roll out new product lines. It’s not hard to imagine cash management, stock trading, wealth management, mortgages, and all of the financial services that crypto holders might need, all built on crypto rails. Now, it’s trying to expand its addressable market by building more on-ramps that make it easy for crypto curious people to get involved in the space. An 8.6% APY is one way to pique peoples’ interest, but credit cards and other products that let people easily earn and grow their crypto holdings without feeling like they’re dealing with crypto will unlock new client bases. But the race is on. As a public company with an $86 billion market cap, Coinbase is undoubtedly going to expand its offering to try to infiltrate more of its customers’ financial lives. It already launched bitcoin-backed loans last August. DeFi is still confusing and hard to use, but it’s improving rapidly and attracting more people beyond the hardcore crypto community. Projects like Aave and Compound offer lower fees and more decentralization than BlockFi. Non-crypto companies like Square, Fidelity, Monzo, Robinhood, Mastercard, PayPal/Venmo, and even SoFi are moving into BlockFi’s space: * Square said 1 million customers bought Bitcoin in January, and it holds over 3,000 bitcoin on its balance sheet * Robinhood said that 9.5 million people traded crypto on its app in Q1 * PayPal lets customers buy, sell, and hold crypto* PayPal’s Venmo will let people pay each other in crypto* Mastercard is supporting crypto on its network * Visa built a crypto API that it’s piloting with neobanks. The list goes on, and new runners are entering the race every day. Many of these companies have more robust financial services offerings than BlockFi, and are betting that adding crypto into the mix is enough to retain existing users and attract some new ones. BlockFi’s bet is that crypto, or at least digital currency, is just better than the existing financial system in a lot of ways that have nothing to do with decentralization, and that CeFi, which combines the benefits of centralization and digital money, is the winning combo. Software is eating the world, and at some point, they think crypto will eat the way we store and exchange money by building money directly into the infrastructure itself. If that turns out to be wrong, or in a more extreme case, if bitcoin crashes and BlockFi’s clients and counterparties explode, BlockFi could struggle, and there’s no FDIC to back up its deposits.But if that’s true, if crypto is fundamental to building better financial products, then BlockFi’s wedge and singular focus on crypto will be an advantage versus incumbents and startups that try to add it on after the fact. Robinhood, for example, doesn’t even let users transfer crypto outside of the app. If people accept that money moves more easily and equitably on crypto rails, bolt-on solutions built for speculation won’t cut it. If they’re right, and CeFi wins, the battle may end up being BlockFi vs. Coinbase. BlockFi board member Anthony “Pomp” Pompliano believes that BlockFi’s decision to start with deposits gives it a clearer path to product expansion, drawing on Robinhood vs. Square: Robinhood remains a brokerage-focused business. They have tried to scale by adding new products (crypto trading, cash accounts, etc), but that appears to be a much more difficult road than originally anticipated. Square on the other hand has been able to build a serious ecosystem of products that includes payment infrastructure, point-of-sale technology, CashApp, Bitcoin brokerage, and fractional share brokerage for public equities.The not-so-subtle implication is that Coinbase is Robinhood and BlockFi is Square, and that BlockFi can build Coinbase before Coinbase can build BlockFi. Coinbase’s IPO just adds fuel to the fire. More companies will enter the space. Spreads will get arbitraged away. Yields will compress. 8.6% APY won’t last forever, but if BlockFi can build a robust suite of financial services with crypto tools for an expanding base of crypto owners, it has a shot at building a lasting institution in a competitive and lucrative space. The OfferBlockFi is offering Not Boring readers up to $250 in free bitcoin for opening up and funding an account. I did it myself, and it was smooth and easy. That said, do your own diligence, read reviews. You probably shouldn’t put all of your money in BlockFi. I put less than 10%. If you own crypto and want to earn on or borrow against your holdings, or if you’re just curious and want the easiest on-ramp to earning and growing your crypto holdings, check it out:Thanks to Dan for editing, and to the BlockFi team - Russell, Chris, and Shayne. How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading, and see you on Thursday for a special edition.Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 537 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 42,205 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify or Apple PodcastsHi friends 👋 , Happy Monday! This is a big one for me: Not Boring’s first birthday. Instead of writing about a very big company, which I normally do on Monday, I’m writing about a very small one: Not Boring. It’s been a crazy year, I’ve learned a ton, and it’s just going to get better from here. But it was not at all obvious that this was going to work out a year ago. Before we get to it, I just want to say a big thank you. Nothing in this story would have happened without you reading, commenting, conversing, and sharing. I feel very lucky that you’re willing to take time out of your day to read what I write. If you want to bring some smart, curious friends along for year two: Today's Not Boring is brought to you a Not Boring Day One-erFun Fact: Public was the first company ever to sponsor multiple Not Boring newsletters. They sponsored Knock Knock. Who's There? Opendoor. and have been with us ever since.Public and Not Boring are a perfect match: like Not Boring, Public makes the investing conversation fun. Public is an investing app AND a social network for talking about business trends, and the social features make it easy to share ideas.Thank Public for making Not Boring possible by hitting the link below and joining me over there. If you want to transfer your account from somewhere else, they’ll even cover the fees.*Valid for U.S. residents 18+ and subject to account approval. Transfer fees covered for portfolios valued at or over $150. See Public.com/disclosures/.A Not Boring Adventure, One Year InThis has been the wildest and most rewarding year of my life, both personally and professionally: our son, Dev, turned 6 months old yesterday, and Not Boring turned one on Friday. A year ago, we knew that Dev was coming, but I had no idea what I was going to do. I had quit my job, launched an in-person company that got crushed by lockdowns (and was probably a bad idea anyway), and to top it off, I caught COVID the week I decided to start writing Not Boring. I was lost. Somehow, since then, with all of your help, I’ve built my dream job. Over the past 365 days, I’ve:* Written and sent 417k words. That’s more than all seven Chronicles of Narnia. * Grown from under 500 subscribers to over 42,000.* Run a syndicate which has invested nearly $2 million in fourteen companies. * Generated more revenue than I’ve ever made in a full-time job. I legitimately didn’t believe this was possible. I would see people with big followings on Twitter or big subscriber lists and think that they had some special je ne sais quoi. I still think that it could end at any moment. Today, I want to share the Not Boring story as honestly as possible -- it often looks way easier from the outside -- with lessons I’ve learned on writing, growth, business models, investing, and creator psychology sprinkled in. We’ll cover:* Getting Here: Per My Last Email → Not Boring Club → Not Boring* Growth: Luck, Shares, Ups, Downs and Tommy* The Writing Process and Psychology* Business Model: Optimize for Growth and Opportunity* The Not Boring Syndicate* The Present and Future of Not BoringIf anything in this story seems planned, premeditated, or in any way clean, that’s just my brain going back, filling in gaps, and connecting dots. As much as I write about strategy, this story is about working hard even when it seems silly and following serendipity. My biggest lesson so far: this is neither as impossible nor easy as it looks.The Winding and Uncertain Road to Not BoringPer My Last EmailI’m cheating a little when I say that it’s Not Boring’s one year birthday. I wrote a different newsletter -- Per My Last Email -- for almost a year before. In early 2019, the board at Breather, where I worked, had just brought in a new CEO, who himself was in the middle of bringing in a new, experienced executive team. A couple weeks into the new regime, Ben Rollert (then VP, Product at Breather, now CEO at Composer) and I presented at an exec team offsite about the need to differentiate and dig moats in an increasingly crowded and bubbly flex office market. We got cut off halfway through with something to the effect of: “Moats? This is a big market, we don’t need to worry about moats. We have a brand. That’s what Apple has.” I realized that my brain was going to shrivel up and rot if I didn’t do something. Ben’s always been smarter than me. He saw the writing on the wall and quit. I couldn’t quit right then -- I managed a 150 person team and didn’t want to abandon them -- so instead, I used my annual learning & development budget to take David Perell’s Write of Passage course.  That was one of the best decisions I’ve ever made. One of the assignments for the course was to launch a Substack and get twenty people to subscribe. I reserved packym.substack.com, named it Per My Last Email, and begged my few hundred Twitter followers to sign up:Two days later, I had 28 subscribers, and we were off to the races. I wrote Per My Last Email on the side, spending a few hours each weekend or early in the morning curating links to essays, books, podcasts, and videos with a dash of commentary. It grew to about 400 subscribers in eleven months. It didn’t make a dollar and I didn’t expect that it ever would. But I had always told Puja and my family that if I ever got really rich and retired early, all I’d want to do is read and write and talk to really smart people. Per My Last Email let me start doing that in a small way. As someone who’d been so singularly focused on work for a decade, it felt good to have a hobby. Lesson: Make room for hobbies, even just a few hours a week. Not Boring ClubWriting was also a way for me to test out a startup idea I had in a really lightweight way. The idea was Not Boring Club: a mashup of social club and continuing education, Soho House meets college extracurriculars for busy grownups. I wrote about education and IRL Member Communities to make sure there was a real opportunity. One of the problems with being good at writing is that you can convince people that bad ideas are good. You can even convince yourself.In October 2019, I quit Breather to start it. I wrote business plans, memos, started a debate club, made decks, built a website, and tried to write my way into a business model. I couldn’t quite figure it out. I knew what I wanted to exist, but the business model wasn’t clicking.  The people around me -- my sister, Puja, even my mom -- tried to gently tell me that this wasn’t it. They were, in hindsight and in the back of my mind even then, so obviously right. But I persisted, and announced the launch in a blog post. Thankfully, I didn’t raise money or sign a lease. Instead, I decided to start experimenting with a Slack group and a series of in-person events. By February, I started onboarding the first 150 (free) members with a series of small group dinners. On March 10th, we had to “postpone” a welcome dinner. Then a Debate Club. Then the next dinner. Then the next dinner.  We quickly moved Not Boring Club online with cocktail making classes, lightning presentations, book clubs, and trivia nights. One day, I was frantically making slides for that night’s Trivia Night. Puja kind of gave me a look, and I realized how fucking ridiculous it seemed. How fucking ridiculous it was. That night, eight people showed up to play trivia. That was the final straw. I needed to do something different, but I couldn’t figure out what. One thing I knew for sure: I was a terrible online community leader, and I kind of hated it. If I’m being honest, COVID was a good excuse to erase my mistake. The Not Boring Club went on the back burner. Lesson: Don’t be afraid to admit that something you thought was a good idea turned out to be a bad idea. You’ll know it in your gut. Trust that instinct and cut bait.Not Boring NewsletterOne year ago, I was locked in my Brooklyn apartment with COVID, feeling incredibly stuck and a little hopeless. Not Boring Club was on indefinite pause. In February, Puja and I found out we were having a baby, and I had zero income. The pressure was on. My brilliant plan? To turn the newsletter into something that could at least pay rent at some point in the future while I tried to figure out what I wanted to do next. Maybe it would even help me find a new job. At the time, I had weekly coaching calls with my mom. (Yup, you read that right.) On one of those calls, when I told her that the newsletter was the thing I was enjoying most and that I wanted to give it a shot, she said, “Why don’t you change the name of the newsletter to Not Boring?” So I did, and announced the change in the Last Per My Last Email in late March 2020. When I sent that email, there were 473 people subscribed to Per My Last Email. I got aggressive and changed my goal from “1,000 subscribers by the end of the year” to “1,000 subscribers by the end of April.” (At the time, I thought “end of April” was synonymous with “end of quarantine.”)After I announced the name change, I got a few replies saying, “Oh man, I loved Per My Last Email.” I called my mom and said that I thought I’d made a terrible mistake, that I’d messed up the newsletter too. Things were dark. But then they started to look up. The biggest change from Per My Last Email to Not Boring, other than the name, was that instead of curating links, I started writing long (ok, very long) essays myself. When I started writing, I wanted to write about tech and strategy (one of the first pieces I wrote was on Natively Integrated Companies and another was on Shen Yun and Startup Economics), but I thought the space was too crowded (the first piece I ever wrote was the Best of Ben Thompson). With Not Boring, I went back to the things I wanted to write about all along, the things that I cared about and spent my free time reading and talking about anyway. It got really fun, really quickly. I wrote about Jeff Bezos’ Fashion Flex, then I wrote about Creative Destruction through the lens of the Mickey Mouse Club, then Supply Gluts and Hey Arnold. I realized that I could write about the things that I liked writing about -- strategy, finance, economics, and tech -- even though they were crowded, as long as I wrote about it with my own, unique voice. That was a huge unlock, and a lesson in counter-positioning. Counter-positioning, my favorite of Hamilton Helmer’s 7 Powers, is when, “A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.” Technically, combining strategy, finance, and pop culture isn’t a new business model, nor is it better, but it’s still a moat. Ben Thompson might be better, smarter, more experienced, and more popular, but can you imagine Ben Thompson explaining creative destruction with this image? Now I wasn’t intentionally counter-positioning -- there wasn’t that much foresight -- I was just having fun. In hindsight, I realize that there aren’t a lot of serious analyses out there that don’t take themselves seriously, because when people do serious analysis, they put on their serious analysis pants. The pop culture thing was a lucky accident.After that post last April, something started to click. People were sharing Not Boring. It got picked up by the Financial Times. Subscribers grew 53% in one month. Not Boring was still tiny, but it was starting to find that elusive *product-market fit*. Plus, people were stuck at home and bored. It was time to start focusing on growth. Lesson: Lean into the intersection of what you’re passionate about and what’s different about you.Growth: Luck, Shares, Ups, Downs, and TommyIn May 2020, one year into writing a newsletter, I wrote Looking Back, Forward, and Up to reflect on one year of writing and set goals for the future. My first goal was to hit 5,000 subscribers by the end of the summer, and then turn on paid subscriptions. From that piece: Goal #1: Grow to 5,000 Subscribers by Labor Day and 10,000 by May 21, 2021It took ten months to get to 500, but less than two to get from there to 1,294. I’ll be testing a bunch of tactics over the next few months to get to 5,000, but the most important will be continuing to improve the content and provide more value so that you want to share it with your smartest friends. Last April, my brother Dan and I I retreated to the beach, shaved off our overgrown pandemic hair, and brainstormed. We decided the best path was to come up with a list of 100 growth ideas. We got to eleven, and did maybe three of them. I’m not a growth hack person.The most important growth levers over the past year ended up being really simple: quality and consistency. Show up enough for good things to happen every once in a while. From the 473 people that received the last Per My Last Email, we’re now at 42,205 a year later -- 8,803% growth 📈 . That growth didn’t happen in a straight line. Not Boring has grown through a series of fortunate events, and a lot of help from friends and internet strangers. A few of the highlights: Polina Sharing Per My Last Email in The Profile. In November 2019, Polina Marinova shared Per My Last Email in her excellent newsletter, The Profile, after I won a contest to receive a tote bag full of some of her favorite books. I picked up 49 subscribers in two days, and I thought that was the most incredible thing in the world. Thanks, Polina! Asking People to Share and Launching Not Boring. While I wrote Per My Last Email, I was afraid to ask people to share -- it felt so self-promotional -- so I buried the ask at the bottom of emails. When I announced that I was switching to Not Boring and making it a thing, I asked people to share front and center. People did, and over 100 new subscribers joined that week. Tommy: Product Hunt and ReferralsIn May, I linked up with my friend Tommy Gamba, who came up with a few big unlocks.First and foremost, he said that we should set up a landing page for Not Boring so that we could launch on Product Hunt. He built a landing page using Usmo, I sent an email introducing the homepage to our 1,885 subscribers, and we launched on ProductHunt. Because people read the email and went over to Product Hunt to upvote, we ended up as the #2 Product of the Day, and in the top 5 for the week. We more than doubled subscribers in two days, from 1,800 to 3,700. I remember having dinner with Puja in Athens, NY as the signups rolled in and realizing for the first time that this actually had potential to be my full-time thing. That wouldn’t have happened without Tommy -- thank you, Tommy!! Tommy also launched a Referral Program through which many of you have invited over 2,000 people to join the Not Boring family -- thanks to all of you for telling your friends! Props to the top three referrers: Joakim Jardenberg, Hunter Walk, and Johannes Sundlo. NB 💙  🇸🇪 .  Writing Essays That People ShareAfter Product Hunt, Not Boring started to pick up momentum. The more people there are reading, the more people who might potentially share. This has been the biggest growth engine for Not Boring, and it’s been totally unpredictable. Some weeks, I write things that I think are great and no one shares them. Others, I’m embarrassed to hit send and they blow up. A few of the most popular posts include: * Tencent: The Ultimate Outsider and Tencent’s Dreams (107,980 combined views) - I sat in the basement for hours and hours looking up Tencent’s investments, and when I asked Dan and Puja to edit the essay, I could tell they both hated it. They told me to break it into two posts, and they became two of the most popular I’ve written. But it didn’t happen on the first send; it took a thread blowing up to get most of the views.* Stripe: The Internet’s Most Undervalued Company (62,159 views) - This highlights an unintentional growth trick I’ve discovered: when you write about a company with passionate employee bases, they share. * APIs All the Way Down (108,421 views) - On Sunday afternoon, I told Puja the essay was terrible and I couldn’t send it. She said she actually loved it, so I sent. It quickly got great feedback and a bunch of shares, then Patrick O’Shaughnessy shared it essay and brought in a ton of subscribers. * Power to the Person (80,376 views) - Li Jin, who coined the phrase Passion Economy and whose work I cited throughout the piece, shared it. Her stamp of approval meant a lot. * Excel Never Dies (207,818 views) - I co-wrote this one with Ben Rollert, and we got to the top of Hacker News, linked in the New York Times twice (in Dealbook and Paul Krugman’s column) and The Browser, and the Excel twitter account even retweeted us. That’s been the formula: write a bunch of essays, and sometimes, people will want to share the ones that resonate most with them. Random Dumb Luck and TwitterSo much of Not Boring’s growth has come from dumb luck. * A bunch of people subscribed after this tweet about Amazon’s investor slides went viral. * Dan Teran included me in a list of newsletter writers he likes reading in May, and I remember watching my inbox that night and seeing names of people I couldn’t believe would ever read what I wrote. * Just yesterday, Web and Lenny including me in lists of writers they like brought in over 100 subscribers. * Hundreds of other examples, big and small. I’m missing a ton of you, but every time I see anyone tweet about Not Boring, it means a lot. Shoutouts from people other people trust go 1000x further than me saying things about Not Boring ever could. The past year has been a series of me turning to Puja in disbelief, saying, “Woah! Person X just tweeted about Not Boring. I love Person X. Holy shit.” Some of those people have become good friends. I hope that never stops feeling mind-blowingly cool. There have been countless small examples of being in the right place at the right time, and often, that right place has been Twitter. I’ve made great friends there, and have gotten the chance to interact with so many of you. To join the conversation, follow me and say hi.Not Boring’s subscriber growth looks almost like the hockey stick that startups dream of, but that masks a lot of the bumps. Every time I write something and it doesn’t do well, and every week subscriber growth slows, I feel like the whole thing might be coming to an end. Lesson: Sustainable growth comes from a consistently quality product that people want to share. Growth hacking doesn’t work long-term, but it does help to kick things off. Writing Process and PsychologyEven though Not Boring has grown so much faster than I expected it would, I can’t shake that feeling that each week is going to be the last, and that soon, you’re all going to wake up to the fact that I’m just some idiot in a basement writing about things I’m deeply underqualified to write about. A few weeks ago, I went on ConvertKit founder Nathan Barry’s podcast. A writer I really respect reached out after listening and wrote:I'm listening to your podcast with Nathan Barry. The fear of the lack of interesting topics... I literally thought it was just me.It’s not. I think it’s everyone. The #1 question I get about Not Boring is what my writing process looks like: how do I choose what to write, research, and put out two essays per week. Let’s take the last one first. I was a runner in high school. I didn’t look like a runner -- I was kinda fat -- but I was good. Steve Prefontaine was a hero, and this quote of his is one of my all-time favorites: I’m writing this on Easter Sunday. I’ve been up since 7am after sleeping six restless, post-COVID-vaccine hours. I’m physically and mentally exhausted. But I’ve been at the computer for eight hours today. I was at the computer eight hours yesterday. I don’t think I’m smarter than anyone, but I do think I can outwork everyone. I haven’t taken a day off this year other than the two days I had COVID, the four days after Dev was born, and a week around Christmas, including weekends. Seven days a week, 352 of the past 365 days. That’s not a brag. I wish I could take time off. It seemed particularly silly when I was making no money on this newsletter and had to turn down socially distanced hangs with friends or dinners with family to write it. I couldn’t be luckier that Puja was so understanding; I don’t know if I would have been. But I’m genuinely petrified that each week, if I don’t give it everything I have, could be the last week that Not Boring grows. Even just taking those four days off for Dev’s birth, growth slowed from a consistent 1,000 new subscribers per week to 400-500 for the next few weeks. This is a momentum game as much as anything. That’s what I mean when I say that doing this is neither as impossible or as easy as it seems from the outside. It’s taken a ton of hard work. Part of the need for hard work comes from my lack of process. I have a running list of topics that I want to write about in Roam, and every week, when I look at it, I realize that I don’t want to write about anything on that list. Instead, I spend a lot of time on Twitter and talking to people to figure out the most interesting companies and things going on that people don’t quite understand, and then I try to understand and translate. For a Monday piece, that typically means figuring out what I’m going to write about sometime on Thursday afternoon or Friday morning, and starting to research. For APIs All the Way Down, I knew that APIs were important, but I didn’t quite understand what made them special. Then Stripe and Shopify announced a deeper partnership and I wanted to figure out why. So to start, I did a couple things: called two people who could point me in the right direction, and then found every article and podcast I could and dove in. Here’s what my Roam looks like: Each gray dot has rows and rows of notes collapsed under them. I try to absorb as much as possible, and try to figure out what the interesting angle is. Sometimes, there isn’t one, and I need to start over. More often than not, I say there isn’t, whine to Puja that I’m not going to be able to send something out, and then sit in the basement reading and listening until some idea hits. Often, I’ll try to outline what I’m going to write about in Google Docs. Most of the time, it looks empty, like this: I’m not an outline person. Instead, I just start writing. That little chunk about Stripe and Shopify seemed like a good enough hook to start with, so I went with it. This is how I started my draft in Google Docs:And then I just write, get blocked, mess around on Twitter, hang out with Puja and Dev, start writing again, complain that I’m not going to be able to get it done again. Then I get back in front of the computer, open up Figma to make some graphics and get the creative juices flowing. That helps -- when I’m stuck writing, I’ll pull data, make a chart, create an image-- and at some point, I find some bolt of inspiration, some thread to pull on that will take me most of the way through the essay. Once I have a bad draft, I send it to Puja and my brother Dan, (and occasionally to my sister, Meghan, if I really want it shredded) with some variation of this text: Sometimes Puja edits; Dan always edits. He’s a hero. The thing I love about having my brother as my editor is that he’s not afraid to tell me when something is terrible, and the reason I like Dan specifically as my editor is because he thinks about all of this stuff as much as me and can give input on the content as well as the structure and form. Then I pace nervously while Dan edits. Sometimes he rips them apart, sometimes he tells me they’re actually good and gives a few copy edits. This is normally Sunday night. Then I read through, make the edits, leave notes for what to do in the morning, and go to sleep. I wake up around 5:30am on Monday, read through with fresh eyes, make more changes, and make any last graphics, like the title image. Then I copy it over from GDoc to Substack, open up Descript, and read the whole thing into the mic for the audio version. Sometimes, I run out of time and need to hit send before finishing the audio version, in which case I send, tweet, and go back to recording. I publish the audio version, go upstairs, and fret over my open rate and how many likes my tweet about the essay got. Then I take a couple hours off and start over for Thursday. Every. Single. Week.  In August, I tweeted that my writing process looks like this: Eight months later, it’s still the same. It’s a psychological roller coaster. I legitimately think it’s all over every week. That may never change, and I think Not Boring will be OK as long as it doesn’t.Lesson: You should take no lessons from my process other than, “If he can do it, I can do it.”Business Model: Optimize for Growth and OpportunitySomehow, despite that process, Not Boring has survived and grown. Growth is one side of the coin, but growth alone doesn’t put food on the table, and it’s an awful lot of work to do for free. So the second goal that I laid out in May 2020 was to start making money: Goal #2: Make Enough Money From the Newsletter to Cover RentWithin the next 6 months, I want to launch a paid version of the newsletter. By this time next year, I want to be making enough from it to cover rent or mortgage payments.The Passion Economy is taking off, enabling thousands to make a living off of what they create. Personally, I love the idea that covering the basics doing something that I love will allow me to take bigger swings elsewhere.At the time, after listening to all of the Substack hype around subscriptions, I assumed that I, too, would charge people to read the newsletter. Ultimately, I decided that was the wrong move for Not Boring. Why? As with everything, there’s not one right answer for everyone. The key is this: your product, growth strategy, and business model need to be connected. Both subscription- and advertising-based models have pros and cons, and make sense for different types of writers:  Subscriptions have pros and cons:* Pro: generate predictable cashflows* Pro: allow writers to focus on writing quality content for their core audience instead of optimizing for clicks (the argument goes)* Pro: subscription-based writers aren’t beholden to their advertisers and can therefore write whatever they want without fear of retribution* Con: Harder to grow because content is behind a paywall* Con: People will only pay for so many subscriptions* Con: When someone subscribes for a year, you need to write for a year * Good for: Topics with a clear focus, especially work-related ones that can be expensedAdvertising does too:* Pro: Free content means readers can share and drive growth* Pro: Makes content more broadly accessible. Another way to look at it is that advertisers are paying for everyone’s subscription* Pro: Writers can experiment and dance around more since people didn’t pay for a particular type of content* Pro: Optionality* Con: Need to spend time doing ad sales and writing ad copy* Con: Ads take space that people need to read before getting to the meat* Good for: More general content with wider appeal For Not Boring, a few of things pushed me over to the sponsorship side, where I happily live to this day. * Product/Content. Not Boring is a little all over the place. It’s not focused on a particular niche. The most successful subscription newsletters are focused: Pomp writes about Bitcoin, Lenny writes about Product Management, Web writes about commerce, Mario writes about tech from idea to IPO, Ian writes about fintech, and Polina writes profiles. A less clear focus means that it’s harder for people to justify expensing Not Boring. * Growth. Not Boring grows mainly through word of mouth. Putting the best content behind a paywall means that people can’t share the best stuff. I want as many people as possible to read and share what I write.* Math. I did some rough math when I was making the decision, and realized that I could probably make a lot more money over time with sponsorships assuming that keeping the newsletter free meant growing faster. If you want to run the model with your own assumptions: Subscription v. Ads ModelIt turns out that I undershot a little bit. Sponsorships were definitely the right call for Not Boring. But how to find sponsors? First, fake it ‘til you make it. I did Cost Per Acquisition (CPA) deals with The Hustle and Readwise. I only got paid if I drove results. They were not big money, but they were examples I could point to and say, “Yes yes of course, I have a booming advertiser base.” Second, rely on a little help from friends. Ankur Nagpal, the founder and CEO of Teachable and a good friend, read Not Boring and said he wanted to sponsor it to promote Teachable’s Share What You Know Summit. Third, put it out into the universe. Puja was infinitely patient with me: seven months pregnant, and married to a free newsletter writer who hadn’t made a dime. She gently suggested that I make a deck and use it to start selling sponsorships. Finally, I listened. I surveyed Not Boring readers to learn more about their backgrounds, professions, and preferences, and with examples of previous sponsorships in hand, put together a rough sponsorship deck. Instead of doing outbound sales, because I hate selling, once I had the deck, I decided to tweet it out into the universe. The Twitter thread worked: it brought in all of the sponsors for the rest of 2020, including today’s sponsor, Public, and other Not Boring Sponsors that you know and love. From there, sponsorship has spread, like the newsletter itself, through word of mouth. Today, Not Boring makes money directly in two ways: Top of Newsletter Sponsorships. This is the sponsorship format you’re familiar with from newsletters and media everywhere: 150 words and a logo at the top of the newsletter. I charge a little more for Mondays than Thursdays because Mondays tend to go more viral. I picked rates out of thin air in the beginning, and then upped them at Jacob Donnelly’s suggestion. I’ve grown rates in line with audience size ever since. Sponsored Deep Dives. A couple times a month, I dedicate a Thursday newsletter to a paid deep dive on some of the startups I think are most fascinating or encapsulate an important trend. The companies I’ve written about would make a strong venture portfolio: Ramp, MainStreet, Pipe, Masterworks, Fundrise, AltoIRA, UserLeap, and Secureframe, with some more great companies on the way: This format was a risk -- sponsored content can be hit or miss, and people generally have mixed feelings about it. It’s particularly challenging for me because I’m so naturally optimistic. When I write a Sponsored Deep Dive, I try to write it in the same way that I’d write a normal Monday post, but since I’m being paid, I get feedback that I need to be even more critical about the company than I normally would. (Read how I choose which companies to write about here).Generally, though, these Sponsored Deep Dives get more positive feedback than I was expecting, and give people a behind the scenes look at companies that normally don’t share much information publicly. They’re here to stay, and I’m going to be tweaking and evolving these based on feedback in the coming months. So far, sponsorships have proven to be the right path for Not Boring. After many months of generating no revenue, the business side of Not Boring is starting to pick up steam, and April is set to be the best month yet: Not Boring is going better than I expected and just hit an inflection point, and I’m incredibly grateful for that. One of the challenges with the newsletter business, though, is that there’s “key man risk.” To a potential buyer or investor, that means that it’s a tough investment, because if I get hit by a bus, the business is dead. That’s even tougher for me and my family: if I get hit by a bus… you get it. That means that even though this is my own business, I’m still the labor, and we all know that capital makes more money than labor. Fortunately, a happy accident of the decision to stay free is that Not Boring’s increased surface area has opened up new and unexpected opportunities, the most exciting of which is the ability to invest in startups together. Lesson: When your business model, product, and growth strategy align, magic happens. The Not Boring SyndicateBack in June, my friend Fed Novikov reached out. After some time running the Backyard project at Airbnb’s Samara, he and his brother, Petr, were starting their own company, Apt. Fed and I had discussed the Natively Integrated approach before, and the Novikovs were using it to build their business. He asked if I would be up to write about Apt and why the Natively Integrated approach makes sense for real estate development. I was. We also talked to Jonathan Wasserstrum, who runs a leading AngelList syndicate, and he agreed to syndicate the deal. In July, I wrote the first Not Boring Investment Memo: Apt: The Natively Integrated Developer, and accredited readers were able to invest through Jonathan’s syndicate. It went well, and Fed suggested that I start a syndicate for Not Boring. I hadn’t thought about doing anything venture-related before he suggested it, but agreed there was a compelling opportunity. On one side, I could help founders explain what they do. On the other, I could demystify startup investing, which seemed like a dark art reserved for a chosen few.Just writing about companies is one thing, but putting my money where my mouth is, and giving readers the opportunity to do the same, gave me more skin in the game. Plus, I thought that we could give portfolio companies an early advantage by helping them tell their story to potential customers, employees, and investors.In late July, we launched the Not Boring Syndicate with a memo on Composer. Since then, over 900 Not Boring readers have joined the Syndicate, and together, we’ve invested $1.88 million in fourteen startups: The things that we hoped would happen -- companies can attract customers, employees, and investors -- are actually happening. Plus, having a big group of investors and a loud microphone behind you can tip the scales in founders’ favor. These tweets from Kaeya, Ben, and Ian, the founders of Swaypay, Composer, and Outfit, are what it’s all about: As an added bonus, the Syndicate has been a fun way to let readers participate and build relationships without launching a traditional community. Michael Batnick wrote about the experience as an LP in Everyone is an Investor. That made my week. Until the day we sent the Apt memo, I never imagined that Not Boring would be able to invest in the companies I write about. Even though I worked at a startup, I was still very much an operator and an outsider. As I hope comes across in my writing, I’m consistently blown away by the companies people build. I know how hard it is; I failed when I tried to do it myself. This is just the beginning of Not Boring as an investor. More to come on that front very soon 👀Lesson: More people getting involved in startup investing shifts the balance of power to founders, where it should be. The Not Boring FlywheelPractically everything good that's happened for Not Boring so far has been a happy accident. For someone who spends so much time writing about strategy, I’ve put surprisingly little thought into the strategy behind Not Boring. It’s just a newsletter.  But over the past few months -- I think mainly because I’m doing something that I genuinely love doing, analyzing companies and telling their stories, so when adjacent opportunities arise, I seize them -- things have started to come together in powerful ways. Not Boring is developing a flywheel. In early March, Jake Singer wrote a piece on Not Boring called Million Dollar Newsletter in his newsletter, The Flywheel. I didn’t want to do the piece originally because I thought I would come across as an asshole for having an essay written on me (Not Boring and I are one in the same, it’s different than a normal company). But here I am 5,000 words into writing about myself, so we’re past asshole level now, and the Not Boring Flywheel is worth exploring. Jake wrote:Packy is a better investor because of his writing, and he’s a better writer because of his investing. You can’t make up a better flywheel even if you tried:I think he nailed it, but I want to give a concrete example of how it works, and how I decide what to do now that it’s spinning. It starts with writing about tech companies and trends. Writing (or podcasting, TikTokking, YouTubing, etc…) attracts people who are interested in the same things you are, and people are the most important part of all of this. Putting your thoughts out there also repels people who don’t like the way you think -- that helps too, it saves time. * Writing essays led me to reconnect with Fed, which led me to write the Apt memo, which led to the Syndicate. * Investment memos for the Syndicate showed other startups that I could help tell their story, regardless of whether they’re raising. That’s how Sponsored Deep Dives were born.* Working closely with companies on Sponsored Deep Dives has created some of my strongest relationships in tech, led to investment opportunities for the Syndicate, and introductions to more companies to write about and invest in (thanks especially to Nick Abouzeid and Mike Wenner for spreading the word about Not Boring!) * They also pay the bills, and give me access to companies building the future, which means I can do this full-time and informs my Monday essays, which kicks the whole thing off again. As the flywheel spins, the audience grows, which gives Not Boring access to new ideas, people, and companies and (hopefully) makes Not Boring more useful to readers, partners, and portfolio companies. As I think about what’s next for Not Boring, new things need to feed the Flywheel.Lesson: Flywheels work, even if they’re accidental. The Present and Future of Not BoringI hope I’ve made this clear throughout, but if I haven’t, let me say it again: I find it incredibly fucking wild that so many of you read the words that I write. I still view this newsletter today as just a bigger version of the little thing it was a year ago with a few friends and random internet people, but I also realize that with more readers comes more responsibility. That said: I am not a journalist. I’ll never lie and I’ll always tell the truth, but what I said at the top of the first Not Boring Newsletter remains true today: The only things I’m not optimistic about are cynics and “well, actually…” people. It’s easy to dunk. It’s easy to look smart saying why things aren’t going to work. But those people are not our people. Not Boring is for the optimists, and for the people trying to make crazy things happen. I’m definitely going to be biased. I’m going to have the backs of the companies in which we invest, and the companies that support Not Boring. So what’s next for Not Boring? The answer is, just like a year ago, I have no idea. Unlike a year ago, though, I have 365 days of not knowing, growing, and figuring it out under my belt, and I’m ecstatic to see where serendipity leads us over the next 365. What I do know is that I unapologetically want Not Boring to be a big business. I want to blur the lines between analyzing, experimenting with, investing in, and promoting the companies and products that I can’t stop thinking about. I want to help companies tell their stories.In the immediate future, there are a few things I’m incredibly excited about. I can’t share details on two of them quite yet, but one involves investing and the other involves experimenting with some of the Web3 tech I’ve written about. Both are expressions of Power to the Person. Expect more Twitter Spaces: Spaces Cadets with Austin Rief and The Idea Dinner with Mario Gabriele and Acquired’s Ben Gilbert and David Rosenthal.  Long $TWTR!I’ll also probably start building a little infrastructure under Not Boring -- a new website, maybe a part-time employee or two (perhaps an EA?) -- just in case I get hit by a bus. Mostly, though, I’m just going to keep writing and following this thing wherever it takes me. When I asked for questions that my Twitter followers had about Not Boring, Tom Critchlow, one of the first Not Boring subscribers and a great writer himself, replied with this: He’s right. This has been an entirely iterative process. There have been big ups, and even the littlest down feels like the end of the world, but I’ve tried to listen to your feedback to move it in the right direction. This only works if we’re all into it. I’ve gone from having one boss to 42,200. Let’s keep iterating and building this together:THANK YOUThis is just a newsletter, and I probably spilled way too many words on it, but I’m bewildered and grateful to have this opportunity. It wasn’t guaranteed by any stretch of the imagination, and still isn’t, but I wouldn’t even have a chance without:* All of you who give me your time each week* Everyone who’s helped grow Not Boring by sharing essays and saying nice things* Nathan and Dan for bringing together the Type House and giving me the opportunity to meet so many people who I’ve read and loved for a long time* Tommy for kickstarting Not Boring’s growth* Everyone who has written guest posts: Ali, Jeremy, Reuben, Gil, Dan* Everyone who’s collaborated with me on posts: Ben, Dror, Marc, Ryan* Sponsors who let me tell their story * Founders who let the Not Boring Syndicate join their adventure * My mom for being my coach, my sister for telling me when I’m an idiot (and for letting us invest in her company), and my dad for bouncing ideas back and forth and being supportive about me writing a free newsletter after everything he spent on my education.* My in-laws, who let me turn their basement into Not Boring HQFinally, there are two people I couldn’t do this without, and for whom I’m incredibly grateful: * My brother Dan for being my thought partner, calling me on my bullshit, and giving up countless weekend and late-night hours to edit nearly every Not Boring essay this year.* My wife Puja for letting me take a big risk on writing this with no income for months and months as I told her “trust me it’s just a math problem, once I hit a certain number of subscribers I’ll be able to make a little money,” even with a baby on the way. Now that Dev is here, I couldn’t ask for a better mom for him. Thanks for putting up with my moaning every week while doing 100x more than I do and making it look easy (and looking good while doing it all). Thanks for a very Not Boring year :) Thanks Dan, Puja, and Meg for editing! How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading, and see you on Thursday for a special edition. Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 873 newly Not Boring people who have joined us since last Thursday! If you aren’t subscribed, join 41,936 smart, curious folks by subscribing here:🎧 To get this deep dive straight in your ears: listen on Spotifyor Apple PodcastsToday’s Not Boring - the whole thing! - is brought to you by… SecureframeSecureframe helps companies get enterprise ready by streamlining SOC 2 and ISO 27001 compliance. If you don’t know what that means, I’ll explain. If you do, talk to them:Hi friends 👋 ,Happy Thursday! It’s been a wild week for Not Boring Deep Dive sponsors. Following up on MainStreet’s $60 million Series A a few weeks ago, news came out about two more Deep Divers this week:* Ramp: On Monday, The Information reported that Ramp raised $65 million from D1 and others at a $1.1 billion valuation, followed immediately by $50 million from Stripe at a $1.6 billion valuation. When we did the Ramp Deep Dive in December, they had just raised $30 million.* Pipe: Yesterday, TechCrunch reported that Pipe raised a fresh round of $150 million funding at a $2 billion valuation. When we talked about Pipe in October, they had raised $66 million total. The bar I use for whether I write a Sponsored Deep Dive on a company is whether I would invest my own money in the company if given the chance (disclosure: I invested a small amount in Ramp, MainStreet, and Pipe after writing about them). You can read more about the Deep Dive selection process here.Today’s Deep Dive Sponsor, Secureframe is fresh off an $18 million Series A itself. I think that’s just the beginning. They make companies more secure, and security has never been more critical. (I always tell you how I’m paid for Deep Dives — CPA, CPM, or equity. Today is CPM).Let’s get to it. This is How They Tell Me Secureframe Saves the WorldLet’s start with a riddle. What do Ukrainian accounting software, Southwest Airlines, and Secureframe have to do with each other? Any guesses? No? I’ll give you a clue. Secureframe is security compliance software that companies, from 3-person startups to enterprises, use to automate SOC 2 and ISO 27001 compliance, complete audits, and continuously monitor their security. It’s how modern software companies stay safe and compliant with less time, effort, or cost, so they can unlock sales and focus on growing their business. But what does that have to do with Southwest and Ukraine? Read on to find out.This is How They Tell Me the World EndsRemember the old Southwest Airlines commercial in which a bored employee clicks on an email titled “Sick of your job??” and infects her whole office? Wanna get away? It actually sums up why cybersecurity is so petrifying: all it takes to take down a system is finding and exploiting the weakest link. One employee opening the wrong file can infect an entire company’s network; even worse, in an interconnected world in which every company runs on top of a stack of other companies’ software, one employee ignoring a software update can bring down major companies all around the world. In This is How They Tell Me the World Ends, New York Times cybersecurity reporter Nicole Perlroth recounts the story of the most damaging cyber attack to date: NotPetya. (Wired tells it here if you don’t want to read the whole book). On Wednesday June 27, 2017, the day before Ukraine’s Constitution Day, hospitals, banks, ATMs, power plants, the government, and practically all businesses in the country were hit, seemingly simultaneously, with what appeared to be ransomware. It locked computers, deleted files, and spread at breakneck speed from computer to computer, and company to company. Messing with Ukraine on its Constitution Day had become a Russian hacker pastime -- Ukraine’s neighbor routinely shut off the power or deleted files -- but this was different, more vicious. It was also harder to contain. NotPetya spread via “two exploits working in tandem”: EternalBlue and Mimikatz (technically, Mimikatz is not an exploit but an application used to take advantage of the EternalBlue exploit). EternalBlue was a backdoor into any unpatched Windows computer, and Mimikatz used those computers to steal passwords and break into others. Together, they preyed on the weakest links. The virus was so hard to contain that it jumped from Ukrainian companies into any company that had an office or even an employee in Ukraine. NotPetya took down systems at: Danish shipping giant Maersk, American pharmaceutical behemoth Merck, FedEx’s European subsidiary TNT Express, and even boomeranged back on Russian state oil company Rosneft. Once the virus was unleashed, there was no stopping it. And it started by finding a weak link, or more precisely, a weak Linkos. Linkos Group is a small, family-run Ukrainian software business that makes M.E.Doc, a tax product that’s like a Ukrainian TurboTax or Quicken. Practically anyone who does business in Ukraine uses M.E.Doc. That’s how the Russians got in. According to Wired: In the spring of 2017, unbeknownst to anyone at Linkos Group, Russian military hackers hijacked the company’s update servers to allow them a hidden back door into the thousands of PCs around the country and the world that have M.E.Doc installed. Then, in June 2017, the saboteurs used that back door to release a piece of malware called NotPetya, their most vicious cyberweapon yet. All told, NotPetya did over $10 billion in damages, according to a White House assessment. It’s an extreme example, one of the most devastating cyber attacks in history, and a distant one, launched halfway around the world. But the book is chock full of other examples, big and small, of hackers, private and state-sponsored, finding their way into the networks of the largest companies and richest governments. Cyber is the new global battlefield, but unlike traditional warfare, it’s much harder to contain the impact to specified targets, as NotPetya showed. Now, companies are often casualties of war. They fall victim to civilian and state-sponsored hackers alike. All of those hackers are constantly looking, or paying, for a way in. They form a global, multi-billion dollar, public-private market for weak links. How Not To Be the Weak LinkosOK, did you solve the riddle? If M.E.Doc and the woman in the Southwest Airlines commercial were Secureframe customers, they wouldn’t have unleashed malware on their co-workers or customers.Chances are, your company isn’t going to be the weak link in the next NotPetya. But if you’re building a software company of any size, you need to care about security.In order to sell into enterprises, companies need to prove that they’re secure. After reading the NotPetya story, the reason why should be clear: enterprises can’t afford to let in weak links. Previously, this prevented smaller companies from selling into larger ones early in their lives. “Bottoms-up” or “product-led” growth is in part a response to slow enterprise sales cycles, which are slow in part due to each enterprise’s bespoke security compliance requirements, which could take months and tens of thousands of dollars to pass, for each company. Over the past couple of years, though, a standard called SOC 2 has emerged as the de facto security compliance standard. Since SOC 2 is generally accepted as the gold standard, getting SOC 2 certified means that you can sell into large companies much earlier. That’s a huge revenue unlock for young companies. SOC 2, the humble security compliance standard, is partially responsible for sky-high early stage valuations.  Today, most software companies are SOC 2 compliant by the time they hit 20-30 employees, with some even getting it when they’re just three people. In a competitive environment, they can’t afford not to be. If your competitor gets its SOC 2 and you don’t, they have free reign to scoop up large customers while you’re stuck down-market. But even though SOC 2 (and a host of sector-specific standards like PCI, HIPAA, and FedRAMP) level the playing field by eliminating the need for a new security compliance process for each potential customer, the process is still a massive pain. It takes months, tens of thousands of dollars, and an endless back and forth of screenshots and process documentation with auditors.Enter Secureframe.Secureframe makes the whole process faster, cheaper and more effective by integrating with the tools you use to automate the process. Typically, startups spend $25-50k on their SOC 2 compliance process. With Secureframe and all of its automations in place, companies save months of time and 50-70% of the cost of a typical SOC 2 certification. Luckily, standardization doesn’t just make it easier for companies to get certified and sell into large companies, it also makes it possible for startups like Secureframe to build tools that make the whole process faster, cheaper, more painless, and more effective. To understand why that matters, we’ll cover:* Security Compliance: Important but Not Top Priority* The Compliance Maze* The Value of Standards in the Consumerization of Enterprise* What Secureframe Does* How to Win a Nascent, Massive, Competitive Market* This is How They Tell Me The World SurvivesIf you want to learn a little something about cybersecurity, standards, and competitive dynamics, come with me. Security Compliance: Important, but Not Top PriorityImagine you’re building a B2B SaaS startup, thousands of miles away from Washington, or Moscow. Maybe you’re in Silicon Valley, or Miami. There are two of you. You have an idea, a couple new M1 MacBook Pros, and cases of Red Bull. You just raised a small pre-seed (what’s that these days, like $5 million?) and IT’S TIME TO BUILD. It’s easier than ever to build a startup, and harder than ever to stand out. So you mix and match a bunch of off-the-shelf software, plug in Twilio to message customers, Stytch to handle authentication, and Stripe to start taking payments. Security is important to you, obviously, and you read something about NotPetya once, but that’s not the top priority for now. Startups, you’ve read, are all about ruthless prioritization. So you trust that security is important to the companies that build the software on top of which you’re building. With more plug-and-play back-end tech, you’re content to trust (for now, until you have a bigger team). You spend a lot of your time on your points of differentiation, on the front-end -- designing, testing with customers, re-designing, getting feedback, iterating, re-testing. Uh oh! A competitor just got funded -- a $6 million pre-pre-seed! -- and you need to pick up the pace. You hire a couple of engineers, a lead designer, and a salesperson. Something’s working. You have product-market fit! The land grab is ON, and you decide to go upmarket before your competitors do, to start selling to enterprise customers. Everything is moving so fast. And then it slows down. Because your enterprise customer asked you to respond to an RFP or RFI (Request for Proposal / Information) and to include your security compliance certification. Damn. The Compliance MazeGiven the potential attackers lurking around every corner, it’s no surprise that large enterprises and even fast-growing startups need to make sure the software they use is secure. That means understanding the software itself, the software that the software is built on, and the processes that the company itself uses to screen employees, manage permissions, and even undertake performance reviews. Until about a decade ago, each company created its own security compliance hurdles for vendors to jump over. If you wanted to sell into Microsoft, that might mean one set of things, if you wanted to sell into Salesforce, another set of things, and if you wanted to sell into the government, godspeed. As more software moved to the cloud, the AICPA, one of accounting’s governing bodies in the US, developed the Service Organization Controls (SOC) standards, of which there are three (technically, SOC3 is more of a general use report instead of a full fledged standard). SOC 2 is really the only one you need to care about. While an accounting-governing-body-created set of system and organization controls sounds tedious, and it is, it’s also way better than going through a new bespoke process for each potential customer. Instead, you can get your SOC 2 certification and proudly display that on your site and in RFI/RFPs to prove that you’re a trustworthy vendor. SOC 2 tells potential customers that you probably won’t, accidentally or intentionally, give hackers an open door into their networks, or into their customers’ networks. The AICPA created SOC 2 in 2011, and has iterated on it a few times. After the last iteration in 2017-2018, SOC 2 became the de facto industry standard. SOC 2 is now table stakes. By the time a company hits 20-30 people, they’ve likely gotten their SOC 2 compliance. Many get it when the company is just the co-founders and a few laptops. That’s because not only do large customers require that their vendors have SOC 2, but that their vendors’ vendors have SOC 2. It’s SOC 2 all the way down. Getting SOC 2 certified requires companies to do a bunch of things. According to WorkOS, those include: * Quality oversight of the company as a whole (performance reviews, independent voices, background checks, etc.)* The SDLC (software development lifecycle) is transparent, trackable, and controlled (issue tracking, unit testing, version control, etc.)* Your application and underlying infrastructure are secure and monitored (encryption, logging, APM, vulnerability scans, etc.)* You’ve implemented access controls for internal services and SaaS (de-provisioning accounts, 2FA, malware detection, etc.)A lot of these things are best practices anyway; SOC 2 just makes you prove and document everything. First, startups typically get SOC 2 Type I, which is just a snapshot in time, and then get SOC 2 Type II, which is audited over 3-12 months, to satisfy customers’ compliance requirements. Plus, they need to get recertified annually, all signed off on by an auditor. And that’s just SOC 2. There’s also ISO 27001, published jointly by the International Organization for Standardisation and the International Electrotechnical Commission, which was recently revised in 2013. ISO 27001 has ~75-85% overlap with SOC 2, but adds on a few information security-specific requirements. If you deal with credit cards, there’s Payment Card Industry (PCI) Standards. Healthcare has the Health Insurance Portability and Accountability Act (HIPAA). The Federal government has the Federal Risk and Authorization Management Program (FedRAMP), which is so onerous -- it takes about two years and $1 million to complete -- that less than 300 vendors are FedRAMP certified. The Department of Defense recently introduced the Cybersecurity Maturity Model Certification (CMMC), its attempt to make it easier and more accessible to sell software to federal agencies. The average CMMC audit costs $10-30k instead of $1 million. All of that sounds like a ton of work, and it is. It all sounds bad and overly onerous, but it’s not. Standards actually level the playing field and make it possible for companies to sell into enterprises and other startups more quickly and cheaply than ever before. The Value of Standards in Consumerization of EnterpriseSince the last iteration of SOC 2, it’s become the de facto security compliance certification. That doesn’t mean that all of a sudden, companies who never required any security compliance now require SOC 2 from their vendors; it means that all of the companies that had created their own compliance requirements began accepting SOC 2 instead. SOC 2 is a lot like the Common App in college admissions: do it once, use it in many places, sometimes with a little supplemental work required for specific schools / enterprises. That makes it dramatically easier for small companies to sell into bigger ones. And increasingly, bigger ones are open to that. The “consumerization of the enterprise” refers to the idea that companies are full of people who use smooth, well-designed software in their personal lives, and have come to expect the same at work. In Bill-A-Bear, I highlighted a list of the work software people on Twitter told me they loved the most. With the exception of Excel (which is a whole ‘nother story), all of peoples’ favorites are modern, smooth, consumer-like. No one wants to use shitty software all day, and new software is often easier-to-use than old software (people typically build new software startups to replace old, shitty software), but at the same time, enterprises and startups alike need to maintain their procurement standards. If startups want to sell into enterprises earlier, it’s on them to be enterprise-ready sooner.SOC 2 makes that possible more cheaply and easily than was previously possible (as do ISO 27001, CMMC, and the rest). That means that startups are able to land bigger clients, earlier. Much Substack ink has been spilled over high early-stage startup valuations, but some of the valuation increase can be explained by the fact that companies are landing bigger clients at a stage at which they previously would have been limited to selling into other startups. That said, getting compliant is still a painful process. SOC 2 and ISO 27001 mean that you only need to go through one painful process per year, but it can still take tens of thousands of dollars and many months of manual back-and-forth with auditors to get certified. That’s where Secureframe comes in. What Secureframe DoesSecureframe helps companies get compliant in weeks rather than months, typically saving customers an average of 50% on their audit costs (which can traditionally run over $50k). Founded by Shrav Mehta and Natasja Nielsen in 2020, Secureframe integrates with over 40 of the most commonly used products companies use to automatically understand their security posture and automate an increasing amount of the security compliance certification process. Maintaining a SOC 2 gets more complex over time. As Secureframe highlights, “Every new contractor, employee, customer, and vendor requires more security controls.” Growth is great, but it makes compliance messier. That’s why Secureframe is focused on automating as much of the process as possible. * If companies plug in their HR system like Gusto or Justworks, Secureframe knows when a new employee joins. * By connecting to a company’s device management software, like JAMF, Fleetsmith or AirWatch, Secureframe can ensure that devices are secure and accounts are properly controlled. * Integrating with cloud providers like AWS, Google Cloud, or Azure gives Secureframe insight into the security of a company’s infrastructure. Instead of asking employees to regularly screenshot their workflows and emailing them to auditors every week, Secureframe does as much as possible automatically, and provides auditors with detailed reports. There’s still a lot of manual work in the process, which may hamper Secureframe’s ability to scale efficiently -- some because Secureframe needs to hire more engineers and build more integrations, and some because parts of the process are structurally manual. For example, you can’t pull board meeting minutes with a direct integration, but Secureframe lets customers easily upload them instead. The team is hiring aggressively to automate the process as much as possible, and already features three times as many integrations as competitors like Vanta.The approach seems to be working. Secureframe has hundreds of clients and has grown nearly 20x in the past year. Just a couple of weeks ago, it announced an $18 million Series A, led by Kleiner Perkins with participation from Base10 Partners, Gradient Ventures, Soma Capital, and others, just five months after its $4.5 million Seed round co-led by Gradient and Base10, with participation from Soma Capital, BoxGroup, Village Global, Soma Capital, Liquid2, Chapter One, Worklife Ventures, and Backend Capital.Secureframe’s business model is straightforward: it’s a SaaS business, with pricing based on company size and the certifications a company wants to get. Once it wins a customer, it’s incredibly sticky. Setting up all of those integrations takes upfront work, and as long as Secureframe makes the SOC 2 and ISO 27001 processes faster and smoother, companies are unlikely to churn. Quite the opposite, actually: Secureframe should see strong Net Dollar Retention, meaning that each customer spends more every year, for a few reasons: * Companies need to recertify every year. In order to continue to sell to large companies, they need to remain compliant, which means they need Secureframe. * As companies grow, they pay Secureframe more money. * Secureframe will add new standards like PCI, HIPAA, and CMMC, which have overlapping requirements with SOC 2 and ISO 27001. It makes sense to use the same company for all of them. More security compliance certifications means more potential customers for Secureframe’s customers. One of their investors told me that “the thesis around Secureframe has revolved around them ‘enabling a new generation of enterprise software companies.’" Clients like Hasura, Instabase, and Fabric rely on Secureframe to get SOC 2 and ISO 27001 compliant earlier so that they can begin selling to large companies, and to maintain their certifications over time. But Secureframe isn’t alone in the security compliance space. How it plans to win is a lesson for other companies in competitive, non-winner-take-all markets.How to Win a Nascent, Massive, Competitive MarketThe security compliance market is massive. Just 3-4 years into its life as the gold standard, about 40,000 companies get SOC 2 alone every year, at an average cost of $25,000-$50,000. That’s $1-2 billion per year, not counting ISO 27001, PCI, HIPAA, FedRAMP, CMMC, or any number of other security compliance certifications. Secureframe and its competitors believe that as they bring down the cost and effort required to get certified, they’ll expand the market. Secureframe isn’t the only company that noticed. Companies like Vanta, Laika, and Tugboat Logic also streamline security compliance. Plus, security compliance software is incredibly sticky, not just for Secureframe, but for its competitors. As long as it works as advertised, customers will stick around and grow. That means there’s urgency to win customers early.What do you do to compete and win in this kind of market? First, you build a differentiated product with a superior customer experience. This is the most important part. Secureframe is a relatively new entrant, but it’s the fastest-growing and best-funded for a reason. Secureframe stands out from competitors on a few key dimensions: * In-House Compliance. Head of Compliance was the company’s first hire, and Secureframe has one of the industry's only in-house compliance teams to make sure that customers aren't just checking the box; they're actually secure and implementing the best security practices. There's no worse customer experience than being hacked after you paid to be safe.* End-to-End Support. Head of Customer Success was one of the first five hires. Secureframe works with clients all the way through certification, even once they’ve handed off the process to auditors, and is committed to a smooth customer experience in a space where “smooth” isn’t a thing. * Most Integrations. Secureframe’s industry-leading 40+ integrations (3x as many as Vanta) means less manual work for customers, faster turnaround times, and ongoing systems monitoring.* Agentless. Secureframe uses an Agentless approach to get access to customers’ data. Some competitors have customers install agents on their devices, which can be time consuming, difficult to set up, and less secure. You want a security compliance company that’s the most… secure. Second, you grow really fast and acquire as many customers as possible. This is why Secureframe is sponsoring Not Boring today. It’s also why I keep hearing about SOC 2 on my favorite podcasts. When I hit play on Invest Like the Best, Patrick is there singing Vanta’s praises, and when I switch over to 20 Minute VC, Harry’s doing the same for Secureframe. It’s a good old fashioned land grab. Agreement on new standards unleashed a new market, and the rush is on to win customers. Every customer that Secureframe wins is a customer that a competitor can’t. (If you’re reading this, you’re on Team Secureframe. That’s the rule. Go sign up!)Secureframe has raised more money than any of its competitors, despite being a newer entrant. Capital isn’t a moat in and of itself, but it can certainly help in a space in which speed is key. Shrav told me about a few other really clever things that Secureframe does to acquire customers, but he swore me to secrecy (for now) because he doesn’t want the competition to pick up his tricks. Third, you build in switching costs so that customers don’t leave once you’ve acquired them. Secureframe does this in two ways:* Integrations. Integrations create a better customer experience; they also dig moats. Once a company integrates all of their tools, and everything’s running smoothly, they’re less likely to leave and go do it again with a competitor. Soon, Secureframe will open up an integration marketplace so that the companies coming to them today saying, “We want to build an integration with Tool X” can do it, and open up the integration to other Secureframe customers. This requires being the biggest (see: point 2, grow really fast) so that it’s worth it for companies to build integrations on your platform. If they pull it off, it will give Secureframe platform network effects, like Windows or the App Store. * Vendor Management. One of the challenges with security compliance is that you don’t just need to prove that you’re secure, but that the vendors you use are secure too. It’s all about minimizing weak links. Since a 100 person company uses 50 vendors on average, this process can be a huge headache. Secureframe works with companies to find and upload all of their vendors’ security compliance certifications, and is building the largest database of vendor security information. In the future, if one company uses AWS and uploads their compliance certifications, the next company that comes in can just pull that off the shelf, saving time and money.  Next, you add more compliance certifications. Secureframe is using its fresh funding to grow beyond SOC 2 and ISO 27001 into PCI, HIPAA, FedRAMP, HITRUST, CMMC and beyond. More certifications can be a deciding factor when comparing Secureframe versus its competitors upfront, and can be a reason for companies to switch from one platform to another despite high switching costs. Since it’s mainly a software business with most costs going to engineering, sales, and customer success, Secureframe has massive margins. It can spend to acquire customers, and spend on R&D to make sure that it has the products it needs to keep them happy and grow their business. Secureframe isn’t constrained by capital, it’s constrained by its ability to hire and execute. And it doesn’t need to win the whole market. With market dynamics like these, competition can actually be a good thing. The industry only coalesced around SOC 2 as the standard a few years ago, and the competitors are sharing the cost and effort of getting the word out. I was more receptive to Secureframe after hearing a Vanta ad, and likewise, potential customers might be more receptive to Vanta after hearing a Secureframe ad (or reading this piece) (but seriously, use Secureframe).Ultimately, though, what it’s really about is making companies, and the internet broadly, more secure. The biggest risk to any competitor, including Secureframe, is that one of its customers gets breached. It’s a reputational landmine, and given the interconnectedness of the system, a potential security threat to many customers. That’s why Secureframe is building more than a “check the box” product. It’s great that SOC 2 lets companies sell to more customers, but the real goal is to actually secure them. This is How They Tell Me the World SurvivesSecureframe’s mission is to secure the internet and help businesses trust their vendors. If Secureframe is maximally successful, there won’t be another NotPetya. Today, that means making it as easy as possible for customers to get their SOC 2 and ISO 27001 certifications. Plus, its compliance team already provides recommendations on best practices that go beyond certifications. Tomorrow, it’s adding more certifications. But certifications meet the basic requirements, and Secureframe thinks that there’s so much more companies can do to secure themselves and their customers. As Secureframe reviews more vendors and assesses their risk, it can help all its customers better manage their own risk. It can recommend vendors based not just on their certifications, but on what Secureframe knows about their security practices more broadly. And as each new vendor comes on, Secureframe can automate and speed up the process for everyone else. Beyond that, Secureframe is working towards building its own standard, drawing best practices from existing standards and from the vendors and customers that work with Secureframe. Combining its own standard with the world’s largest database would give Secureframe the holy grail: the ability to set a higher bar that actually makes the internet secure and make the bar easier, faster, and cheaper to clear so that companies can focus on what they do best.SOC 2 compliance… not as boring as it sounds, huh? If you want to learn more about getting compliant and securing your business, schedule a call with the Secureframe team. Don’t be the weakest link. Goodbye. Thanks to Shrav for telling me the Secureframe story, Anant at Soma for the great insights, and Dan and Puja for editing.How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading and see you on Monday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 997 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 41,668 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify or Apple PodcastsToday’s Not Boring is brought to you by… MasterworksLast week, you might have heard that the art market went—as they say in b-school—absolutely bonkers, setting a nice new record of $69 million for a nifty digital artwork. The takeaway? Art investing has hit the mainstream. But perhaps putting your money in physical art by the blue-chips makes more sense for you. Me, I own 5 paintings on Masterworks 👨‍🎨Contemporary art has outperformed the S&P by 172% from 2000–2020, according to data from Masterworks. They were the first platform to let you invest in paintings by the likes of Basquiat, Kaws, and Haring. But what about returns? They’ve got that too: They sold their first Banksy work for a cool 32% annualized return to investors.With results like that, it’s no wonder there are over 17,000 people on the waitlist. To skip the line, just use my special link, tell them the Packy sent you, and you’ll be good to go.P.S. Here's some important legal info from MasterworksHi friends 👋 ,Happy Monday! Today’s essay is one that I’ve been waiting a long time to write: WeWork is going public. I’m bringing in the big guns for this one: Dror Poleg. Dror literally wrote the book on the future of real estate -- Rethinking Real Estate. Dror’s writing combines history and future, and is brilliant, nuanced, and balanced, words that don’t often describe WeWork coverage. We’ve waited years for this. We can’t wait any longer.Let’s get to it. We Good Now?by Dror Poleg and Packy McCormickIf I told you about a company doing $3 billion in revenue, leading a multi-hundred-billion-dollar market, that offers the easiest way for Fortune 500 companies to do flexible work, counts Amazon, Microsoft, Walmart, Goldman Sachs, Spotify, Netflix, IBM, and Airbnb as customers, and is going public at a $9 billion enterprise value (EV), would you buy it? What if I told you it’s burning $3.2 billion per year, has historically failed to meet nearly every target it set, and has to do construction every time it wants to increase its inventory? And that it had to pull a planned 2019 IPO due to investor disgust at the founder and CEO’s antics. Would you buy it then? This is the WeWork enigma. It has done some truly mind-blowingly impressive things while burning mountains of Masa’s money. If it weren’t for some huge unforced errors, it would have gone public at a valuation near $50 billion way back in 2019, before COVID supersized remote work valuations. It rode a positive narrative to the moon, and came crashing down when the narrative flipped. We all know We. The company’s story was everywhere in the fall of 2019. WeWork’s failed IPO was a car crash of epic proportions, and we all rubber necked. As someone who worked for a WeWork competitor, Breather, I watched it all with particular schadenfreude (this is Packy, speaking for myself). But since its public failure, it installed new management, flew under the radar, and refocused on its core business. It’s less exciting, but more solid. Its business model is neither inherently terrible nor is it as high-margin, high-growth as a pure software business. When WeWork was private, figuring out WeWork was SoftBank’s problem. We could afford to laugh at the company’s story without thinking too much about the actual business. But now that BowX SPAC’d it at a seemingly reasonable $9 billion valuation on $3 billion in revenue (in this economy?!), it’s worth taking a closer look. Today, we’ll do that: * The Royal We. Adam Neumann was narcissistic and brash… exactly what was needed to shake up office real estate. * WeStory. From 3,000 sq ft in Soho to millions across the world, fueled by an epic hype flywheel.* From WeWork to We. Neumann pushed the company outside of office and into a little bit of everything. * IPOh No! WeWork’s attempted 2019 IPO failed spectacularly thanks to unforced errors, and the company brought in new management, refocused, and trimmed down.* WeSPAC. On Friday,Vivek Ranadivé’s BowX SPAC announced that it’s taking WeWork public at a $9 billion valuation.* Side Note: Masa is a Genius Again. Masa is on a tear. WeWork breaking even would be the icing on his comeback cake. * WeWork by the Numbers. The refocused WeWork is a straightforward business. * The WeWork Bear Case. This time, maybe it’s the market’s fault. * The WeWork Bull Case. WeWork survived, erased its mistakes, and is perfectly positioned to capture value in a more flexible world.* Back to the Future. You know who would have been a perfect CEO for this market?Look, no one expected us to be publicly defending Adam Neumann less than we, but here we are.The Royal WeMaybe Adam Neumann really was the savior Adam Neumann thought Adam Neumann was. For the first eight years of WeWork’s life, the We Story was the Adam Neumann story. The two were inextricably linked. He was the Royal We.  The WeWork co-founder and ex-CEO was a narcissistic cult leader who made off with billions and left employees and investors holding the bag. * He regularly called his direct reports’ direct reports into late-night meetings to publicly embarrass their bosses. * He pushed his co-founder, Miguel McKelvey, aside to give his wife Rebekah more power. * He personally trademarked “We” and sold it back to his own company for $6 million. * He established what is quite possibly the dumbest fucking financial metric in financial metric history: Community Adjusted EBITDA. * He set delusional goals for himself: “becoming leader of the world, living forever, amassing more than $1 trillion in wealth.”But Adam Neumann was also the perfect person to launch WeWork, shake up the sleepy commercial real estate industry, and change the way that people rent office space.Commercial real estate isn’t like software, a fact that critics pointed out over and over again as WeWork’s valuation soared to $47 billion. In the world of bits, a polite, meek coder can spend months locked away in a dark room, emerge with a brilliant piece of software, put it up for sale on a website that anyone can access, and let the market decide whether what they built is worth paying for. It’s pretty close to a meritocracy. Commercial real estate is an oligopoly. A handful of families, companies, and Real Estate Investment Trusts (REITs) own the vast majority of the desirable real estate in the world’s major metropolises. They own buildings and collect rent checks. Life is pretty good if you own the right piece of real estate, so landlords are not known for being particularly forward thinking or open to change. Polite and meek don’t work in real estate.Adam Neumann almost sunk his company, but he was also the right person, in the right place, at the right time to get it off the ground in the first place. With the benefit of hindsight, it’s easy to say that WeWork should have done all of the good stuff and none of the bad stuff. They should have done revenue share deals with landlords instead of taking on lease obligations. They shouldn’t have thrown big parties. Adam should have been more straightforward and honest. But you can’t have your cake and eat it too. A quieter, more conservative WeWork wouldn’t have had the scale, money, shine, or leverage to make a dent in commercial real estate. WeWork was the disruptor. Like Napster, it broke some rules. Normally, the disruptor makes a lot of noise, spends a lot of money, and fails. Someone else swoops into a shaken industry, works with landlords, and builds a solid business. But in this story, Adam met Masa. SoftBank’s billions both choked WeWork and kept it alive. Adam got the boot, and rightly so. His company, under new management, lives to fight another day. What’s unique about this story is that WeWork is both Napster and Spotify. It’s disruptor and partner, destroyer and builder. Somehow, eleven years into the WeWork journey, after a failed IPO attempt and turbulent ups and downs that would make Kingda Ka jealous, WeWork is going public. It’s in the best position to capture the value created by the destruction it wrought.But it all started with 3,000 square feet in Soho. WeStory Just as mobile boomed, the financial markets crashed, and people began working over WiFi on laptops, Neumann and McKelvey launched GreenDesk, an environmentally-conscious co-working space, in Brooklyn’s Dumbo neighborhood in 2008. They quickly realized that green wasn’t the draw, community was, so they sold GreenDesk and launched WeWork in 2010 with 3,000 square feet at 154 Grand Street in Soho. Coincidentally, Packy got coffee at Gasoline Alley in that building every day when Breather’s office was down the street.WeWork wasn’t the first coworking space -- that honor goes to the aptly-named Coworking Space, launched in 2005 in SF -- but it was the loudest and most ambitious. It took Neumann’s special blend of confidence, salesmanship, capital-raising ability, and casual relationship with the truth to force an otherwise unmovable industry to fundamentally change. When WeWork started, there were a few thousand square feet of coworking space in the world, but the combustible cocktail of Neumann and venture capital changed that quickly. WeWork raised a humble $1 million Seed in October 2011 and another $6.9 million that December, and in April 2012, Benchmark came in to lead a $17 million Series A. It quietly raised another $190 million in 2013, before lifting the veil and announcing a massive $355 million Series D at a nearly $5 billion valuation in October 2014 led by major institutional investors Goldman Sachs, Wellington Management, and T. Rowe Price. Those investors’ involvement sent a clear signal that WeWork wanted to go public, and that the public markets were waiting with open arms. At the time, institutional investors rarely backed private companies. Instead, T. Rowe, Goldman, and Wellington and other large institutions received allocations in the Initial Public Offering (IPO), and their purchases supported companies’ ability to smoothly enter the public markets. If those IPO experts were in, the logic went, they must believe that WeWork had a good shot as a public company. In reality, what it meant is that Adam Neumann’s skills as a salesman extended beyond just local landlords and VCs. He was able to convince some of the world’s most buttoned-up investors that WeWork wasn’t just any real estate company. That, in turn, convinced landlords to lease WeWork more space, which meant more revenue, which got investors excited, which got landlords excited, and so on. Neumann built a Hype Flywheel so strong that it sucked in people typically immune to hype, including Jamie Dimon and WeWork’s board.In just four years, WeWork transformed coworking from a quaint, communal way to work into something on every landlord’s mind. At the time of the Series D announcement, just four years into its life, WeWork was generating $150 million in revenue at 30% operating margins, and had accumulated over 1.5 million square feet of leases. Over the next three years, it would add roughly 6.5 million square feet in the US alone, while going international and launching subsidiaries in China and Japan. Source: VoxToday, about 4% of the 3.5 billion square feet of office space in the country are flexible. By 2030, that number will be several times higher. The trend towards more flexibility in office rental is inevitable: flexible office reduces friction, lowers upfront costs, and shortens commitment lengths. It lets office experts do what they do best, and lets companies focus on the things that they do best. It does to office what SaaS and the cloud did to software, and gives employees a say in where they work. It transforms office expectations from B2B to consumer. That transformation would not have happened nearly as quickly without Adam Neumann. If that were the whole story -- WeWork uses capital, aggression, and force of personality to transform massive, sleepy industry -- the company would have gone public years ago, and Neumann would be a venerated public company CEO. But there were clues in the deck the company used to raise that $355 million Series D that it didn’t want to just rent desks. It wanted to change the way WeLive and “elevate the world’s consciousness.” And in 2017, Neumann found his soulmate, and with him, the pools of money he’d need to rule the world. From WeWork to We When he met McKelvey, Adam Neumann had run two failed companies: one that made a collapsible heel for women’s shoes, another that made baby clothing with knee pads. Both seem like Shark Tank pitches that would have gotten five “I’m outs.” In half a decade, though, Neumann had built the largest coworking company in the world, thrown the traditional five-to-ten-year lease model into question, and raised over $1 billion dollars. His company controlled millions of square feet of office. Given that meteoric rise, it’s understandable that Neumann thought he could do anything. It started with WeLive. If coworking worked, why couldn’t coliving? Theoretically, the same principles apply: lease space wholesale, chop it up and add shared amenities, and sell it retail. Plus, maybe if we all lived together, we could cure loneliness and make people happier. In the company’s Series D deck, it said, “The demand for Space as a Service extends to residential real estate, making WeLive a natural extension of the WeWork concept, community, and brand.”Series D investors bought it, as did investors in the company’s $433 million May 2015 Series E and its $690 million November 2016 Series F. But no one bought Neumann’s vision to be more than just office space more than his Series G lead: Softbank’s Masa Son. When Adam met Masa in December 2016, the SoftBank CEO showed up two hours late, told Neumann he had 12 minutes for a tour, and suggested they continue the conversation in the car. There, after knowing each other for 28 minutes, Son famously whipped out an iPad, drew up terms for a $4.4 billion investment, and asked Neumann to sign. He did. Masa, according to Neumann, appreciated that he was crazy, but thought that he needed to get crazier. Oh, he did.In the two and a half years between closing that investment and filing to go public, in addition to accelerating the expansion of its core business, WeWork: * Invested in a wave pool company, WaveGarden* Opened its first gym/spa, Rise by We, in New York* Launched a grade school for young entrepreneurs, WeGrow, under the leadership of Adam’s wife, Rebekah * Acquired coding boot camp Flatiron School* Acquired Meetup for $200 million * Acquired MissionU, a one-year vocational bootcamp, under the WeGrow brand* Acquired Teem, a facility management software company, for $100 million* Raised another $3 billion from SoftBank* Legally changes its name to The We Company, as part of Neumann’s expanded vision "to encompass all aspects of people's lives, in both physical and digital worlds"* Updated the company’s mission to “elevate the world’s consciousness.”* Nearly sold over half the company to SoftBank for $16 billion before SoftBank pulled out and invested $2 billion at a $47 billion valuation * Acquired office management platform Managed by Q for $249 million * Acquired Islands, Prolific, and Waltz in one week * Acquired workspace management software Space IQ * Acquired Spacious, which built ground-level drop-in workspacesBy the time it filed its S-1 to go public on August 14, 2019, Neumann’s company had transformed from WeWork, a coworking company, to The We Company, which did a little bit of everything. That’s when things started to fall apart. IPOh No! What is inside all of us but greater than each of us? According to The We Company’s IPO filings, the answer is “the energy of We.” The company dedicated its first formal communication with public market investors to... itself. Investors were already concerned that WeWork was, at worse, a cult or, at best, a company run with little consideration for objective reality. In the months leading to the IPO, the narrative around the company turned dark. A series of bombshell reports by WSJ’s Eliot Brown and Maureen Farrell raised multiple red flags. These reports included:* Adam Neumann cashing out $700 million of his shares in the company, using some of that money to buy real estate, and leasing some of that real estate back to the company;* Allegations about gender and age discriminations;* Concerns about management’s lack of focus amid mounting losses;  * SoftBank scrapping plans to acquire a majority stake in WeWork for $16 billion; and* A discrepancy between the valuation Softbank used for its last direct investment in WeWork ($47 billion) and the valuation the company used to buy shares from existing WeWork employees and shareholders ($23 billion).The S-1 provided an opportunity to cut through the noise and focus everyone’s attention on the company’s actual business. The We Company passed on the opportunity. The S-1 highlighted the company’s quirks, confirmed media reports about lack of executive judgment, and made it difficult for anyone serious to continue to defend We and its valuation. Less than three weeks after the S-1 was published, the Journal reported that The We Company was considering slashing its target valuation by “more than half.” The company was facing “widespread skepticism over its business model and corporate governance.” Public markets seemed to be losing their appetite for money-losing unicorns. Uber and Lyft, which went public earlier that year, were trading below their IPO price. But those other companies at least managed to get some people excited. As one analyst put it, “there were Uber bulls, there were Lyft bulls,” but he heard no bullish views at all about the flexible office giant. “WeWork,” he said, “is exhausting people’s cynicism.”But cutting the valuation was no longer enough. Investors lost confidence in the company and its CEO. On September 17, 2019, The We Company decided to postpone the IPO indefinitely. A week later, Adam Neumann stepped down as CEO and ceded his control of the company. But he managed to let the door hit the company on his way out. The ex-CEO was set to receive up to $1.7B in share buyouts, consulting fees, and a structured loan. We’s failed IPO was the most spectacular collapse in business history. Within weeks, it went from being one of the world’s hottest companies to the verge of shutting down completely. Many say the collapse was inevitable. They see the company’s reliance on long leases with suppliers (landlords) and short commitments from customers as a recipe for guaranteed disaster. Instead, WeWork should have either bought the buildings or signed revenue-sharing agreements with landlords instead of committing to pay rent.These explanations make sense, but do not explain WeWork’s collapse. Most companies on earth sign long leases and rely on short-term commitments from customers. This includes retailers, restaurants, tech companies, and even some profitable coworking and hotel operators. It would have been great for WeWork to own the buildings or partner with landlords, but I don’t think Neumann could have finessed an average mortgage broker as well as he finessed some of the world’s leading venture investors. And convincing landlords to share the risk when they can simply collect rent is a tall order: it’s possible, but it would have taken ages, leaving WeWork a small and unknown operator among hundreds of others. Yes, WeWork could have signed better leases, it could have been more discerning in its expansion decisions, and yes, it could have occasionally partnered with landlords and investors to operate or acquire buildings without signing any leases. There was nothing inevitable in its collapse. What ultimately killed The We Company’s IPO was the shift in narrative. A series of unforcederrors by Neumann made him look like a cynical, greedy nepotist who did not believe in his own company — selling shares ahead of the IPO, leasing his own buildings to the company, appointing his wife as Co-Founder and various other relatives and buddies as executives, and charging his own company millions for the right to use the name that he chose for that same company. Once all these stories came out, WeWork could not have taken any company public, let alone one that requires some selling. In the weeks following the failed IPO, The We Company did everything it should have done before the IPO. It started to renegotiate leases across the world, realigning its growth around proven locations. It shut down or spun off non-core business units and acquisitions, including WeGrow, Managed by Q, and Meetup. It started shedding employees. And it appointed a CEO that could not lead a cult even if he wanted to — Sandeep Mathrani, an experienced real estate operator who is respected by many of the world’s largest landlords and institutional investors. Mathrani’s appointment was announced on February 2, 2020. That same day, the 9th Covid-19 patient was diagnosed in the United States. A month later, some of the world’s largest tech companies advised most of their employees not to come to the office. Within a few more weeks, most developed countries were under lockdown and office buildings were deserted. A global pandemic was a good starting point for the new CEO. He capitalized on landlord distress to renegotiate leases and walk away from deals that had not been finalized. He sold a majority stake in WeWork’s China joint-venture to investors who were happy to expand in one of the few countries where people were already back in offices. He avoided a lot of the flack for mass layoffs thanks to similar layoffs happening across the economy — and the cushion provided by the U.S. government’s expanded unemployment benefits and stimulus checks. He focused the company’s offering around larger, corporate customers. And he even changed the company’s name back to WeWork, erasing Neumann’s all-encompassing We Company. Meanwhile, WeWork’s shareholders poured more money into the company, showing their commitment to its success. And they renegotiated Mr. Neumann’s golden parachute, saving some money for the actual business and indicating to the public that lessons have been learned.Ultimately, the pandemic stress tested WeWork’s business and set it up to become a public company. WeSPACTo recap, WeWork burned $15 billion dollars, pulled an IPO, faced a pandemic that prevented people from going to the office, and lived to tell the tale. On Friday, BowX Acquisition Corp, a SPAC led by “Mr. Realtime” himself, Sacramento Kings owner Vivek Ranadivé, announced that it’s merging with WeWork to take it public at a $9 billion enterprise value. The deal, which has been rumored for a while (we discussed it on a podcast when the rumors began swirling in January), actually makes a ton of sense. WeWork is the proto-SPAC. Thus far, the SPAC structure has mostly been used by companies like WeWork: companies with big potential, but some hair on them. For WeWork, the hair is its bumpy history combined with the fact that it lost $3.2 billion last year. (Don’t worry, like most SPACs, it predicts that it will double revenue and turn very profitable by 2024.)In exchange for dealing with that hair, SPAC sponsors (the people who launch, and lend their credibility to, the SPAC) receive a little extra ownership in the company, in the form of warrants. They also stand to benefit if the price of their shares rise over $10 after the deal closes. To do that (recent market craziness aside), and for the investors who bought the SPAC’s shares to make money, the two sides need to agree on a price that has some room to run. In WeWork’s case, BowX and WeWork agreed to an EV of $8.966 billion. Since the price is negotiated and not dictated by the market, the big question for SPACs is whether the market agrees with the price. If they don’t, the SPAC will trade down and shareholders can vote down the deal. If it does, the shares will trade higher than $10. This year, 74% of closed SPACs have traded up. That question is particularly fascinating in WeWork’s case because of its private market funding history. Most startups have different investors lead, and therefore price, each round. But SoftBank is the only fund that has priced WeWork since 2017. With the SPAC, it once again negotiated terms with just one investor. But now, the market can finally weigh in.So far, it’s weighing in in favor of the deal. Upon announcement, the shares traded up to $11.71 before closing at $11.21 during after hours trading on Friday. That means the market is currently valuing WeWork at just over $10 billion. That’s a massive drop from where WeWork expected to go public just two years ago, but it’s also a huge relief for investors who pulled the company from the brink of bankruptcy. No investor had more skin in the game, or is breathing a bigger sigh of relief, than Masa. Side Note: Masa is a Genius Again We just need to pause here for a second and marvel at WeWork sugar daddy and SoftBank CEO Masayoshi Son. As of last summer, investors had written him off as a cautionary tale of what goes wrong when one man has too much hubris and too much money (sound familiar?). Dror has been a Masa believer all along. In September, Packy wrote Masa Madness. He set out to rip Masa and SoftBank apart for big, losing bets like WeWork and YOLO options trades that moved the market, but came away begrudgingly impressed. Since then, Masa has been on a heater. * In September, SoftBank sold chip maker ARM, which it acquired for $31 billion in 2016, to NVIDIA for $40 billion. Not spectacular, but a win. * When DoorDash went public in December, SoftBank turned its $680 million investment into an $11.9 billion payday. * Coupang outdid DoorDash when the Korean ecommerce giant went public in March and gave SoftBank a $33 billion profit on its $3 billion investment. It’s not all up and to the right -- SoftBank-back Greensill filed for bankruptcy the same week Coupang IPO’d, costing the Vision Fund $1.5 billion -- but even though the Vision Fund is a very, very big venture capital fund, it’s still a venture capital fund. It will be defined by some big losers and some massive winners. On paper, Coupang is the Vision Fund’s biggest winner and Alibaba is Masa’s best investment of all-time. But if WeWork somehow breaks even, after Masa very publicly poured $13.5 billion into the company and wrote it down to less than $2 billion, and after being relentlessly mocked for the investment, it will be the biggest moral victory of Masa’s career. SoftBank owns roughly half of WeWork after averaging down on the near-IPO-crash. On paper, Masa’s already more than doubled the value of his post-writedown WeWork holdings. If the company gets to a roughly $30 billion valuation, he makes his money back, and no one will ever question the Masa magic again.So will he? Let’s dive into WeWork’s numbers. WeWork by the NumbersNow that WeWork’s model has been stripped down to the core, it’s actually quite simple: The company enables companies to access workspaces of all shapes and sizes, anytime, anywhere. As Dror pointed out in his book:“The office of the future is not a single location; it is a network of spaces and services. The network must include spaces designed for the performance of specific tasks such as focused work, team brainstorming, client presentations, employee training, meetings, and more.Tenants don’t want “space”; they want a productivity solution to help them attract and retain the best individuals—and empower those individuals to produce their best work. The solution should include physical spaces, various services, and digital tools that enable companies and individuals to make the best use of their time. At its best, it should also empower individuals to lead healthy and meaningful lives.”WeWork is the only company that offers this “office of the future” on a global scale. Companies such as Industrious and The Office Group have a great product but do not have a global footprint. IWG has a global footprint, but it does not deliver a consistent experience, does not have a consumer brand, and it’s offering is not tied together by easy-to-use software. This does not mean WeWork is a “software company”; it means WeWork uses and sometimes develops software better than its competitors. The same could be said of Starbucks, Dominos Pizza, or CitizenM hotels.WeWork brought in $3.2 billion in revenue in 2020, which is the same as its revenue for 2019 and its projected revenue for 2021. The bulk of revenue ($2.9b) was generated by WeWork’s Core Leased business. These are spaces that WeWork leases from landlords and resells to its own members. There are now over a million WeWork workstations in 850 locations across 150 cities. These workstations are paid for by WeWork’s 450,000 “Physical Memberships,” payments for ongoing access to a specific location. Contrary to popular belief, most WeWork members are not freelancers and small startups who commit month-to-month. More than 50% of physical memberships are from companies with 500 or more employees, more than 50% of memberships are committed for 12 or more months, and only 10% or so of memberships are month-to-month. But while WeWork is more stable, it still loses plenty of money. Net income for 2020 was negative $3.2 billion, and adjusted EBITDA was negative $1.8 billion (excluding the China JV which has since been spun off). Generating $3.2 billion during the worst year in office history is quite a feat. WeWork’s losses are also impressive — in absolute terms, but also relative to the market as a whole. The company did better than most people expected. It was expected to get completely crushed during a Covid-like crisis, losing customers while still having to pay suppliers. And yet, many WeWork customers kept paying — even if reluctantly — and WeWork itself managed to use the crisis to reduce its own obligations to landlords. The company projects 6% revenue growth in 2021 and 47% in 2022 once the office market returns to a semblance of normalcy. By 2024, WeWork expects to bring in nearly $7 billion in revenue. These projections are ambitious, but they are not crazy. A company that sold $3.2 billion of office space in 2020 can sell twice as that four years later, assuming the office market still exists.The big question is whether WeWork could ever generate a profit. To do so, it will have to reduce and/or find new ways to finance the cost of launching and refurbishing its spaces. It sure is trying: WeWork significantly slowed down its expansion in 2020 which led to a 60% reduction in capital expenses. The company plans to cut CapEx by an additional 75% in 2021. Slowing down expansion will increase the share of mature locations in the company’s portfolio. If 2019 is any indication, mature locations in the company’s 20 best markets generate a “Building Margin” of 27%. Building Margin is revenue minus rent and other building expenses (but not amortization or depreciation). This non-GAAP metric is optimized to show WeWork’s business in the best possible light. And just like WeWork’s original S-1, the latest filings do not tell us how often WeWork would need to refurbish its locations and at what cost (most mature locations have been open for less than 36 months).Occupancy across WeWork’s portfolio was 47% in 2020, down from 72% in 2019. This, too, is not good in itself but better than expected at a time when most people are essentially barred from going to the office. The company says it can achieve EBITDA breakeven at 70% occupancy, and projects 75% occupancy in 2021, 90% in 2022, and 95% in 2024. These, too, are ambitious projections. But WeWork did consolidate its portfolio around better-performing locations, so it’s not unreasonable to expect higher occupancy once people return to the office. However, 95% sounds too high. Even if all goes well, the structural vacancy for a flexible office business is likely higher, especially if the company plans to keep growing (and it is). Still, we believe WeWork can turn a profit on its core business if it can avoid Neumann-era reckless expansion and spending. And WeWork’s other business lines can also help reduce vacancy and improve margins. These businesses include WeWork All Access, Marketplace, and Platform. The most interesting business line is WeWork All Access (WAA): A monthly subscription that provides on-demand access to (some of) WeWork’s global network of locations. Think of it as “Spotify for Office Space”: Users or their employers pay a fixed monthly fee of $299 and can access hundreds of shared locations. The service also allows them to book private workspaces and meeting rooms for additional fees. Beyond the benefits for customers, WeWork hopes that WAA would enable it to monetize underutilized spaces across its portfolio. WAA revenue is expected to have much higher margins as it relies on spaces that are already built and operated for the company’s core business. On-demand access is also a gateway to other WeWork services and allows companies to try out different locations and workstyles before committing to a long-term deal. WeWork All Access launched in 2020 so there is no historical revenue to look at. The company expects it to generate $90 million in revenue in its first year (2.8% of WeWork’s total). At $299/month, this boils down to 25,000 paying customers or less than 1% of WeWork’s existing member base.As Breather alumni, we can’t help but love the idea of on-demand office space. We also understand that this can hardly be a standalone business. But it could work well as a complement to WeWork’s existing business. This product is ahead of its time — most companies would still like their employees to be somewhere rather than anywhere. But we expect it to appeal to some of the world’s forward-thinking and fastest-growing companies. WeWork might have to tweak the offering and pricing, but this can become a significant business over time. WeWork’s other two business lines are Marketplace and WeWork Platform. Marketplace is a collection of value-added services the company offers its members, usually in partnership with other vendors. These include add-ons such as dedicated internet networks, HR and payroll services, and (soon) insurance. Marketplace generated $37 million in 2020 and is expected to reach $86 million in 2021 and $313 million in 2024. We cannot say that we understand the basis for these predictions, particularly the jump from 2020 to 2021. Marketplace is tangential as a source of revenue, but it has higher profit margins and it can contribute to lower customer churn. Still, the company has been touting the Marketplace opportunity for several years and so far it has failed to become a significant business.The last business line is Platform, where WeWork partners with landlords to design, fit out, and operate spaces that it does not lease. In these scenarios, WeWork signs a management or franchise agreement with landlords and gets a share of the revenue generated by the spaces it operates. Landlords, in turn, provide the space and cover most of the fit out costs.Platform sounds like an ideal strategy — exactly the type of strategy pundits thought WeWork should have pursued instead of signing leases. Indeed, it offers higher margins and lower risk. But so far, it has not proven to be a business that can grow quickly. WeWork generated $5 million in Platform revenue in 2019, $5 million in 2020, and is expecting it to reach $12 million and $159 in 2021 and 2024, respectively. These projections represent a big jump. They are ambitious but not unreasonable. Post-COVID, many landlords would be much more amenable to partnering with operators like WeWork to upgrade their inventory and tie into a network of additional spaces and services. But as we mention below, this would only work in WeWork’s favor if landlords are in just enough distress to make them partner, but not enough distress to crash the whole office market.The WeWork Bear Case In 2021, many of the original concerns about WeWork have been turned on their head:* Back then, most people were skeptical that most office tenants would be interested in more flexibility and services. Today, the bigger question is how many companies will use offices at all and whether additional services would be enough to lure back employees. * In 2019, the concern was that landlords were too complacent to partner with WeWork and strong enough to force it to pay high rents for years to come. In 2021, the bigger concern is that landlords have too much vacancy and are eager to partner with anyone who can help them attract tenants. * In 2019, the biggest risk was that capital markets would dry up and WeWork would not be able to continue to fund its losses. While this is still a concern, the bigger risk in 2021 is that capital markets would fund other companies that will expand aggressively and poach WeWork customers (and executives). * In 2019, the office market and even the stock market seemed to behave normally and the main concern was that WeWork itself would do something crazy. In 2021, it is the markets that are crazy and WeWork is the one that seems to have a reasonable plan and a real — if still fragile — business. In 2021, the two biggest risks for WeWork are market risks. In the office market, the company is walking a tightrope. It benefits from the relative distress among office landlords and from the uncertainty about the future among office tenants. But WeWork is not just an alternative to the office market; it is also a major player within it. If too many companies decide to give up a big chunk of their office spaces, WeWork would suffer. Landlords could also decide to convert big chunks of their portfolio into WeWork-like spaces without partnering with WeWork. In that scenario, WeWork would still have an unparalleled offering, but an abundance of supply could eat into its margins. In financial markets, WeWork is relying on investors to maintain their appetite for stocks and SPACs in general, and for companies trying to transform giant, heavy industries in particular. If the market collapses or even softens, WeWork is not likely to be among a handful of stocks that buck the trend. And if some SPACs are ensnared in scandals, all SPACs are likely to suffer. Ultimately, WeWork’s main weakness in 2021 is its inability to control the public narrative. The companies that do best in the current market are those that have charismatic CEOs, who make outrageous statements and can skip traditional middlemen and communicate directly with the public. We’re thinking Elon Musk, Richard Branson, Cathie Wood, Chamath Palihapitiya. It also brings to mind  what’s-his-name... that guy who wanted to be president of the universe. We’ll return to him later. But first, let’s consider the bull case for WeWork.The WeWork Bull CaseIf you had told me In the fall of 2019 that I’d ever utter the words, “Here’s my bull case for WeWork,” I would have thought my kid wished that I could only tell lies. But that was at a $47 billion valuation, with Adam Neumann at the helm. Today, leaner, saner, and more focused, with tailwinds at its back, WeWork is valued at $10 billion. Back then, Airbnb was worth 75% as much as WeWork; two years later, it’s worth 10x as much. The thing about being the disruptor is that it gives you a big head start if you can survive. Thanks to Masa, WeWork lives. It has tens of millions of square feet of hard-to-build inventory, office management and access technology that it burned billions to build, unparalleled design and construction muscle for the scale and speed at which it operates, an enviable client roster, and more accumulated assets. All of that cost a ton of money in the past, which doesn’t matter to new investors: they get it all for the low, low price of $9-10 billion. PLUS, COVID gave WeWork a magic eraser on some of its more permanent mistakes. It renegotiated or exited bad leases and right-sized the team. If you’re investing in WeWork today, you get to look forward, not back. How attractive “forward” looks depends on improvements in two areas. All the shenanigans aside, Adam’s WeWork consistently overpromised and underdelivered in two key areas: profitability projections and asset light expansion. In the SPAC presentation, Sandeep’s WeWork is making similar promises. Profitability Projections. WeWork expects to generate positive Adjusted EBITDA by Q4 this year, and projects 11% EBITDA margins for 2022. Easy to put in a deck, harder to do. The company has a long history of dramatically missing its profitability projections, as the Wall Street Journal pointed out in 2019: While Mathrani won’t control the narrative with his words like Neumann did, if WeWork actually hits its target and turns a small profit in Q4 this year, that action would speak louder than words. Capital Light Expansion. The holy grail in flexible real estate has always been capital light expansion, or signing revenue share deals with landlords instead of leases. Everybody says they’re going to be capital light -- WeWork said it, Knotel said it, Breather said it -- and we all genuinely wanted to, but it’s tough to pull off. If they were open to it at all, landlords really only wanted to do revenue shares on the spaces they had the hardest time leasing, aka the worst space in their portfolio. COVID may have actually made landlords more willing to play ball. WeWork has gotten out of some bad leases, and renegotiated others into management agreements in which the landlord pays WeWork for its branding, technology, marketing, and operations, and shares some of the upside when they bring in a tenant. WeWork highlights this “Platform” model in the SPAC deck:Landlords have office space that they want to offer flexibly, big companies want to access office space flexibly, and WeWork sits in the middle and takes a small cut. WeWork, to feed the narrative needed to hit its multiples, mentioned technology 92 times in its 2019 S-1; in the SPAC presentation, they highlight what technology might directly enable. The Platform approach, along with WeWork’s All Access pass, mean that the company could have the best of both worlds: a focus on its core product, office space, without tying its fate directly to the number of square feet it leases. That should be a boon for both margins and growth potential. If WeWork can prove that it can be profitable, and that it can continue to grow while lowering, but not eliminating, its dependence on leases (there are good deals to be had out there), it’s back at the head of the push to make office space more flexible and easy to access. If it can handle the basics, WeWork becomes a bet that office space, like everything else, will adapt to meet modern consumer expectations, and that the companies that remove friction will win. That’s a narrative the market can get behind. Opendoor, despite owning houses and missing its numbers due to the pandemic, is trading 120% above its acquisition price. Opendoor has more competition and a much smaller market share in the residential real estate market than WeWork does in office. If the company can be believed (and that’s always the question with WeWork), it will control one out of every 20 square feet of office real estate in the country by the end of the decade, plus hundreds of millions more around the globe. In the bull case, WeWork finally captures the value that it’s shaken loose. It benefits from a head-start it was lucky to survive, and flexes its muscle as the one company landlords and enterprise clients can trust to deliver well-designed flexibility anywhere in the world at an affordable price. It continues to do what it’s always done -- grow really quickly -- but it does so with a real focus on unit economics. For all the questionable things Adam Neumann did, his company, in under a decade, transformed office real estate from a stodgy B2B product into a user-centric consumer product. As work becomes more flexible, and employees have a say in where they work, WeWork is best positioned to capture new demand at scale. Maybe nothing speaks to WeWork’s upside better than Miami. WeWork’s initial weak performance in Miami was an open industry secret; now, WeWork is the official flexible office partner of the city to which half of the tech industry seems to be moving.  Viva WeWork. Back to the FutureWhen you’re living through something, it always feels unique. With the benefit of hindsight, though, things tend to follow predictable patterns. While the details may change from case to case, the Gartner Hype Cycle plays out over and over again with new products. While WeWork isn’t likely to elevate the world’s consciousness anytime soon, it can rent office space to companies big and small more flexibly, better designed, and at a lower price than would have been possible a decade ago. That’s pretty good. But the market today is largely fueled by narratives. Tesla is a story about a clean, sustainable future. Bitcoin is a story about money without middlemen. Heck, even Gamestop was a story about… something, told by a charismatic youngster with long hair and funny t-shirts. You know who would have been perfect for this market? Adam Neumann. In 2019, Neumann ran into a public market buzzsaw that was not friendly to the kind of antics that private market investors sometimes let companies get away with. Today though? Today, public market investors have been eating that shit up. Want proof? Look no further than Nikola and its $5.5 billion market cap despite no business beyond a video of a truck rolling down a hill. We’re not suggesting that Neumann take back the reins — over the long term, Mathrani’s approach of actually building a strong business will win out — but WeWork would be well-served to borrow some of its founders positive attributes. While Neumann was certainly off on the execution, he was right that people want to feel like they’re part of something bigger than themselves. Even an office space can make its occupants feel something, and even an office space company can make investors feel like they’re part of a movement. The future of office is definitely Not Boring. If WeWork needs help telling its story, you know where to find us: working from anywhere we want. Thanks to Dror for teaming up, and to Dan for editing!How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading and see you on Thursday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 404 newly Not Boring people who have joined us since Monday! If you aren’t subscribed, join 41,075 smart, curious folks by subscribing here:🎧 To get this memo straight in your ears: listen on Spotifyor Apple PodcastsToday’s Not Boring is brought to you by… Important, Not ImportantThe world is changing, and the issues we face are not only connected, but enormously complex. Climate, infectious disease, pollution. To stay smart and do our part, we need to seek out the most reputable news sources and identify the most effective ways to take action.That’s where Important, Not Important comes in.Important, Not Important is a free weekly newsletter that curates the most vital science news of the week, providing a generalist analysis you can use to better understand what’s happening, and data-driven Action Steps to tell you what the hell to do about it, all in 10 minutes or less.In short, Important, Not Important exists to make you feel less fucking terrified and more in control. Selfishly, I read it because today’s biggest challenges are also some of the best investment opportunities. Want to go deeper? They have a podcast, too, featuring conversations with some of the smartest humans on the planet. Hi friends 👋 , Today, On Deck is announcing that it’s raising a $20 million Series A led by Keith Rabois at Founders Fund with participation from Learn Capital, Chamath Palihapitiya, Slack Fund, Village Global, Eric Yuan, Fred Ehrsam, Allison Picken’s The New Normal Fund, Charles Hudson at Precursor Ventures, Adam D’Angelo, Jen Rubio, Elad Gill, Julia DeWahl, Henry Ward, Afton Vechery, Jules Walter, Eric Su, Julia Lipton, Scott Belsky, Anthony Pompliano, Bloomberg Beta, Dylan Field, Aarti Ramamurthy, and many, many more members of the On Deck community. I’m thrilled that Not Boring is able to invest alongside that crew to help support the creation of a modern educational institution for the future of work.I’m particularly excited about this one as an On Deck alum and someone who once tried (and failed) to do a fraction of what On Deck is doing.Let’s get to it.What’s On Deck for On Deck?A Not Boring Investment Memo: A $20 million Series A to Rebuild EducationWhen Not Boring Was Not Boring Club "Find ways of staying curious and learning new things, because it's super sad to think your last day of college is the last day you are taught something new." — Kevin Systrom, Founder, InstagramBefore Not Boring was a newsletter, it was Not Boring Club, an idea I had for a mashup of social club and continuing education, Soho House meets college extracurriculars for busy and ambitious people. My thesis was that people wanted a combination of lifelong learning and community that was more interactive than online education and much, much less expensive than an MBA, within the flow of their daily lives. I hated that the end of college meant the end of learning with friends.To validate the opportunity, I did what I do to think through something: write. In July 2019, I wrote Why There Isn’t a Dominant Aggregator in Online Education. The numbers backed up the need for new (continuing) education models: * Education is one of only two of the top 10 consumer spending categories (at 2% of total consumer spend) not owned by an Aggregator. * In 2015, the US government spent $649 billion on K-12 education, US colleges spent $559 billion to educate and support their students. That spend accounted for ~7% of US GDP. * In 2018, student loan debt passed $1.5 trillion, and is continuing to grow. * $107 billion is spent on online education globally (and that was before COVID).Good enough for me. When it was time to leave Breather and really go for it, I decided to do what an increasing number of founders do: apply to On Deck. I got in, and joined ODF2 in New York. I remember getting into the Slack, joining the #intros channel, and thinking that I was so far out of my depth. On Deck put together one of the most talented groups of people I’ve ever been a part of.Turns out, On Deck was a lot of the things I was looking to build: education, community, network, friendships, and career opportunities. I made friends and connections in On Deck that I still talk to daily.Then the pandemic hit. After briefly trying to bring the Not Boring Club online, I threw in the towel. On Deck, which had previously been entirely in-person, went the other way and stepped on the gas. It quickly moved online, welcomed global applicants, and scaled up at breakneck speed. Over the past year, On Deck has done something insanely hard: scaled community and education, online, profitably, while growing revenue 10x and building out a platform on top of which it can launch new products and integrate acquired ones such that each is a desirable standalone offering that connects to and strengthens at least one other part of the ecosystem. If that’s a lot in one sentence, that’s because On Deck has done a lot.While it’s so hard to avoid On Deck on Twitter that joining and/or working for On Deck has become a meme, I agree with #2 Not Boring referrer and VC Hunter Walk: On Deck is undercovered and underappreciated relative to the strength of its business model, the frenetic pace of its progress, and the potential size of its impact (these excellent posts by Jake Singer, Paul Millerd, and Nick DeWilde aside). That’s what we’re here for. EdTech and community have traditionally been hard categories to invest in. How did On Deck just raise $20 million from some of the world’s best venture investors? Let’s dig: * On Deck Investment Thesis.* Natively Integrated Education.* Platform and Team Constellation. * The On Deck Opportunity.On Deck is building more than a new kind of educational institution. It’s building a new way to build. On Deck Investment ThesisOn Deck is dramatically reimagining continuing education by breaking it into smaller atomic units, each of which feed off of each other to create a better customer experience, strong Lifetime Value, and deep moats that will protect its high price point and margins over time. The On Deck investment thesis is a Russian Doll: there’s what they’re building, what that looks like today, and how they’re building what they’re building. What they’re building: On Deck is building a modern, digitally native education platform at a fraction of the time and cost of traditional higher and continuing education. What that looks like today: On Deck is comprised of 17 different programs, which themselves are comprised of smaller cohorts, which all roll up into a broader On Deck ecosystem. Each new program feeds into the others, providing “supply” for a “demand” the team has identified in existing programs. For example, On Deck Angels supplies capital to On Deck Founders, while Founders reciprocate with access to exclusive dealflow.How They’re Building What They’re Building: The meta, how On Deck is building what it’s building, is the most unique and fascinating part. The team is building a platform on top of which it can plug in new programs. As I was thinking about what makes On Deck special, I saw this tweet:  On Deck doesn’t make programs, it makes organizations that make programs. And it does so incredibly quickly. On Deck launches new products and programs more quickly than pure software companies do, while managing all of the complexity of dealing with real humans. When I joined, On Deck only had its Founders Fellowship. Today, a little over a year later, it has fellowships for Founders, Angels, VCs, No-Code, Writers, Podcasters, leaders scaling companies, people looking to join startups as one of the first 50 employees, Community, Climate, FinTech, and more. In eight months, they went from one fellowship to this: One of the challenges with both community and top-tier education is that it’s really hard to scale. There’s something called “evaporative cooling,” which is when the quality of the people and interactions in a community decreases as more people join. On Deck has one of the most credible approaches to solving this challenge of any I’ve seen.By adding new verticals instead of making the Founders Fellowship really, really big, On Deck has built a group of small, intimate communities that roll up into one large, On Deck community. Each fellowship it adds reinforces the others. Jake Singer wrote a fantastic piece on On Deck’s Flywheel, which is spot on but misses a key element: the speed at which it turns the flywheel. The more quickly On Deck adds new high-quality programs and integrates them with the existing programs, and the faster it acquires new companies to enhance all of the existing programs, the faster the flywheel spins, the deeper the moats go, and the harder it is for anyone to compete with On Deck. As we’ll dig into below, On Deck’s accumulated institutional program-building expertise allows it to get creative with who it taps to lead programs. Instead of hiring for educational experience, it can hire for passion, expertise, and audience, all of which increase On Deck’s awareness and credibility. Looking at the programs together, On Deck is building what co-founder Erik Torenberg calls, “Stanford for the Internet.” Today, On Deck is where top talent, from anywhere in the world, goes to kickstart an increasing number of paths in tech and the creator economy; over time, it should be able to plug anything that people want to learn or build together into its infrastructure. Specifically, it has two products:* A new approach to continuous online education: delivered through synchronous 'cohorts' of 100 - 200 individuals, with an emphasis on peer-to-peer learning. In 2021, On Deck will launch up to 120 of these cohorts across ~30 categories, driving substantial upfront cash flow.* A private, professional social network. Serving as the "campus" to On Deck’s "college," the On Deck product is a “market network” facilitating matching between talent and opportunity, knowledge, and more. It’s LinkedIn and AngelList meet Quora, and it’s one way that On Deck will be able to continue to charge subscription revenue long after each Fellowship ends.Now if you’re like the investors I spoke to when I was thinking about Not Boring Club, despite everything I wrote above, you might hear the words “community” and “education” and head for the exits. WAIT! You might want to hear On Deck’s numbers first. On Deck is an education business with software margins: On Deck turned a profit in 2020, and entered 2021 on a ~$20M run rate. On Deck is known for its consumer-facing programs, but it currently has five revenue streams: * Consumer-Facing Programs. The bread and butter, these cover everything from the Founders Fellowship I was a part of to On Deck Writers. * Career Programs. Like the YPO for X, these are ongoing professional organizations that people should be able to expense out of their L&D budgets, for example On Deck Scale, and the new Design and Chief of Staff programs. * Partnerships. On Deck has annual partnerships with 17 partners like Stripe, Carta, Mercury, and Substack.* Recruiting. On Deck recently acquired Lean Hire, which should benefit dramatically by being plugged into the On Deck Network. * Digital Subscription Bundle. On Deck is launching an ongoing subscription to keep program participants engaged over the course of their careers.With these programs and products, and new ones launching seemingly weekly, On Deck is on track to 10x again in the next 2-3 years. When you zoom out, what On Deck is building looks less like an educational institution and more like a really great internet business. What makes a great internet business? It’s pretty simple: acquire customers cheaply, sell them more things, get operating leverage, produce strong margins, and build moats to protect it all. Look at On Deck:* Low CAC. On Deck doesn’t pay much for marketing. Instead, referrals from existing fellows constitute one of its biggest channels, with over 2,500 direct referrals to ODF alone. Plus, with each new high-profile program lead or participant, On Deck’s surface area and attractiveness grows. * Revenue expansion. Most educational institutions get customers for four years, and then spend the rest of their lives asking for donations. On Deck is able to cross-sell multiple programs and products to each Fellow, including an ongoing subscription.* High upfront costs, low marginal costs. On Deck is building a platform on top of which it can launch new programs and products more cheaply and quickly. * High margins. Despite requiring real live humans, On Deck is already profitable because it maintains pricing power compared to competitors (although it’s 1% as expensive as an MBA).  * Moats. As the network behind On Deck scales, an increasing share of its “utility” comes through the network participants unlock through joining — which becomes increasingly hard to compete with over time. See Exhibit A: Linkedin. It’s taken On Deck years to build its reputation and network. Invite-only dinners turned into Founder Fellowships turned into the growing network it is today. Now that it has the lead, it’s built to compound. The flywheel that makes On Deck valuable to participants also means that On Deck digs deeper moats with every program it creates, every new cohort that enters, and every connection it makes among everything that it does.It’s building a modern educational institution that looks nothing like the ones it aims to replace.  Natively Integrated EducationEducation is a massive market. Americans spend 2% of discretionary income on education, and the government spends a lot more than that. When you add job placement and company creation to the mix, and take it global, the opportunity gets so big as to make TAM calculations seem fake. People are willing to spend money to improve themselves and their lot in life.But somehow, education has been practically impervious to technology’s attacks. Harvard could buy the three most valuable EdTech startups in the world out of its $41 billion endowment and have enough left over to buy any of the largest American companies like Udemy or Coursera, too.The challenge, as I wrote in 2019, is that education isn’t well-suited to aggregation. Aggregators, according to Ben Thompson, are businesses who leverage their direct relationships with a critical mass of users to exert power over increasingly modularized suppliers, creating a flywheel as more demand means more supply means more demand and so on, at decreasing unit cost to the business.  There are three main problems for would-be education aggregators: * The Job To Be Done is complex. Aggregators like Netflix, Spotify, Uber, and Facebook work well because the job to be done is simple: I need to watch/listen to something, get somewhere, or connect with friends and family. People want all sorts of things from an education, from finding a new job to satisfying their curiosity to building a network. * Supply is not sufficiently modularized. You don’t care who’s driving your Uber; you very much care who’s teaching your course and which name is on your diploma. * Success requires real effort from the user. Picking a course or program isn’t like picking something to watch on Netflix; it requires real effort to stick with it and get the most out of it. People won’t be satisfied with whatever the aggregator surfaces, and are less likely to stick it out and put in the work without group accountability. In the piece, I suggested that since education isn’t well suited to aggregation, the Natively Integrated approach was the right one to take. Natively Integrated Companies: * Leverage technology to integrate supply, demand, and operations from day 1* Build relationships with customers to build products that resonate* Take principal risk to achieve 1) and 2) and capture a larger share of profitsThis is exactly the approach that On Deck is taking to education. * Leverage Technology. It leverages social media and a digitally native team to create demand and find supply (program leads), and has built most of its product behind the scenes to facilitate connection. Even when I was in the program, Brandon Taleisnik was a no-code wizard, stitching together a variety of products to run a 200+ person program largely by himself. With a real engineering team in place today, those products will only get better. * Build Relationships. On Deck chooses which products and programs to launch based on feedback and requests from the community. On Deck Scale, for example, came out of the question “Now I’ve founded my startup, how do I grow it?” * Take Principal Risk. On Deck builds all of its programming in-house instead of aggregating supply. When it fills a program, it keeps all of the profit. By taking this approach, On Deck is able to build something that fills a different set of needs than a traditional online course, and that fills many of the same needs an MBA does at ~1% of the cost. Paul Millerd’s meme summarizes it nicely:Most importantly, instead of modularizing supply (in this case, program leads), On Deck understands that people follow people, and puts its team front and center. Platform & Team Constellation If you’re building a new kind of educational institution, one that’s born on the internet and serves the internet, you need a new kind of digitally native team. On Deck doesn’t hire teachers or university administrators. Instead, it’s built a team of strong tech operators and investors to lead the company:* On Deck Founder & Chairman Erik Torenberg is a seasoned community builder. He was on the founding team at Product Hunt, founded Village Global, and hosts the Venture Stories Podcast.* Co-founder & CEO David Booth is an experienced 3x former founder, deep "systems thinker" with experience in finance and law, product & operations at AngelList, Carta, and CoinList;* CTO Andreas Klinger was founding CTO at Product Hunt, VP Engineering at CoinList, and Head of Remote at AngelList.* COO (Interim) Eric Friedman was previously COO at Company, Head of Expa Labs, and Global Director Sales & Revenue at Foursquare.* Head of Experience Trish Kennelly was formerly VP Product & Experience at Remote Year.Klinger and Friedman both joined since my cohort, and when I saw the announcements of both, I was floored. They’re world-class. They were no doubt attracted by On Deck’s mission and velocity, but also by Erik and David. I’ve gotten to know David through the Fellowship and by keeping in touch since, and have seen him work at multiple levels. He was the one in the weeds leading our Retreat to kick off the program, and he’s one of the sharpest strategic thinkers I’ve ever met, as evidenced by the speed at which On Deck is building an incredibly complex and hard-to-replicate machine. As for Erik, Keith Rabois submitted the following quote for this piece: I backed On Deck because Erik is an excellent community builder and talent aggregator. We’ve been talking about building monopoly on talent for many years, and On Deck is doing it.David, Erik, and the On Deck leadership team have two main jobs: * Build Out the Platform. This is all of the technology, infrastructure, processes, norms, traditions, pricing, and program structure that underpins everything On Deck does. It’s also the acquisitions On Deck makes to enhance fellow experience and increase LTV, and the decisions on which new programs to launch and who should lead them. * Recruit a Constellation of Program Leads to Build on the Platform. Because it has a nearly plug-and-play platform for building programs, On Deck is able to bring in people from non-traditional backgrounds. These people form a constellation around the core On Deck Team, and in turn, build constellations of industry leaders around themselves to participate in or advise each cohort.A big part of the magic is who On Deck taps to run new programs. There are two sources: internal and external. Internally, every On Deck Fellow is a potential employee or program lead. On Deck can evaluate candidates during their time in the programs, and candidates can learn what makes On Deck tick by experiencing it themselves. They bring On Deck experience, passion, and proof: if they went through On Deck and decided to work there, it must be good.Externally, On Deck brings in people with expertise and audiences. As they join, they market On Deck to their followers, and bring in their network to lend their expertise and credibility. It seems that someone I follow on Twitter announces they’re leaving their job to launch a new On Deck program every day, to the point that I tweeted this in January: In either case, On Deck is able to tap into a talent pool that’s much wider than a traditional educational institution, because it’s developed a playbook, processes, and tooling to make each new program more successful than the last. That means it can hire for other things like passion, expertise, and audience that increase On Deck’s awareness and credibility. At the same time, it’s able to attract high-caliber talent to run programs because On Deck itself can lend those people its shine. Nick DeWilde calls what On Deck is building a Platform Brand.As DeWilde explains: To recruit talented leaders for On Deck’s fellowships, Torenberg empowers them to serve as the faces of their respective fellowships and provides ample opportunities to build their public personas.It’s working. On Deck has been able to recruit great people to lead fellowships and various parts of the business. As a couple examples of just people that I know personally. * Shriya Nevatia was the smartest person in my program when it came to community and career development, and On Deck hired her shortly after the program. First, she ran community, and she just launched On Deck Catalyst. Shriya is product-leader fit to a T. * I’ve collaborated with Gonz Sanchez, On Deck’s Head of Growth, while he was running Seedtable, and he’s one of the sharpest people I’ve worked with. * Max Nussenbaum, a fellow On Deck Founders Fellow, is a former YC founder and the highest-energy, most helpful person in my fellowship. He now runs On Deck Writers, and has invited me in to speak a couple of times. Max is a great hirer too, because he hired… * Tom White is a Writing Partner in OnDeck, and he was my editor on Conjuring Scenius. I’ve sung Tom’s praises many times -- he’s had a bigger impact on my writing than any single person -- and he is perfect for the role. * Sar Haribhakti left an awesome job as GM of Fintech at Slice to launch and run On Deck Fintech. He’s been leveraging his Twitter following to the program’s benefit, and applications have been overwhelming. He’s also assembled an all-star cast of advisors to the program. The list goes on, and those are just some of the great people I know. If I had to pick one thing about On Deck that gives me the most confidence, it’s the people. Like Morning Brew, On Deck has recruited best-in-class talent who each bring their own skillsets and audience, and lets their personalities shine. On Deck Fintech is as much Sar as it is On Deck, for example. That increases brand awareness and reach, drives down customer acquisition costs, and brings even more great people into the On Deck Flywheel. This is a risk for On Deck, too. By putting the individuals who run On Deck front and center, it increases the surface area for good things and bad things. If you don’t like someone who On Deck taps to run a program, it will sour the way you think about On Deck, and if a public On Deck employee tweets something stupid, that will come back to bite On Deck. Harvard has build up a reputation over centuries that can withstand the bad behavior of any one faculty member. On Deck doesn’t have that luxury.Ultimately, though, I think it’s a smart approach, and that On Deck is just getting started. The On Deck Opportunity If you take one thing away from this piece, it’s this: On Deck is building a platform on top of which it can plug in any person, program, or product related to helping people get smarter, make connections, find jobs, or create. It moves so quickly that it should be able to launch new fellowships based on whatever topic is trending by bringing in leaders in the space and minimizing the time and effort it takes them to build out a curriculum. It even has a page, On Deck Labs, where people can express interest in the programs they’d like to see next. One obvious next step would be On Deck Crypto - this would work both as a fellowship for people who want to go into crypto full-time, and as a corporate L&D program for people at traditional companies who want to understand how to leverage Web3 technologies to improve their businesses. I’m told they’re recruiting Program Directors for both Crypto/Web3 and Digital Art (NFTs) currently, so if you want to throw your hat in the ring this may be your chance!Another opportunity that On Deck has up on the Labs page is On Deck YouTubers. It already has programs for Writers, Podcasters, and Online Course Creators, and as the nature of work changes, and kids want to become YouTubers, On Deck will be there to show them how. This may be On Deck’s biggest advantage over traditional educational institutions: its willingness to experiment and try new things. The world is moving ever-faster. The ways for people to make a living are constantly expanding. The half-life of professional skills has fallen to five years. A modern educational institution needs to be able to serve an increasing number of niches well to keep up. On Deck has built the infrastructure to do just that. With that infrastructure in place, I expect to see On Deck continue to evolve how it engages with people who want to teach. Today, On Deck program leads are employees. I suspect that in the near future, industry leaders will be able to structure non-employment contracts with On Deck that let them lead one fellowship, lend their credibility, and share in the upside through a revenue share, equity grant, or maybe even an On Deck token. I certainly think we’ll see an On Deck DAO long before a Harvard DAO. On Deck’s success isn’t guaranteed. There are real potential threats, including but not limited to: * Evaporative Cooling. Even with the best structure in place, evaporative cooling is a very real threat. On Deck will need to figure out ways to balance size, status, and utility as it grows. Being an On Deck Fellow in five years may mean something very different than being an On Deck Fellow today. * Return to Normal. On Deck benefited from a year during which everyone was stuck at home, looking to learn new skills, find new jobs, build, and find community. It will need to continue to evolve to keep up its rapid growth as people return to normal, and will likely go back to its in-person roots to let Fellows form deeper bonds IRL. * Competition. New competitors to On Deck will emerge, many of which will try to do one thing very well instead of taking On Deck’s platform approach. The reason that I’m so bullish on On Deck is that it’s not locked into any one product or way of doing things. It’s become an adaptive organism. As On Deck grows, it’s already shifting its key value prop from status to utility. It was able to respond quickly to the pandemic-induced shift online, and already has plans in the works for a robust IRL rollout (which, of course, will feed the flywheel). And it will respond to competition by building new things on top of the platform it’s built, combining the intimacy and magic of small groups with the benefits of a scaled ecosystem. As the world continues to change, On Deck will change with it, and prepare its members to take advantage of those changes. Being the fastest iterator is a competitive advantage in itself. The next new Stanford won’t look like Stanford. It will be digitally native, global, and constantly evolving. It will look a lot like On Deck.How did you like this week’s Not Boring? Your feedback helps me make this great.Loved | Great | Good | Meh | BadThanks for reading and see you on Monday,Packy This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.notboring.co

Welcome to the 675 newly Not Boring people who have joined us since last Monday! If you aren’t subscribed, join 40,671 smart, curious folks by subscribing here:🎧 To get this essay straight in your ears: listen on Spotify or Apple PodcastsToday’s Not Boring sponsor asks: Looking for a new investing app?Unclear what J.R. Smith is looking for here. Perhaps a new investing app, in which case he may want to check out Public.com, the investing social network I’ve written about before.Much like J.R. Smith’s jumper, the stock market can be unpredictable. Sometimes you just don’t want to be alone with your charts and numbers and that’s where Public comes in.Public is an investing app AND a social network for talking about business trends, and the social features make it easy to share ideas in a fun way. Join me there by hitting the link below. Btw, if you’re looking to transfer your account from somewhere else, they’ll even cover the fees. *Valid for U.S. residents 18+ and subject to account approval. Transfer fees covered for portfolios valued at or over $150. See Public.com/disclosures/. J.R. Smith is in no way affiliated with Not Boring or Public.com. Hi friends 👋 , The fun part about working for myself is that I don’t have a job description, but if I did, one bullet might go something like this: “Hang out on the internet and translate the most interesting things you find.” A few months ago, I started seeing tweets about NFTs. I had no idea what they were then, but the people working on the edges did, so I read and talked and thunk and wrote. I wrote to learn as much as anything. Now, NFTs are everywhere. Beeple’s Everydays sold at Christie’s for $69 million. Your grandmother probably owns some NFTs. It’s moving fast out there.Now, all of those people who were tweeting and Clubhousing about NFTs are on to the next: DAOs. DAOs, or Decentralized Autonomous Organizations, are, apparently, what comes next.Each new depth I plumb in the world of Web3, the more out of my depth I feel. When I told Jess Sloss, who runs Seed Club, that I was exploring DAOs, he wrote: “🐇  meet 🕳”. I’m at the very top of the hole, and exploring out loud. I won’t have all the answers, but hopefully, we’ll learn something together. Let’s get to it. The Dao of DAOs(You can click on ☝️ to go straight to the full post online)The Ether (ETH) that hackers stole from The DAO on June 17, 2016 would be worth $6.6 billion today if it weren’t for the fork. Launched on April 30, 2016, The DAO was an early Decentralized Autonomous Organization (DAO) and venture capital fund. 11,000 people invested 11.5 million ETH, 14% of the total supply at the time, worth roughly $150 million, which they planned to collectively invest in crypto projects. Unlike a traditional fund, in which institutions and high net worth individuals (Limited Partners or LPs) invest money into a fund that other people (General Partners or GPs) invest into companies, investors in The DAO would be able to vote on proposals based on pre-set rules, established in smart contracts. Each person’s vote was weighted by the number of tokens they held, which was based on how much they had invested. If a proposed project received enough votes, the smart contract automatically triggered the investment of The DAO’s funds into the project’s ETH wallet.  Two weeks into The DAO’s crowdfunding campaign, TechCrunch wrote, “The DAO is a paradigm shift in the very idea of economic organization. It offers complete transparency, total shareholder control, unprecedented flexibility and autonomous governance.”Then, less than two months in, on June 17th, hackers hit The DAO and took out 3.6 million ETH. At the time, that amounted to around $50 million. Today, with ETH trading at $1,851, the stolen ETH would be worth $6.6 billion, placing it among the most expensive hacks of all time. The hackers aren’t billionaires today, though. The funds were put on a 28-day hold based on the terms of the smart contract, which gave The DAO and the broader Ethereum community nearly a month to figure out what to do. After a contentious debate, the Ethereum core team, led by Vitalik Buterin, released a hard fork of the Ethereum blockchain. It was essentially a new version in which everything was the same, except in the forked version, the heist never happened. The Ethereum core team couldn’t force people to move over; people voted with their feet, answering this question: does the benefit of erasing the hack outweigh the cost of human interference on trust in Ethereum? To most, it did. While some people continued to use the Ethereum blockchain on which the heist had occurred, renamed Ethereum Classic, the Ethereum we all know and love is the forked version. If you look at the Ethereum blockchain today, you won’t find any trace of the heist. No harm, no foul. From NFTs to DAOsOff-chain, there was some harm though: namely the death of DAOs’ early momentum. While you’re probably at least familiar with the terms Bitcoin, Ethereum, DeFi, and NFT, chances are, you don’t know what the hell a DAO is. In fact, the last 400 words probably read like gibberish. But DAOs are re-emerging, five years later, with a diverse set of use cases, a growing software toolkit, and new governance and incentive models. A bunch of smart people I follow have been talking about DAOs recently, as the “what’s next” after NFTs.When Jill talks, I listen. So I decided to go down the rabbit hole, and it’s way deeper than I expected. NFTs are relatively approachable. They’re easy to capture in catchy headlines. “Expensive JPEGs?! LOL.” Because at their most basic, they’re simple: they make digital media ownable and collectible, and people sometimes pay a lot of money for them. DAOs sit a level above NFTs -- DAOs can own NFTs and create NFTs, plus do a whole lot of other non-NFT things -- and have more transformative potential than NFTs. An NFT is a piece of digital media; a DAO could be a whole media company.Because they’re more complex, they’re not nearly as easy to capture in a headline, soundbite, or price tag. But that’s what we’re here for. This is the beginning of an exploration, a walk through my own process of figuring out what DAOs are, how they work, how they interact with the rest of Web3, what advantages they have, and where all of this might lead. We’ll start simple, and then we’ll build up: * Enter the DAO* Ethereum and DAOs* Uniswap versus Coinbase* Forking SushiSwap* Progressive Decentralization* Why DAOs?* The 7 Powers of DAO* DAOs Today and TomorrowAll roads lead to DAOs. A lot of the more exploratory pieces I’ve written -- Secure the BaaG, Power to the Person, We’re Never Going Back, The Value Chain of the Open Metaverse, and Conjuring Scenius -- pointed towards DAOs without me knowing it. Those pieces all asked a version of the question: how are we going to work, invest, create, and play together in an increasingly digital and global world? If Power to the Person was about how much a single individual can accomplish alone, DAOs are about how much we can do together.But wait. What’s a DAO?  Enter the DAO Note: If you’re unfamiliar with Web3, or need a refresher, read The Value Chain of the Open Metaverse.Let’s start with a definition. In her post, A Beginner’s Guide to DAOs, Scalar Capital’s Linda Xie gives a good one:A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.A DAO is “decentralized” in that it runs on a blockchain and gives decision-making power to stakeholders instead of executives or board members, and “autonomous” in that it uses smart contracts, which are essentially applications or programs that run on a publicly accessible blockchain and trigger an action if certain conditions are met, without the need for human intervention. More simply, DAOs are a new way to finance projects, govern communities, and share value. Instead of a top-down hierarchical structure, they use Web3 technology and rapidly evolving governance and incentive systems to distribute decision-making authority and financial rewards. Typically, they do that by issuing tokens based on participation, contribution, and investment. Token holders then have the ability to submit proposals, vote, and share in the upside. If blockchains, NFTs, smart contracts, DeFi protocols, and DApps are tools, DAOs are the groups that use them to create new things. If they’re the what, DAOs are the how. They’re the Web3 version of a company or community. And as people experiment with new building blocks and structures, DAOs will have emergent properties that we can’t predict today. Supporters believe DAOs have the potential to reshape the way we work, make group decisions, allocate resources, distribute wealth, and solve some of the world’s biggest problems. DAOs are why Ethereum was created in the first place. Ethereum and DAOs In the beginning, there were DAOs. Vitalik Buterin, the co-founder of Ethereum, mentioned Decentralized Autonomous Organizations in the introductory paragraph of the Ethereum White Paper in 2013. Vitalik linked to a piece he’d previously written for Bitcoin Magazine (which he founded in 2011) titled Bootstrapping a Decentralized Autonomous Corporation: Part I, in which he asks and attempts to answer the question: Can we approach the problem from the other direction: even if we still need human beings to perform certain specialized tasks, can we remove the management from the equation instead?In the post, Vitalik refers to Bitshares’ founder Daniel Larimer's idea that Bitcoin is actually a sort of a proto-DAO, a new kind of decentralized equivalent to a traditional company: * Shares ≈ Bitcoin * Shareholders ≈ Bitcoin owners * Employees ≈ Miners and validators * Payroll ≈  Bitcoin rewards for adding blocks to the chain * Marketing  ≈ All of those people with laser eyes pumping BitcoinBut Bitcoin is limited. It’s kind of dumb. It doesn’t really know much, can’t really change itself, and doesn’t really do anything; “it simply exists, and leaves it up to the world to recognize it.” It really is like gold in that it sits there as people do stuff to it and assign value to it. More charitably, to analogize with an equally complex analogy (this is the nice thing about having smart readers!), ifBitcoin is like Artificial Narrow Intelligence (ANI), DAOs are like Artificial General Intelligence (AGI). Bitcoin does the thing that it was programmed to do really well, but DAOs can theoretically do anything really well. Vitalik said as much when he introduced Ethereum: What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create "contracts" that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.Bitcoin is digital money. Ethereum is a platform on top of which builders can create anything, from apps to entire organizations. Ethereum, Bitcoin, and other blockchains are Layer 1 in the Web3 tech stack. For Bitcoin, all of the magic happens at Layer 1, but with Ethereum, most of the magic happens in Layer 2, the protocol and smart contracts layer. The second layer is where builders create Lego blocks of protocols and smart contracts that can be arranged in countless combinations and formations to do anything from mint art to trade crypto, directly, without the need for a third-party. Zora is an NFT protocol that lets any creator mint, own, and sell their work. The Uniswap protocol is a decentralized exchange that lets “developers, liquidity providers and traders participate in a financial marketplace that is open and accessible to all.” Mirror’s decentralized publishing platform “revolutionizes the way we express, share and monetize our thoughts.” Zora, Mirror, and Uniswap are all protocols, but not all protocols are necessarily DAOs, and vice versa. To understand the difference, let’s start by comparing a centralized platform and a decentralized protocol, and then we’ll move on to the evolution of a decentralized protocol into a DAO. Uniswap versus CoinbaseJust because something touches crypto doesn’t mean it’s decentralized, and just because something is decentralized doesn’t mean it’s a DAO. Coinbase lets people buy and sell cryptocurrencies, but in every other way, it’s like a centralized exchange on which you’d trade equities, bonds, currencies, or commodities. It matches people who want to buy at a certain price with other people who want to sell at that price, and takes a cut of each transaction for facilitating the exchange. As a company, Coinbase behaves like a typical centralized company does. It has investors, a board, and a CEO who makes decisions that shape the direction of the organization, for better or worse. Coinbase, not its users, choose which cryptocurrencies can be listed on the platform. Coinbase’s centralized nature makes it relatively simple to understand and use: just connect your bank account, deposit funds, and start buying crypto. That path works: Coinbase is going public in a direct listing IPO that will likely value the company north of $100 billion. Uniswap, on the other hand, is a decentralized exchange running on the Ethereum blockchain. Unlike Coinbase, Uniswap doesn’t even have a wallet; it’s purely an exchange and requires users to hold their crypto elsewhere. Since it’s decentralized, Uniswap doesn’t decide what can be traded, doesn’t provide liquidity, and doesn’t have a bank account. Instead, Uniswap is an Automated Market Maker with which users can trade directly through smart contracts that set the price based on available liquidity. There is no middleman, and Uniswap doesn’t choose which tokens can be traded on it. Instead, anyone can be a Liquidity Provider (“LP”) on Uniswap by locking up any pair of ERC20 tokens they choose (literally just putting them in a digital vault and not touching them for a while) -- say ETH and a stablecoin like USDT.  In exchange, they receive liquidity tokens that represent their proportionate share of the liquidity for that pair. When someone makes a trade on Uniswap, they pay a 0.3% transaction fee, which is paid out to liquidity providers based on the amount of liquidity tokens they hold. (To go deep, read this.)Uniswap itself is just a protocol, and doesn’t take any of the transaction fee it charges. Until late last year, Uniswap was not a DAO. It didn’t have a token, or a market cap. Today, Uniswap does nearly $1 billion in daily volume, generates close to $30 million in daily transaction fees, and as of today, has a market cap of $17 billion. What changed? In August, things started to get forking wild.Forking SushiSwapTwo roads diverged in a wood, and I—I took the one less traveled by,And that has made all the difference.-- Robert Frost, The Road Not TakenOne of the beautiful things about decentralized protocols is that their code, smart contracts, and transaction histories are out in the open for anyone to see, audit, and even copy. That openness acts as a check and balance; it incentivizes good behavior and protocol optimization, because if enough people disagree with the way the team behind a protocol is doing things, or think they have a better way to generate value, they can fork it. That’s what Chef Nomi, the pseudonymous team behind SushiSwap, did to Uniswap. For the first two years of Uniswap’s life, it existed as a simple protocol, governed by the decisions of its founder, Hayden Adams, and the smart contracts on top of which it was built. It issued tokens to LPs that gave them their share of transaction fees, but those tokens weren’t tied to the protocol itself, they didn’t give holders a say in the governance of Uniswap, and ownership ended as soon as the LP stopped providing liquidity. SushiSwap launched in August 2020 as an evolution of Uniswap to change that. In a blog post, the SushiSwap team wrote (emphasis mine): “Taking Uniswap’s elegant core design, we’ve added community-oriented features that we believe help improve the design of the protocol, as well as provide further benefits to the actors involved.”Imagine writing that sentence in public as a traditional company: “Taking Facebooks’s source code and design...” That wouldn’t happen. But Web3 is different; forking is expected.  SushiSwap is similar to Uniswap in almost every way except one: on SushiSwap, the 0.30% fee is split, such that “0.25% go directly to the active liquidity providers, while the remaining 0.05% get converted back to SUSHI (obviously through SushiSwap) and distributed to the SUSHI token holders.” The introduction of the SUSHI token, and allocation of 0.05% to the token, means that token holders can participate in the upside even while they’re not actively providing liquidity. It rewards being in early or buying into SUSHI with a tradable token. Cool, so is SushiSwap a DAO? Nope. SUSHI provides economic participation, but it’s not a governance token (for now). It is working on a governance framework, the Omakase DAO, and plans to turn over control of the protocol to the community. For now, the community can vote on improvement proposals on Snapshot, but the votes are non-binding. You know what is a DAO now? Uniswap. As a response to the SushiSwap fork, in order to keep people from migrating to the forked protocol, Uniswap announced the long-anticipated UNI token on September 16, 2020. Unlike SUSHI, UNI tokens give holders governance rights (the right to vote on proposals and to allocate UNI to grants, partnerships, and more). In the post, the Uniswap team wrote: Having proven product-market fit for highly decentralized financial infrastructure with a platform that has thrived independently, Uniswap is now particularly well positioned for community-led growth, development, and self-sustainability. Immediately upon issuance of UNI, UNI holders received ownership of: * Uniswap governance* UNI community treasury* The protocol fee switch* uniswap.eth ENS name* Uniswap Default List (tokens.uniswap.eth)* SOCKS liquidity tokensWhile Uniswap doesn’t allocate 0.05% back to UNI like SushiSwap does to SUSHI today, the community owns the “protocol fee switch,” subject to a 180-day timelock delay, and the community will be able to vote on whether to do so when that lockup ends. So where does that leave us? Uniswap was a protocol that became a DAO without a change in fee splits, and SushiSwap forked Uniswap to create a new fee split, but is yet to become a DAO.The example brings up an important point: crypto companies don’t have to, and generally shouldn’t, be a DAO from day one. They can evolve. Unlike The DAO, which launched from day one as a DAO, both Uniswap and SushiSwap are going through what Variant Fund’s Jesse Walden coined “Progressive Decentralization.”Progressive DecentralizationJesse Walden is the person whose work I turned to most often when I’m trying to understand Web3 and the ownership economy. So when I asked Mirror’s Patrick Rivera a question that had been stumping me -- “How can you possibly expect to design great products by committee?” -- he unsurprisingly directed me to Walden’s piece on Progressive Decentralization. Walden wrote that it doesn’t make sense to try to design products by committee or give tokens from day one. Instead, Walden laid out a framework for tackling decentralization as a three-step process with the “goal of building a sustainable, compliant, and community-owned product”: 1. Product-Market FitThe early days of a crypto startup should look like the early days at any startup: a small, focused team putting all of their energy into building, learning, and iterating until they find product-market fit. If your product is shit, a community won’t save it, and will become disengaged regardless of token ownership. Look at how much time VCs spend with their winners versus their losers.  Web3 startups actually have an advantage here -- because of the open nature of Web3, they can build and test quickly by snapping together existing smart contracts, code, and products into new ones. DeFi is called “Money Legos” for a reason; every time someone builds something new, that becomes a building block that others can use. The magic often comes from the way teams combine existing Legos, not from creating new Legos. “At this stage,” according to Walden, “there should be no pretense of decentralization — a core team is driving all product decisions by necessity, in the interest of finding product/market fit.” This was an unlock for me in the way I think about Web3 companies: I had grouped all crypto startups into a group I later learned is called “Decentralization Maximalists,” but in reality, that’s a very small subset, and the top crypto startups are more pragmatic than that. Many crypto startups raise traditional venture capital to fund product/market fit discovery, often under a Simple Agreement for Future Tokens (SAFT), a structure developed by Protocol Labs and Cooley that’s similar to Y Combinator’s SAFE, except that it converts into tokens instead of equity should the company issue tokens in the future. 2. Community ParticipationOnce a company has achieved product-market fit, it should begin to experiment with getting more stakeholders involved more directly. Walden likens it to open source development, inviting participation from the community, giving bounties, grants, and other incentives, developing in the open, building community, and introducing rough consensus on decision-making. Even non-open source companies like Twilio and Stripe built a strong competitive advantage by creating a community among the developers who build on their APIs. Unlike Stripe and Twilio, though, which don’t hand equity out to their developer communities, at this point, crypto companies can and should start thinking about how to use fees and tokens to incentivize ongoing contribution to supercharge community involvement and loyalty. On the fee side, there’s a trade-off between charging fees to users to give to contributors, or not charging fees until the platform has built up sufficient network effects. Since crypto services are open source, charging high fees could cause someone to fork your service, but not charging fees that you can pass on to contributors means that you don’t have money to incentivize contribution. The equilibrium state here is that protocols are minimally extractive, meaning that they charge just enough to cover costs. Uniswap, for example, charges just 0.30%, which they pay directly to Liquidity Providers. On the token side, teams can issue tokens to a small group of community members to experiment with governance dynamics. This is the training wheels period, during which the core team can still give themselves enough decision-making power that they can influence decisions towards their vision. At this point, they should also publish and solicit feedback on plans for distributing tokens that balance rewards for the core team and early contributors with continued incentivization for participation. New models are being tested daily using game theory, math, observed behavior, and conversation to build, test, and iterate on new incentive and governance models. That’s for another essay (or read a16z’s On Crypto Governance, watch this video on applying game theory, or read white papers like Maker DAO’s).3. Sufficient DecentralizationAfter a team has successfully completed the first two steps, they’re ready to distribute tokens to the broader community. This is an alternative to a traditional IPO, SPAC, or acquisition, called “Exit to Community,” and is the point at which a project or company becomes a DAO. This is done by triggering a smart contract that mints and distributes tokens based on predefined rules determining everything from who gets how many today, to how tokens will be distributed in the future, to what economic and governance rights token ownership confers. From this point forward, future development of the protocol is in the hands of the community. The core team might still influence decisions based on their standing in the community or the number of tokens they hold, but the rules in place in the smart contracts, and any modifications made based on community vote, will determine the future changes. Everything from new products, to hires, to fee changes, to marketing campaigns will be proposed and voted on by token holders. Congrats: your protocol has moved from hierarchy to DAO.  But now that we know how to move a project from idea to DAO, we should probably answer another question that’s been nagging me: why are community participation and decentralized control desirable in the first place? Why DAO? If you believe that Decentralization Maximalists are just a small subset of the Web3 community, and that most people involved are logical, financially-motivated actors (why else would incentive design be so core?), then there must be an economic and strategic advantage to the DAO structure. In Progressive Decentralization, Walden highlights two advantages: 1. Community Participation and Control Results in Limited Platform Risk. Chris Dixon argues that platforms start open to attract users and developers, and then begin extracting once they reach a certain size and scale in order to increase profits and maximize shareholder value.DAOs are all about maximizing stakeholder value. The users and contributors are also the investors and owners. While community ownership seems weird and novel and almost hippie, it’s actually a more natural model than a few outside investors and board members dumping a bunch of money into a company and deciding what it should do. The reason we do it the way we do is that, until now, it’s been too hard to coordinate having a lot of small owner/stakeholders who all get a say in decision making. Technology is finally enabling the more natural model. Here’s a smell test: think about it in reverse. What would happen if we had started with broad community ownership and tried to introduce the current model of outside investor control? I think there’s no way people would let it happen. Done right, the DAO structure means that protocols and platforms remain aligned with stakeholders over time. 2. Regulatory Compliance Crypto tokens can be deemed securities under the Howey Test, which would make distribution challenging and expensive, but analysis suggests that tokens might switch from security to non-security if they eliminate information asymmetry and dependence on the core team to create value. (Walden warns, and I second, that this is new and that you can’t rely on this analysis - go talk to a lawyer if you’re thinking about issuing a token.)Those are two solid reasons for considering a DAO, but alone, I don’t think they’re so compelling that an increasing number of entrepreneurs who’ve created humming economic engines would cede control to the community. There may be some people out there self-aware enough to build systems around themselves that check their future ability to extract value, but not that many. There must be some other advantages to the DAO model. What would Hamilton Helmer say? The 7 Powers of DAORight now, DAOs are in the experimental phase. The concept itself is working to find meta-product-market fit. At this stage, many people are drawn to create DAOs out of curiosity and a desire to experiment with new models of community participation, creation, and collaboration. DAOs don’t need to be better yet, just novel. Over the long-term, though, to meet Vitalik’s vision of companies without managers, DAOs will need to have competitive advantages over other forms of organization and governance. Going DAO should create moats, “those barriers that protect your business’ margins from the erosive forces of competition.” In 7 Powers, Hamilton Helmer lists seven sources of competitive advantage: Let’s take a look at where the DAO structure might help teams build moats. Scale Economies: 3/5 HelmersA business in which per unit costs decline as production volume increases. DAOs give groups of people and organizations across the globe the means and incentives to pool resources in the pursuit of a greater goal. Theoretically, this gives them the ability to drive down costs for each new unit they produce or new user they accept. The DAO structure may also drive down labor costs by paying for many services as-needed, with less friction than a traditional organization. I only give this a 3/5, though, because there’s not as clear an inherent advantage to DAOs over traditional structures here. Network Economies: 5/5 HelmersThe value of a service to each user increases as new users join the network.Network economies are where DAOs have the potential to thrive and knock off incumbents. This will be the strongest moat for successful DAOs. A canonical example of network economies is Facebook, which gets more valuable to you each time one of your friends joins because you can talk to them and see what they’re up to. DAOs, built on cryptonetworks that combine stateful protocols directly with money, provide network effects on steroids. With DAOs, users are owners, and every time someone else joins the DAO and/or uses the protocol, the user’s tokens theoretically get more valuable. Additionally, as the DAO gets stronger, more people build on top of it, which makes it stronger, which attracts more people, and so on. Ethereum has platform network effects, like Windows, but with financial steroids. Once a DAO picks up steam, it’s going to be very hard to reverse it. Counter-Positioning: 4/5 HelmersA newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.To the extent that the DAO model itself is advantageous in other ways, DAOs can build strong moats against their incumbent counterparts just by nature of being a DAO. The DAO version of Facebook that rewards users for inviting new members, sharing their data, and contributing content has a moat against Facebook in that there’s not a snowball’s chance in hell Zuck would ever turn Facebook into a DAO. This one barely misses a fifth Helmer because while it’s a moat against traditional corporations, it’s not necessarily a moat against other DAOs. Switching Costs: 2/5 HelmersThe value loss expected by a customer that would be incurred from switching to an alternative supplier for additional purchases.This is a tricky one. On the one hand, DAO members would incur switching costs because the tokens they own in one DAO may become less valuable if they switch to a competing DAO, but as the SushiSwap example highlights, blockchain-based protocols can be forked into new, very similar protocols, that are compatible with incumbent protocols. While this scores low as a moat, the low switching costs are part of the beauty of DAOs: it creates a Darwinian dynamic in which protocols are constantly competing to keep their stakeholders happy and well-compensated.Brand: 4/5 HelmersThe durable attribution of higher value to an objectively identical offering that arises from historic info about the seller.Part of the reason that certain brands are able to charge higher prices for the same item is that people tie their identity to those brands. Wearing a Tiffany bracelet says something different than a regular silver bracelet. Similarly, people will tie their identity to the DAOs in which they’re a contributing member and of which they’re an owner. If you consider Bitcoin a DAO, think about all of the people whose identities are tied up in owning Bitcoin. They’re willing to market Bitcoin, buy dips, and bash non-believers for free. This doesn’t get the coveted fifth Helmer because that cuts both ways. Emotions are high, and if the DAO does something members don’t agree with, they might run away quickly. The Moloch DAO, which awards grants to advance the Ethereum ecosystem, even has a “rage quit” mechanism built-in, through which a member can rage quit and withdraw their tokens if they don’t agree with a particular community decision. Cornered Resource: 4/5 HelmersPreferential access at attractive terms to a coveted asset that can independently enhance value.A DAO’s community is its cornered resource. While many DAOs employ or otherwise compensate people for their contributions, there are many instances in which people contribute to the DAO just to make it, or the blockchain on which it’s built, more valuable. The Moloch DAO gives grants from its members’ own pooled ETH in order to make ETH more valuable, and can submit proposals to do free work to make Ethereum better. Those engineers’ time is independently valuable. Process Power: 2/5 HelmersEmbedded company organisation and activity sets which enable lower costs and/or superior product.This is another “Good for the ecosystem, bad for the moat” rating. On the one hand, DAOs inherently and literally have embedded organization and activity sets -- they’re programmed into the smart contracts themselves -- however, for that same reason, they’re not defensible against other DAOs or protocols. The challenge with making your Legos and instruction manuals public is that anyone should be able to copy and paste your processes. The best governance and incentive structures will be copied and tweaked. Taken together, by granting economic incentives to a DAO’s users, contributors, and broader ecosystem of stakeholders, and giving those stakeholders a say in the DAO’s governance, DAOs have the opportunity to build incredibly powerful moats. The strongest is network effects -- once a DAO hits escape velocity, it will be hard to take it down, particularly given the fact that community governance means it should be able to adapt and evolve in a way that the community believes will create the most long-term value. That said, DAOs should be wary of using those moats to get too comfortable. They shouldn’t extract too much value, grant too much power to too few stakeholders, move too slowly, or do anything else that might piss off a sufficiently large piece of the community. If they do, they give others an opening. The threat of forking is ever-present. It’s survival of the fittest. DAOs Today and TomorrowAfter clawing their way back from the jaws of the hack of The DAO, DAOs are just starting to find their footing. It’s very early days. According to DeepDAO, the top DAOs have only $952 million in assets under management. That would rank all DAOs’ assets combined as the 86th most valuable cryptocurrency by market cap.Already, though, fascinating experiments and movements are taking place. Louis Grx highlights a few of the different types of DAOs, including: * Creator DAOs: Jarrod Dicker, Patrick Rivera, and Brian Flynn wrote about the potential for creators to own their work, and share the upside with their true fans. There are no major examples of Creator DAOs today, but I suspect some of the people minting NFTs today will launch DAOs tomorrow that lets fans invest instead of subscribe.* Protocol DAOs. DeFi Protocols like interest rate protocol Compound and liquidity protocol Aave, let crypto owners earn on billions of dollars worth of assets and share financial rewards and governance with their communities. * Tokenized Communities. Tokenized communities took a hit last week when social money platform Roll was hacked. Unlike The DAO, though, the hack didn’t kill tokenized communities, it made them stronger, as disparate communities and their members came together to make the impacted people whole. Richard Kim’s RNG is a leading example of a Tokenized Community, as is FWB, founded by Miquela creator Trevor McFedries.* Investor DAOs. Here, we come full circle. The LAO is picking up where The DAO failed. Its members have contributed 14,809 ETH to invest in blockchain-based projects, including other DAOs, like Flamingo, which itself invests in NFTs.  Like NFTs, the early experiments happening now likely represent a small sliver of their future potential. It may be decades before we see a DAO compete with multi-hundred-billion dollar public companies -- a decentralized ride sharing network or app store that charges minimally extractive fees -- or it may come sooner than we think. Jack has been on a roll recently and loves crypto (he even sold his first tweet as an NFT); maybe he’ll be able to get Twitter’s decentralized network, Blue Sky, off the ground and turn its ownership and governance to the community.More likely, it will start small and evolve. Companies that are buying Bitcoin on their balance sheets and minting NFTs (I see you Charmin and Taco Bell) today might experiment with DAOs for a small project or company function in the near future. As more DAO tools emerge, it will become easier and easier to run small tests. Already, the DAO Lego Kit is filling out:New tools mean more access. Seed Club can even help you navigate it all. It’s easier than ever for new companies to build, experiment, learn, iterate, remix, rebuild, test, find product-market fit, involve their community, and one day, exit to their community. The energy in the space is contagious, and the community is wildly inclusive and helpful. That might be the ballooning crypto balances talking, but they kept building during the last crypto winter and will keep building if and when there’s another. After getting ETH pilled and going down the rabbit hole, I’m more confused than before, more curious than ever, and incredibly excited to see what people build in this space, together. I kind of want to experiment with a Creator DAO of my own. I don’t know what shape DAOs will ultimately take, which governance and incentive models will prevail and attract the most energy, or when we’ll see a trillion-dollar DAO, but it feels like an inevitably. DAOs are novel, and they just feel kind of hippie. Giving ownership and control of a project or company to the community is just not how things are done. The more I think about it, though, the more I think that stakeholder ownership is the natural state of things, and that we just haven’t had the technology or models to coordinate such widely distributed governance and ownership before. Given a tabula rasa and all modern technology, I think we’d design a system that looks a lot more like a DAO than one with heavily concentrated board control.I’m starting to believe we’ll get there. Enough smart people with enough passion, tools, voice, and incentives, combined with a friendly survival of the fittest culture, can rapidly experiment their way to the next big thing. The world is going to be a very different place when they do. In the spirit of transparency and sharing value, here’s a doc with all of the source material I used in researching this piece: DAO Links. Enjoy the trip down the rabbit hole.Thanks to Patrick, Jess, and Ryan for being my Web3 sherpas, and to Dan for editing!How did you like this week’s Not Boring? 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